2020 has been a year like no other in American history, and we cannot yet know what major effects still lie down the road from COVID-19. One thing we can be certain of, however, is that the stimulus sent to Americans as relief from the financial squeeze of mass unemployment will affect the economy in both the short and long term. However, a thorough analysis of the stimulus by those with backgrounds in economics, like Max Arias of the Wharton School, reveals that there’s some evidence to show that the long-term effects may not be what we think. Specifically, Maxwell Arias has ideas that the spending might not hike inflation, a major concern of some economists.
The link between stimulus and inflation is fairly clear on paper, says Max Arias: more money pumped into the economy as emergency relief means that each individual dollar is worthless, just like how nobody is willing to pay $100 for a gallon of milk when each grocery store has hundreds and hundreds of gallons. This relationship is primarily based on the economics of the 1970s, when monetary policy was upended and governments began to pump more dollars into flagging industries, resulting in the “stagflation” where dollar values dropped while salaries stayed flat. Yet Maxwell Arias explains that this isn’t necessarily the case this time, for several key reasons.
First and foremost, the demand for goods has dropped with the over availability of money, meaning that prices must come down because fewer consumers are willing to spend. With purse strings tight, explains Max Arias, inflation will be limited, since household budgets are shrinking due to cut wages and jobs, meaning that there are not as many people pursuing consumer goods. Additionally, the COVID-19 pandemic is global instead of local, meaning that investors are looking for safe havens as economies across the globe dip, and the historical strength of the American dollar and the American economy make it an attractive investment target. Thus, says Maxwell Arias, we have less to worry about in terms of inflation than we do about the speed of the economy reopening.
It remains to be seen whether the economy can re-capture most of the losses in the first half of 2020; some project it to be strong going forward, while others say it may take years to make up the difference. If the economy grows strong, inflation is more likely as demand rises, but gains over a longer period of time are more likely to keep inflation modest, as it will dampen overall spending patterns. Or, in other words, if dollars are kept in pockets, they will retain their value; but if dollars are spent on the market, their value will drop.