Go Back  PPRuNe Forums > PPRuNe Social > Jet Blast
Reload this Page >

Effects of the virus - Inflation or Deflation?

Jet Blast Topics that don't fit the other forums. Rules of Engagement apply.

Effects of the virus - Inflation or Deflation?

Old 26th Mar 2020, 23:08
  #1 (permalink)  
Thread Starter
 
Join Date: Feb 2008
Location: Southwold
Age: 67
Posts: 60
Effects of the virus - Inflation or Deflation?

Now I'm not an expert on this as I only did Economics to A level but I am wondering what the effects of all this will be on the economy. On one hand the effects of government handing out vast sums would be expected to be highly inflationary, possibly exacerbated by quantative easing. On the other reduçed economic activity and slackening demand fir gods and services could be strongly deflationary. Any thoughts - will the two balance each other out?
Effluent Man is offline  
Old 27th Mar 2020, 04:38
  #2 (permalink)  
 
Join Date: Jan 2008
Location: Denver
Posts: 1,011
In the short term, they will balance - or even stay disinflationary.

Money poured into an economy that does not increase the "velocity" of money - how much is actually moving around from buyer to seller, and how rapidly ($$ per week per person, over and over) - will not on its own produce inflation. Inflation has been described as "too much money chasing too few goods" - but one has to pay attention to the verb there: "chasing."

There are many things that can tie down the velocity of money. Being stuck in one's home, unable to spend on travel, theaters, sports events, food-services and pubs (as we know all too well right now). Carrying and servicing (as opposed to incurring) debt. Putting money into "sinks" where it may sit with little or zero velocity (mattresses, retirement accounts, even stocks and bonds (see below)).

Looking at inflation from a US perspective, we had our worst inflation in the 1970s: Interestingly, that was a time when the Baby Boomers were just reaching peak spending years (buying and furnishing houses, having kids, buying the other goodies of life). It was a time of high and rising energy prices (the Oil Embargo - energy prices are a core driver of costs throughout an economy). It was a time of the Gov't pouring money into our own economy via military spending (the Cold War and Vietnam - back when we actually paid for wars). Interest rates were artificially low (and employment high) as Nixon tried to boost the economy to ensure re-election in '72. Labor Unions (whatever good they may do otherwise) were inflationary, as they moved the working class into the middle class.

Today, the underlying structure of the economy is different. Some of the differences are temporary (Arabia dumping oil into the world market at bargain prices, instead of jacking them up). But some are more built-in. Fossil fuels now have competition from renewables, most of which are capital-intensive rather than labor-intensive (you put in windmills or solar panels once, briefly, and then the labor costs mostly disappear). Student loan debt is disinflationary (the money was spent back then - now it is just sucking buying power from recent (and not-so-recent) grads.) Mass transit is somewhat disinflationary - cuts down on money chasing fuel prices and car purchases. Uber and Lyft and electric scooters (the sharing economy) as also cutting back on how many young people think they need a car of their own.

Money going to rich people with increasing inequality is disinflationary - it tends to just pile up instead of circulating. One person spending $60 million on a bizjet, while good for the bizjet maker and its employees, doesn't have the same broad economic effect as 200 people each buying a $30000 car. Meanwhile, people stuck with flat wages for 40 years don't have much disposable income, and now that quality-wars have produced cars that last 15 years - they (we) keep them that long.

IRAs increase with a rising stock and bond market - but unless/until the money is pulled out and spent at age 62.5 or later, it has little velocity. Of note, in the inflationary 1970s, about 15% of the US population owned stocks; today that is about 55%, and we have low inflation.

And of couse automation and tech in general is disinflationary - 10 people running a factory instead of 2,000 (or two people manning a cockpit instead of four) just don't spend as much, even if their per-person incomes are 75% higher. And machines and computers don't spend anything at all.

These trends are why inflation has stayed below 4%, and often as low as 2% since 1990 (with a spike to about 5.5% just before the 2008 crash, when oil went to $120/barrel).

I don't see those core characteristics changing once the virus crisis is over, and I think that will tend to soak up any inflation from the response spending. Now, of course, if Sanders gets in and cancels all student debt.....

