When Will Inflation Hit in the USA and the World Amidst Money Printing Spree?
There's a prevailing concern among economists and policymakers regarding the potential for inflation in the United States and the global economy due to the extensive money printing measures taken by central banks. However, the reality is more nuanced than meets the eye, given the current economic dynamics at play.
Money Printing and Circulation: Where Does the Printed Money Go?
It is important to clarify that much of the money printed by central banks, particularly the Federal Reserve, may not be making its way into the broader economy. Approximately half of the debt held by the US government is owing to itself, implying that the debt is actually held by the Federal Reserve. This internal circulation of money reduces the pressure on the economy to experience hyperinflation.
De-Dollarization and Its Potential Impact
Should there be a significant de-dollarization, leading to a flood of dollars back into the United States, it could put pressure on the economy. However, the likelihood of this happening is low. De-dollarizing is likely to be a gradual process, which would force the US to maintain higher interest rates on Treasury bonds and encourage European nations to buy more to mitigate the risk of losing their foreign exchange reserves. This, in turn, could prevent a rapid return to the dollar and an eventual spike in inflation.
Corporate Greed and its Role in Inflation
Arguably, corporate greed plays a significant role in today's inflationary pressures. However, the United States is unlikely to suffer from hyperinflation due to its pivotal position in the global economy and international banking. As a major economic power, the US influences global markets, and its fiscal policies can be adjusted to mitigate inflation.
Prior Experiences with Stimulus and Inflation
Previous experiences with substantial economic stimuli, such as the $1.9 trillion injection in 2017, saw inflation rise by about 0.5 percentage points over several months. However, the money primarily benefited a small group of individuals, leading to minimal overall economic impact. Current stimulus measures must overcome the deflationary effects of the coronavirus, which pushed inflation down to -2% during the 2008 crisis.
As of April 2020, inflation was at just 0.1%, and it has since recovered to 1.7%. Despite the large influx of new money, inflation is still running relatively low. This suggests that the current rate of inflation is not alarmingly high and may not significantly increase in the near future.
The Role of Interest Rates in Controlling Inflation
A rise in inflation can drive interest rates higher, which would increase the cost of government debt. Since the US government debt surpasses its GDP, a 1% increase in interest rates would exacerbate government spending, necessitating a tax increase to counteract this. Additionally, the government could print more money, but the market expects policymakers to avoid this as it could lead to exponential growth in the debt.
The last time the economy saw significant injected funds was in 2017, and while inflation did rise, it was not drastic. The current stimulus measures have to work against the deflationary effects of the coronavirus, and general inflation tends to run around 2%. Given the large amount of new money, there is a possibility that the inflation rate should increase, even if only slightly.
In conclusion, while there are valid concerns about inflation following extensive money printing, the current evidence suggests that the US and global economies are not likely to experience a full-blown inflationary crisis. The factors discussed above—internal circulation of money, gradual de-dollarization, corporate behavior, and interest rate controls—work together to mitigate the risks of high inflation.