Will the printing of Covid-19 'Helicopter Money'​ lead to Hyperinflation later?

Will the printing of Covid-19 'Helicopter Money'​ lead to Hyperinflation later?

This article is the first in a series of articles looking at the impact of the Covid-19 pandemic and anticipate what our near future could be so we can adapt to any threats to our financial well-being. This article looks into governments printing massive amounts of rescue money - 'helicopter money' - and the possibility of it triggering inflation or worse, hyperinflation.

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The SARS-CoV-2 virus is spreading across cities around the world. Thousands are dying as countries lockdown and businesses close. It is the beginning of April, and millions of us are staying indoors hiding away from possible infection.

The numbers are bleak:

  • At the time of writing, there are about 1.2 million cases, and 68,000 people have died from the virus worldwide. [1]
  • From these figures, we calculate the mortality rate to be around 5.6%.
  • If unmitigated, this virus can infect anywhere from 40% to 70% of the population [2].
  • There are about 7.7 billion people in the world.
  • This all means to say that about 172 to 301 million people worldwide may die if we do nothing to curb this virus from spreading further. [3].
About 172 to 301 million people worldwide may die if we do nothing to curb this virus from spreading further.

As I write this, the virus is killing thousands in Italy, Spain and the rest of Europe. It has also started infecting people in the USA. Even though these countries are considered to be the more developed wealthier nations in the world, their hospitals are struggling to cope with the number of patients streaming in. What will happen when the pandemic explodes in poorer countries which are very densely populated and have less funded medical and health institutions?

We are now a more globalised world, so we depend on each other for the fruits, vegetables and other goods to survive. Supplies of these essential goods will drastically reduce when the virus hits farmers and their families across large parts of Asia, Africa and South America.

The future gets even grimmer if anything were to happen to our supplies of food, energy, clean water, electricity and all the resources we need for our everyday lives. I can continue pointing out disturbing scenarios, including those when militias and organised criminals hijack our power plants and such essential utilities. But I will not go on because it is not my intention to cause panic. I just want many of you who are reading this, who are expecting us to return to some form of normality quickly, to consider the possibility that recovering from this ordeal will likely take much longer. This pandemic will have a long-lasting impact on how we live our lives. After this pandemic is over, the world we will return to will be a world vastly different from what we have known.

As cities and countries shut down and people are being asked to stay at home to stop the spread of the virus, many businesses are also closing, leaving millions of people without jobs, income or both. Faced with having to make decisions that will have an enormous impact on their citizens, governments have already begun printing more money to reduce the economic impact of this pandemic on households and businesses.

In the news, this practice might be softened by terms such as ‘borrowing money’, ‘creating money’ or ‘quantitative easing’. Whichever label is used, the outcome is the same. The government is transferring a percentage of the value of every dollar, euro or any other fiat currency you have in your bank account, to their bank account so they can spend it today. (For this reason, I will use the term ‘creating’ money to refer to all these simultaneously.)

This practice of creating money and injecting it into the economy applies inflationary pressures on currencies, and over time you can see the purchasing power of a currency drop when you compare its value to other goods. When economists are asked about whether they think these recent series of cash injections do or will cause inflation, you get conflicting answers. I sense there is some obfuscation going on, a lack of ‘straight-talk’ when it comes to discussing topics of printing money. Billionaire Nick Hanauer said in his TED talk in 2019, “There was a time when the economics profession worked for the public interest... but today, they only work for big corporations and billionaires, and that, is creating a little bit of a problem”[4]. So let us whittle things down to basics, and I will leave it with you to decide if there is a risk or not. 

Creating money and injecting it into the economy applies inflationary pressures on currencies, and over time you can see the purchasing power of a currency drop when you compare its value to other goods.

Imagine a basic economy. This economy has a total of 10 apples (supply). It also has 10 people, having $1 each. This means that there is $10 in the economy. Each of these people wants an apple equally. In this situation, each of the 10 people can afford to have an apple each because the price of one apple equals $1. This is the price where quantity supplied equals quantity demanded.

Now imagine, if in this economy, the government ‘creates’ and injects another $10 into the economy. This means that there is now a total of $20. To maximise their profits, suppliers will adjust for this and set the price of an apple to $2. [5]

If you are one of the people in this economy, what this means for you is this: before the government printed money, you could afford to buy an apple with your dollar. However, after the government printed money, you can only afford to buy half an apple because an apple now costs $2. In other words, the purchasing power of your dollar was halved (your purchasing power is reduced), from 1 apple to only half an apple, as the price of the apple doubles from $1 to $2 (i.e. price inflated). Where did half of your purchasing power go? It went to the government.

Something like this is already happening year after year. Policymakers try to keep inflation rate under 2% per year. This is why the money you earned and saved is losing its purchasing power every year and why a cup of coffee costed around $0.25 in 1970, and it costs $1.60 today.

‘Creating/printing/quantitative easing/borrowing’ money is a way to transfer the purchasing power of money, or the value of money, from those who have it, to the control of the government. If you are part of the government, this is a great tool, especially in times like these. You can take control of some of the purchasing power or value from the rest of the economy so you can redistribute it to those you think you need it most.

‘Creating/printing/quantitative easing/borrowing’ money is a way to transfer the purchasing power of money, or the value of money, from those who have it, to the control of the government... its citizens need to ensure that its government redistributes that money effectively...

When purchasing power, or value, is transferred to the control of the government, its citizens need to ensure that its government redistributes that money effectively and that it is not mismanage due to incompetence or bad decisions, or misappropriated due to corruption. Given the size of the recent ‘quantitative-easing’ it becomes extra crucial to support people and institutions including those in, and of, finances, law and the media to ‘keep the bastards honest’ [6].