Last edited by pattern_is_full; 27th Mar 2020 at 06:41.
pattern_is_full is offline  
Old 27th Mar 2020, 05:00
  #3 (permalink)  
See and avoid
 
Join Date: Mar 2003
Location: USA
Posts: 504
Nice analysis pattern_is_full.

In addition, advice I've seen says to put the $1200 most tax-paying Americans now expect into a rainy day fund and not spend it unless you have high interest credit card debt to eliminate.

Three million Americans filed for unemployment benefits, but many others must be looking over their shoulders.

Taking that many consumers out of a consumer-driven economy has to have ripple effects we haven't seen yet.
visibility3miles is offline  
Old 27th Mar 2020, 15:40
  #4 (permalink)  
 
Join Date: Jun 2009
Location: Bedford, UK
Age: 66
Posts: 1,230
Deflation has been testing our defences for a while. I can't see inflation making a big comeback anytime soon: too much savings in respect to opportunities. Wish something could be done about share buybacks.
Mr Optimistic is offline  
Old 27th Mar 2020, 16:41
  #5 (permalink)  
 
Join Date: Aug 2009
Location: Texas
Age: 60
Posts: 5,470
Most of what is going on these days is conflation.
(Pattern: nice post)
Lonewolf_50 is offline  
Old 28th Mar 2020, 03:20
  #6 (permalink)  
 
Join Date: Sep 2005
Location: Ontario, Canada
Age: 52
Posts: 73
I would bet on inflationary impact. Here is why:
The economy is being put (partially) on pause. To counteract the loss of employment, the governments of this era tend to resort to many ineffective things, and one thing that has very tangible effect: they print the feel-good tickets and hand them out.
When the pause button is released, there will be fewer businesses producing goods & services. Simply because the "pause button" does not work perfectly. But the held-back and pent-up demand will be there. The credit and direct "quantitative easing" will be there, to ensure the economic ball gets going.
So, all of this says to me: expect inflation. At least during the recovery period.
And then there is the gruesome argument about the windfall of early inheritance... Let's hope that's not a big factor.
balsa model is offline  
Old 28th Mar 2020, 07:39
  #7 (permalink)  
 
Join Date: Oct 2018
Location: Ferrara
Posts: 1,354
I'm with balsa - loads of paper money coming in - and it will be hard to turn off the taps........ when is a company OK? When the virus is gone or when the Directors can pay themselves the same as in 2019? Guess which one they'll fight for.....................
Asturias56 is offline  
Old 28th Mar 2020, 08:11
  #8 (permalink)  
Thread Starter
 
Join Date: Feb 2008
Location: Southwold
Age: 67
Posts: 60
Pattern, Thanks for taking all that trouble to put together a comprehensive and nuanced response. All the points that you make I agree with. I must admit that from my scant knowledge of economics and my own experience I had come to broadly similar conclusions. I was scheduled to go to France next week on a touring holiday, so that's a fair wedge of cash that will now remain in the EM coffers.

I am currently finding that my spending is negligible - about £50 since last weekend! Maybe if enough people are interested we could bump this thread to monitor the economic effects of the virus. Another point that has piqued my interest is the wild swings on stock exchanges. Is there logic to this, response to good/bad economic news, or is the basis of it motivated by profit seeking? Finally what is the effect on hedge funds and pensions if the stocks reduce in value? Which by my rough calculation is currently around 30%.
Effluent Man is offline  
Old 28th Mar 2020, 09:07
  #9 (permalink)  
Thought police antagonist
 
Join Date: Jul 2003
Location: Where I always have been...firmly in the real world
Posts: 943
The economic effect of the virus is already having an impact.....

https://www.theguardian.com/business...t-rating-to-aa-
Krystal n chips is online now  
Old 28th Mar 2020, 09:47
  #10 (permalink)  
 
Join Date: Jul 2010
Location: Asia
Posts: 649
The best thing people can do with a stimulus bonus is to spend it locally in small businesses. Get a haircut, have lunch in a small cafe, service your car with an independent mechanic, go shopping at the baker/butcher/green grocer in the high street. Call a tradesman and get those niggling things attended to at home. Don't pee it up in the air or spend it on imported goods.
krismiler is offline  
Old 28th Mar 2020, 10:48
  #11 (permalink)  
Thought police antagonist
 
