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In: Economics
So, to be honest… my understanding is that we honestly don’t really know for sure….
This was a huge fear back in 08/09 when the era of ultra low rates started, but it was an economic crisis and we needed low rates to get though it, however the inflation never materialized.
I believe the leading theory is that since the 08 recession was a financial crisis, the next decade was a long period of people and companies paying off debts and improving their balance sheets meaning there wasn’t the demand in the economy needed to drive inflation as any extra $ was going to pay down debts. The following decade spent improving balance sheets and the $ that was injected into the economy post COVID meant that today most businesses and households have good balance sheets and are now spending $ on goods and services rather than paying down debts, stoking inflation.
However economists will probably be looking at the whole time period for a long time trying to understand just what happened then and what changed in 2020 for a long time. Similar to how the Great Depression has been an area that has also had a lot of academic research.
For reference- this policy was also called ZIRP
https://en.wikipedia.org/wiki/Zero_interest-rate_policy
We did get inflation, in assets for rich people.
To formula for inflation is
Inflation = quantity of money x velocity of money.
You create a bunch of money via quantitive easing, which means you have very low interest rates and artificially low bond returns.
That excess money goes into stocks, housing and other types of assets. These assets are not real things, the price of stocks can go to infinity without any physical disruption taking place.
So money supply went up, but velocity was basically zero. The money went into savings and that savings went into investments.
In 2020, you created a bunch of money in a very short time period, but gave it to poor people.
Poor people did not save this money, they bought cars and Bitcoin and meme stocks but also physical things. So the prices of those physical things are scarce, so changes in demand for real assets lead to changes in price more so than nominal assets.
Because we had an oversized generation in their final years of their careers. They were dumping a significant portion of the relatively large incomes into retirement savings, and thus taking money out of circulation.
Now they are retiring and asking for their savings to be returned to them so they can spend it on food and medicine.
Low interest rates don’t cause inflation, so that’s not part of the situation.
Printing money causes inflation, if that money gets into the broader economy. Before COVID, the government printed a lot of money and mostly used it to balance spending they were already making. This didn’t give people new money, it simply avoided the austerity measures of other countries. There was inflation in investments like houses and stocks, but the people involved were mostly using retirement accounts to reduce their taxes so it didn’t get into the general economy.
COVID spending was a completely different thing. Government was printing checks and sending them to everybody. That directly injected the money into the economy and caused a lot of inflation.
Because not only was there an inflationary money policy, there were major supply chain disruptions that caused supply for many goods to drop, while demand remained the same or even went up
A lot of people just paper over the supply chain disruption of Covid but it was a very big component of the inflation spike of the past few years
money supply wasn’t increased 40% in one year, like it was during the last year of the Trump administration. There is a lot of information available about fractional reserve banking, and how money supply is created, and how it is grown safely. Increasing the overall money supply by 40% in one year is not doing it right.
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