I often hear it said that printing/borrowing money is okay as long as the money is paid back to the economy. This, it is argued, applies deflationary pressures that should even out the initial inflationary pressures caused by the printing/borrowing of money. Yes, it’s possible if our governments have the discipline or commitment to pay back what they borrowed! The fact that global debt has been increasing continuously, however, indicates to me that we are not paying back debt nearly enough. Even before Covid-19, the World Bank already expressed concerns that global debt is reaching potentially unsustainable levels. At the end of September 2019, there was a staggering 253 trillion dollars in debt worldwide, which is almost three times the economy of the entire world.

When governments are furiously printing prodigious amounts of money, they are applying inflationary pressures on their currency. If there are no corrective actions or forces to counter-balance these pressures, currencies risk sliding towards hyperinflation, which can lead to even more disastrous consequences. This possibility becomes even more probable if we experience yet another calamity (example? Or not necessary?) before we have fully recovered from this pandemic.

Hyperinflation can inflict massive hardship and losses on an economy and its people as the value of their savings devalues to nothing. The benefit they hoped to gain from years of honest hard work and discipline disintegrates to just pieces of paper, or digits on a screen.

Hyperinflation can inflict massive hardship and losses on an economy and its people as the value of their savings devalues to nothing. The benefit they hoped to gain from years of honest hard work and discipline disintegrates to just pieces of paper, or digits on a screen.

In 2008, Zimbabwe experienced a year’s inflation rate of 231,000,000%, which meant that the prices of goods were doubling every 17 days! It was called the land of the starving billionaires, because people had billions of Zim dollars, but they could not afford basic needs.

In Venezuela in March 2019, prices were rising so quickly that at the end of the month, a teacher could only buy a dozen eggs and two pounds of cheese with a month’s wages and 2.5kg of chicken costed 14.6 million bolivars, which at the time was worth $2.22 US dollars!

Peter Bernholz, Professor Emeritus of Economics at the University of Basel in Switzerland, looked at the last 100 years of hyperinflation in the world and wrote about it in his book, “Monetary Regimes and Inflation”. What he found was that in 25 out of 29 instances (87%), hyperinflation happened because governments tried to solve their problems, usually to fight wars, by creating money.

People in governments are facing tough decisions now as they confront the fact that we need to lock down our cities and countries to control the spread of this virus. By doing so, however, we are shutting down our economies also. People stop working, but they still need to be fed, sheltered and kept secure from violence. We did not prepare enough for a pandemic despite our scientists warning us about it for years. But now that we find ourselves in one that will be more devastating than anything we could have imagined to happen in our lifetimes, what do we do?

The alternative is to allow people to live life as usual, but knowing what we know about the Sars-CoV-2 virus so far, this course of action will kill tens of millions and we will likely find ourselves in a much deeper economic hole. Therefore, it makes sense that we print money to support people, their families and businesses now because even if we still end up in an economic hole, we will at least save millions more from dying.

CONCLUSION

To summarise, we discussed how serious the spread of this virus is and its potential to infect and kill millions of people around the world. The decisions of multiple governments to ‘create’ money to support their citizens and businesses during this pandemic will apply inflationary pressures on fiat currencies in the future. If there are no corrective actions or forces to counter-balance these inflationary pressures, there is also a risk of hyperinflation, which can lead to even more disastrous consequences.

The decisions of multiple governments to ‘create’ money to support their citizens and businesses during this pandemic will apply inflationary pressures on fiat currencies in the future. If there are no corrective actions or forces to counter-balance these inflationary pressures, there is also a risk of hyperinflation, which can lead to even more disastrous consequences.

//END

What's Next?

In this series of articles, I will refer to this article to discuss how Bitcoin (Bitcoin SV) was designed as a currency never to inflate. This takes off the power or the ability for governments to use ‘printing’ money, or ‘quantitative easing’ as a way to fund wars, bail out companies as they did in the Global Financial Crisis or, as is the case now, to support people financially during a pandemic. We will discuss whether that is good or bad and more importantly, what options we have to protect ourselves financially. Follow me on any of the different online channels to be notified when the next article is ready.

About The Author

Marquez Comelab has been helping businesses around the world do business online with web design, web development, SEO, online marketing and e-commerce payment systems since 2003. Currently, he is exploring and learning how Bitcoin SV can help individuals and small businesses. Find out more at MarquezComelab.Com.

Footnotes

[1] Webpage, "Corona Virus Update", https://www.worldometers.info/coronavirus (Last accessed: 5 April 2020)

[2] Estimates gathered from multiple sources but the most extreme estimates I have seen is a webpage: “Estimates of the severity of coronavirus disease 2019: a model-based analysis” https://www.thelancet.com/journals/laninf/article/PIIS1473-3099(20)30243-7/fulltext , (last accessed 5 April 2020). This paper refers to the ‘infection attack rate’ of 80% for unmitigated epidemics.

[3] 7.7 billion x 0.4 x 0.056 = 172 million and 7.7 billion x 0.7 x 0.056 = 301 million.

[4] TED talk: “The dirty secret of capitalism – and a new way forward” by Nick Hanauer. Youtube video: https://youtu.be/th3KE_H27bs?t=69 (Last accessed 4 April 2009).

[5] As a side, it is worth noting that in printing money, no extra value is created because there are still ten apples, which represent the real value or the output or productivity of that economy.

[6] “Keep the bastards honest” is a phrase used by Donald Leslie Chipp (1925 - 2006), an Australian politician. ‘Bastards’ referred to other politicians of the major political parties or politicians in general.

Tags:   Coronavirus Covid-19 Bitcoin inflation hyperinflation economics finance money payments cryptocurrencies


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