Join Date: Jul 2003
Location: Where I always have been...firmly in the real world
Posts: 943
Originally Posted by krismiler View Post
The best thing people can do with a stimulus bonus is to spend it locally in small businesses. Get a haircut, have lunch in a small cafe, service your car with an independent mechanic, go shopping at the baker/butcher/green grocer in the high street. Call a tradesman and get those niggling things attended to at home. Don't pee it up in the air or spend it on imported goods.
Well the good news is, that, many formerly did spend on the underlined above. Not so simple now however with budgets / incomes cut and bills to pay, because as I've said, any debt holiday isn't going to last any longer than any organisation thinks they can get away with. The UK already has alarming levels of personal debt and the current situation will only serve to exacerbate these levels plus the debt is across the social spectrum.

The Bold above is far more problematic If you are fortunate to have any of these outlets conveniently located near you, fine, and they still exist up to a point. As an aside, try finding a fishmonger however.

There's a very good reason for the depletion of such outlets,..........it's called the supermarkets
Krystal n chips is online now  
Old 28th Mar 2020, 11:43
  #12 (permalink)  
Ecce Homo! Loquitur...
 
Join Date: Jul 2000
Location: Peripatetic
Posts: 10,274
Stagflation.......

https://www.cnn.com/2020/03/10/inves...rus/index.html
ORAC is online now  
Old 28th Mar 2020, 11:46
  #13 (permalink)  
 
Join Date: Jun 2009
Location: Bedford, UK
Age: 66
Posts: 1,230
Yes we had plenty of that in the UK in the 70's as I recall. Since we have spent the last few years trying to conjure up inflation without success ( Japan has been unsuccessful at that over the last 30 years), inflation seems to have gone into hiding. Throwing money away in big wars seemed to work in the past but I am not keen on the idea.
Mr Optimistic is offline  
Old 28th Mar 2020, 14:15
  #14 (permalink)  
 
Join Date: Jul 2010
Location: Asia
Posts: 649
Things were bad enough before all this started, remember US Government debt levels, pension black holes in most western countries, record levels of household debt and above all nothing in reserve either public or private for a rainy day. Once this ends it will be similar to coming out of a major world war except that after WW2 America was largely unscathed and in a position to help Europe through the Marshall Plan. Major rebuilding projects demanded a lot of economic activity to support them.

The Germans got the most benefit as the majority of their industry was destroyed, and they rebuilt from scratch with brand new equipment and best practices. There was little appetite for unionising when you didn't know where your next meal was coming from and everybody had to pull together in order to simply survive.

Britain on the other hand patched up what was damaged, continued with antiquated plant and the good old bolshie British workman.

After a few austere years Germany began pulling out in front, Britain had to wait for Margaret Thatcher in 1979 before thing got back on track.
krismiler is offline  
Old 28th Mar 2020, 19:24
  #15 (permalink)  
 
Join Date: Jan 2008
Location: Denver
Posts: 1,011
Originally Posted by Effluent Man View Post
Another point that has piqued my interest is the wild swings on stock exchanges. Is there logic to this, response to good/bad economic news, or is the basis of it motivated by profit seeking? Finally what is the effect on hedge funds and pensions if the stocks reduce in value? Which by my rough calculation is currently around 30%.
Always remember that Alan Greenspan referred to a run-up in stocks back in the pre-crash 2000s as "irrational exuberance." Or as Agent K said in Men In Black, "A person is smart. People are dumb, panicky, dangerous animals."

The markets are best considered as an example of herd activity and psychology, as well as business sense. In fact that is what "technical analysis" of the markets does - measure and codify how animal emotions produce identifiable patterns in the market. E.G. a "head and shoulders" top to a market: price goes up and falls back, and then goes up again to a higher level and falls back, and then goes up a third time but can't even reach the first high = indicates people don't have the stomach or emotional fortitude to pay as much anymore. The market or the individual stock is going to decline for a while. And more generally, where people start feeling uncomfortable - or relieved and optimistic, with an inverted head-and-shoulders, indicating a price bottom.

On the one hand, stocks (again, in the US anyway) have been a focus or "sink" for inflation as well as money. As have been other "assets" like homes, or college educations. Sometimes they are called "bubbles" - inflation in one narrow part of the economy.

