Covid 19 - Will it cause inflation or hyperinflation?

sandringham42

This is a relevant and interesting discussion on the extremely precarious state of debt and global economics. From a lay person's perspective what I see is that interest rates have gone down and down to a point where you can borrow money for almost free. In a free market interest rates reflect the demand for credit and the simple rules of supply an demand suggest that when the price of money is zero, no one wants it or there is oversupply. Its price is so low also because central commercial banks have been creating limitless amounts of credit from nothing. Gloal debt in 1981 was 14 trillion dollars, in 2020 it's 265trillion. Simple maths shows that debt has risen almost 19 times and interest rates have plummeted form around 16 - 20% to almost ZERO! The risk of raised debt is unprotected. What we are seeing now is a spectacular downturn in stocks and shares which will no doubt undergo some correction but with increasing job losses and liquidations, closures and suspensions the stock values can't hold up forever. Already the chaotic intervention by governments - too late, and too much is making sovereign debt go through the roof. It's all credit! But if governments can borrow almost limitless amounts for next to zero % the risks rise exponentially. The only way to hedge against that is higher interest rates. This is what makes our current economic system like a ponzi scheme. Built on the never never and held up by money printing. The crash has to come and with it a real risk of hyperinflation. As expected all this is at the cost of unleashing major hardship on the population. Some advise putting your money - if you have any at all - in commodities. Gold, silver etc. For the majority this is neither a practical or a do-able proposition. So I'm licking my finger and holding it up to the air and go where the wind takes me. May the force be with you.

EdGasketTheSecond

"What we are seeing now is a spectacular downturn in stocks and shares"

That may happen or the FED could continue to prop up the market with unlimited dollars. It has been rumoured thay have a deal going with Blackrock to basically buy up shares in the market using ETF's or whatever. The market could stay up but should really be crashing based on the current situation.

" Gold, silver etc. For the majority this is neither a practical or a do-able proposition."

Why not? Anyone can buy a gold ETF just like a share; or open a BullionVault account; or go into a coin dealer and buy a gold sovereign.

coachman12

Weles100 said:

I have 20k in cash savings and 5k in a bond. What can i do to protect this against inflation? and will covid 19 defintely cause inflation?

I will be fascinated to find out the answer to your intriguing question,Weles. There is a most complex
set of permutations of which none can be ruled out completely. They include another great depression, inflation, hyperinflation and even a re-calibration of the economic system that we have known for many years, especially if we do not rush back to globalisation. 
Much will depend on the latter issue; on the duration of the emergency measures;on the way share prices react; on the usual factor of supply vs demand; on the way Governments and the major Central Banks tackle the fall-out; and indeed a host of other complex issues too convoluted to go into here. 
My own guess, which is no more than that in spite of a degree in economics and politics, is that deflation looks a real possibility. I read an article recently which was comparing the UK economy post-corona with post WWII, and the economist did not even refer to the possibility  of deflation, which made me think my basic economics' studies are way out of date. But I stick by my instincts and am relieved that others on this thread,who are probably less antediluvian than me, also tend to envisage deflation. But I wouldn't put more than 50p on it at Ladbrokes.
For what its worth, I'd keep the Bond you already mentioned  and keep the the cash savings in the highest savings rate account currently available, whether easy access or better still fixed term accounts if you feel able to lock your money away for a while. All the best, Weles (and to all of us !! ).

margaretx9

Deflation is quite possible - as per the 1930s depression!
Could go either way depending on what happens.

EdGasketTheSecond

I think stagflation is quite likely. The 'money printing' might stave off a depression but prices of basics like food will rise fast.

BananaRepublic

margaretx9 said:

Deflation is quite possible - as per the 1930s depression!
Could go either way depending on what happens.

A key factor in the Great Depression was the lack of government intervention which allowed events to unfold. The GFC was far less severe than it could have been thanks to government interventions. Hopefully the same will be true of the Big Lurgy Outbreak. 

Facebook and Amazon are doing nicely ... 

EdGasketTheSecond

By not letting events take their course in the GFC, rather than let the markets resolve the issue then, the government has kicked the can down the road and their policies have made things many times worse this time. Now there is no road left to kick the can down.

Malthusian

The markets did resolve the issue in the GFC. The markets were free to dump government debt on the basis gilts were worthless Ponzi points, or decline to buy the shares of banks when the UK government sold them back to the market. But the markets thought the governments' interventions were alright for government work so they didn't. If you think the markets were wrong that's too bad. The customer is always right.

Thrugelmir

EdGasketTheSecond said:

By not letting events take their course in the GFC, rather than let the markets resolve the issue then, the government has kicked the can down the road and their policies have made things many times worse this time. Now there is no road left to kick the can down.

A lot of progress has been made in the past decade. Was never going to be a quick fix. 

Linton

Inflation happens for 2 main reasons:

1) There is insufficient supply of goods and/or labour to meet the demand. Therefore prices and wages increase leading to increases in price-linked guaranteed income and the demands of labour for increased wages.

2) Decreasing value of the £ raises the cost of imported goods leading to increases in price-linked guaranteed income and the demands of labour for increased wages.

(1) seems unlikely since the Government backed personal income at the moment is less than people were getting prior to Covid-19 and there is little opportunity to spend.  Once we start getting back to normal people are unlikely to have a lot of money for excessive spending and it would seem unlikely that insufficient labour would be a problem.

(2) seems unlikely since the UK is not in a significantly worse situation than other developed countries.