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In the mainstream financial press there is a lot of attention given to the inflationary risks of the Federal Reserve’s bout of money printing. As Pantera Capital CEO Dan Morehead said, the United States has printed more money in June than in its two centuries of existence. Putting this in context, over the course of the pandemic the Fed has nearly doubled its balance sheet to about $7 trillion. 

Some pundits, such as professor of economics Antony Mueller, believe the reverse case – that the economy is deflating – is more likely in the short term. Deflation is when the rate of growth of demand is lower than the growth rate of production. An under-utilized workforce reduces not only productivity, but also demand: because there’s less money to spend. 

“The modern monetary policy suffers from a deep fear of deflation and tries to avoid it at any cost,” Mueller said. “There are various effects at work that promote an automatic recovery from a deflationary shock.” He cited ZIRP and NIRP (zero interest rate policy and negative interest rate policies) and quantitative easing as two tools in the Fed’s toolbox. 

These same tools often can often prevent a natural business correction and lead the economy to inflate. If that’s the case, and the workforce remains under lockdown, the states may be heading to a period of stagflation instead, where inflation rises without growth.

Ending on a pragmatic note, Mueller said reliable economic prognosis is difficult and expectations are volatile. There is a degree of trust in economists and government actors to make forward-directed decisions, and “while trust can easily be destroyed, it is hard to re-establish.”

This content was originally published here.

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