Stock prices as a function of return - price-to-earnings ratio - have been inflated already. It costs more to acquire a given amount of income from them, except for the Ponzi-scheme-like idea of "if it goes up I can sell it to some other sucker for a quick profit." Nominal P/E ratio historically would be about 16:1 - it has gotten as high as 22:1 over the 2010's boom as people "chased alpha (return on investment)" because no one, from retirees to large retirement plans (institutional investors) could make their goals with (low) bond interest alone.

But to be specific, I think US stocks (which may influence other markets) were already about 10% inflated ($3000) at their Dow 29000+ peak. There were already signs of price-resistance in the months right before Italy's infection - it was bouncing off that high. And then we got a double whammy of "escape of Covid" out of Asia, and the massive drop in oil price - and the bubble popped. Panic selling - which "overshot" a rational bottom, and causing margin calls for some, followed by panic buying on any sign of good news (gotta get in while prices are still low!)

I expect if and when stability returns, it will be at the equivalent of Dow 26000 or so. But news may cause many peaks and valleys along the way.

(Margin calls - some people buy stocks on credit. 15% down, with the remainder due over a period of time (like any loan). If the stock goes up 15%, you have doubled your money on that 15% increase, even after paying off the loan. But if the stock goes down 15%, you get "underwater" on your loan. Your stock (collateral) is worth less than what you owe the lender. You have to pony up at least another 20% - right now! - and have to sell something else to cover the margin.)
pattern_is_full is offline  
Old 28th Mar 2020, 23:46
  #16 (permalink)  
 
Join Date: Jul 2010
Location: Asia
Posts: 649
(Margin calls - some people buy stocks on credit. 15% down, with the remainder due over a period of time (like any loan). If the stock goes up 15%, you have doubled your money on that 15% increase, even after paying off the loan. But if the stock goes down 15%, you get "underwater" on your loan. Your stock (collateral) is worth less than what you owe the lender. You have to pony up at least another 20% - right now! - and have to sell something else to cover the margin.)
And this is at the root of the problem, fine if it works when the price goes up the stockholder and banks make money. When the price goes down the taxpayers are expected to cover the losses incurred by the banks. Privatise the profits and socialise the losses.

There is a place in the investment world for high risk/high return trading, however those engaging in it need to understand the risks involved, be able to fully cover their positions and not expect a bail out when things go south.
krismiler is offline  
Old 29th Mar 2020, 00:15
  #17 (permalink)  
Thread Starter
 
Join Date: Feb 2008
Location: Southwold
Age: 67
Posts: 60
My view exactly. I was in business for nearly forty years and whenever I used bank borrowing I was happy to provide security in the form of personal property. I have noticed in this latest crisis business people complaining that this isn't fair. Well it is. You should not expect to be able to risk other people's money to make profits but if it all goes pear shaped to then walk away unscathed.
Effluent Man is offline  
Old 29th Mar 2020, 02:50
  #18 (permalink)  
See and avoid
 
Join Date: Mar 2003
Location: USA
Posts: 504
krismiler

Get a haircut,
Not allowed

have lunch in a small cafe,
Not allowed

service your car with an independent mechanic, go shopping at the baker/butcher/green grocer
Allowed

Call a tradesman and get those niggling things attended to at home.
Depends on whether they're willing to show up (probably)

At least in my neck of the woods...
visibility3miles is offline  
Old 29th Mar 2020, 02:59
  #19 (permalink)  
 
Join Date: Jul 2010
Location: Asia
Posts: 649
Imagine the outcry from ordinary tax payers if they were expected to make up the losses for punters who had a bad day at the bookies or racetrack. The banks shouldn’t expect one either and nor should they be allowed to get into a position where they need one.

A bank is a custodian of other people’s money which must be protected. If they want to go on speculative ventures using their own profits or money raised specifically for that purpose from adventurous investors that’s fine but don’t lend my savings out to someone who thinks oil is going to hit $200 a barrel but has nothing to fall back on if it doesn’t.
krismiler is offline  

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Thread Tools
Search this Thread

Contact Us - Archive - Advertising - Cookie Policy - Privacy Statement - Terms of Service - Do Not Sell My Personal Information

Copyright © 2018 MH Sub I, LLC dba Internet Brands. All rights reserved. Use of this site indicates your consent to the Terms of Use.