MAccording to estimates by the International Monetary Fund, governments have mobilized more than 7 trillion euros in the corona crisis so far. But that’s not all: the central banks have announced programs, mostly bond purchases and lending, worth several trillion euros. The numbers are staggering and raise the question: can such a policy be pursued without ultimately inheriting inflation?
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Goods price inflation has many causes, and it is worth taking a quick look at the main ones. A well-known cause is an increase in costs, for example for raw materials, wages or capital, which companies pass on via rising prices for their products and services. The future of globalization deserves special attention here, which many experts believe has kept inflation rates low in industrialized nations over the past twenty years because goods produced in low wages in emerging countries such as China have kept prices low in industrialized nations and prevented strong wage increases to have. The Bank for International Settlements estimates that this impact could have depressed inflation in developed countries by one percentage point.
Even before the outbreak of the Corona crisis, the rise of political populism and the outbreak of trade wars raised doubts about the permanence of largely unrestricted globalization. If the reconstruction of the international retail chains to Corona is slow to get going, the strategic conflicts between the major powers are escalating and the attempts of industrialized nations to move the manufacture of products previously manufactured in low-wage countries to their own borders could increase, inflationary pressure could arise. But these processes take time and would probably be countered by the willingness of consumers to replace previously cheap goods with more expensive ones. And unlike after severe wars, the corona virus should not leave behind destroyed production capacities and therefore should not lead to the associated shortage of goods.
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Neither is the supply of money scarce – at least not the money that is created by central banks through bond purchases and lending to commercial banks and is predominantly in the accounts maintained by commercial banks with the central banks. The sharp increase in this so-called central bank money is reflected in the strong growth in total assets not only of the European Central Bank (ECB) but also of other central banks such as the American Fed.
Contrary to old theories, however, as the graphs show, there is obviously no close connection between the growth of the central bank’s total assets, the growth of the money stock circulating in the economy (represented by the money stock M3) and the level of goods prices. The amount of money M3 in the definition of the ECB comprises the cash held by so-called non-banks (mainly companies and households) plus the sight deposits held with banks and savings banks, time deposits up to two years in duration, savings deposits with a statutory notice period of up to three months and selected short-term deposits Securities such as money market funds and money market papers.
The “flood of money” does not reach the real economy
The thesis that has to be heard again and again, that as a result of a “flood of money” or “printing money” (digital balances are actually generated at the ECB) inevitably lead to high inflation, has been hanging in the air for many years. This is also well known in the professional world. Much of the so-called “flood of money” does not even arrive in the real economy.
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