Zero growth economy with currency inflation

05/18/2020 in finance, economics using tags zero growth economy

After COVID-19 battered the stock market, the stock and bond markets have been eeriely calm. The stock market was already overpriced before the pandemic, and interest rates were recovering. The world economy was vulnerable as interest rate yields were already low across developed nations. COVID-19 took away whatever buffer the developed world had left. If interest rates dip further, the US economy can enter a debt hole that would be difficult to crawl out of, similar to the situation Japan and the EU has faced. Geopolitically, this is a very bad position to be in given the rise of China as an economic power.

The Fed chairman, Jerome Powell, understands the risk of negative interest rates. Both experiments (EU/Japan) resulted in failure, and the US is in no position to consider such a policy as such a policy would result in a lost decade situation. The US cannot afford this situation as it would be geopolitically unacceptable as the sole superpower.

Instead, Jerome may be considering the alternative: increasing inflation via MMT, while causing an inflationary depression. Debts will remain as MMT will allow consumers to sustain the current debt levels. However, debts will never be finished until we begin to have economic growth. The risk the Fed is currently trying to avert is defaulting on a missed treasury interest payment, which could cause the financial system to collapse as the “risk-free” asset no longer remains “risk-free”. The Fed’s tools in this case involves increasing the M2 money supply, which has spiked as of late. The risk-freeness of treasury interest payments is guaranteed through tax receipts.

The market is still crashing, but the crash is being “outprinted” by central banks. The value of assets and debts remain relatively stable, and interest rates are pegged at zero. This is really a tax on wealth, without passing any legislation, as those who are impacted by COVID-19 are typically low income laborers. This level of M2 money supply increase is unprecedented in US history. We’re entering uncharted waters.

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