MOSCOW, 8 March – RIA Novosti, Natalia Dembinskaya. The American authorities pumped trillions of dollars into the economy by running the printing press at full capacity. Consumers are sitting on the “covid” money accumulated over the pandemic and are about to start spending it. And ahead of us is a new two-trillion-dollar stimulus package from Biden. Observers warn: conditions for hyperinflation are in place. The Federal Reserve says everything is within the normal range. Whether the United States is threatened by an uncontrolled rise in prices – in the material of RIA Novosti.
So much money
By some estimates, the Federal Reserve has spent more than nine trillion dollars on anti-crisis measures. This money was just printed. Since June, the growth rate of the money supply has never dropped below 22 percent per annum – the highest rate in history.
This surge of unsecured bills spurred inflation. However, the Fed immediately changed the target value: “an average of two percent” (instead of the previous “two percent”). This is in order not to raise the key rate. They talked about the risks of hyperinflation if the Fed continues in the same vein.
It should be noted that economists interpret hyperinflation in different ways. So, according to one of the definitions, it is an uncontrolled process in which prices for goods and services grow annually by 1000 percent or more. Another option is 100 percent in three years. The third is 50 percent a month. Be that as it may, this happens extremely rarely in developed countries.
In the United States, inflation has been very low for the past 40 years. Horse racing was in 1979 and 1989 – 13.29 and 12.52 percent, respectively. The ten-year maximum was recorded in 2011 – 3.14. In 2019 – 1.81, in 2020 – 1.4, forecast for 2021 – 2.24.
Incentives and savings
Some economists point out that the key conditions for hyperinflation are already in place. There is an oversupply of paper money without a corresponding increase in the production of goods and active government regulation.
The last straw, according to Republican lawmakers, will be the proposed US President Joe Biden's $ 1.9 trillion stimulus package. The bill was approved by the House of Representatives. The next step is the Senate. The White House is confident that this step is consistent with the scale of the crisis caused by the pandemic. However, critics consider it excessive.
Inflationary risk is also increased by deferred consumer demand. Consumers of the world's largest economies have amassed nearly three trillion dollars in the pandemic, according to Bloomberg. People stayed at home, did not spend money on cafes and restaurants, and did not dream about traveling. Half of these savings come from the United States.
A surge in spending and consumer activity will inevitably drive up prices. However, according to the head of the Federal Reserve Jerome Powell, there is nothing to fear. The financial regulator “does not see how financial support and spending increases that will not last for many years can change the dynamics of inflation.” However, at some points, the figure will exceed the target of two percent, Powell admitted.
According to analysts, US hyperinflation is not really in danger. There are several reasons for this, the main one being the global status of the American currency. It is very difficult to print so many dollars that the world economy cannot absorb them, said Ararat Mkrtchyan, chief strategist at Beta Financial Technologies. For the same reason, hyperinflation is unlikely in the eurozone.
The situation is different with regional currencies. If, for example, Russia or China builds up the money supply excessively, major troubles will not be long in coming.
“The dollar is the world's reserve currency, and it is consumed all over the world. Developing countries that have distortions in their economies – Russia, Brazil, India, Turkey, Saudi Arabia, Nigeria – are more difficult in this sense,” adds Vitaly Mankevich, President Russian-Asian Union of Industrialists and Entrepreneurs.
In the postwar period in the United States, a sharp increase in the money supply led to an increase in prices. However, the expert explains, this happened because people were spending money: they bought more clothes, more food. Now the Americans have enough food and clothing. And as 2020 has shown, the “printed” money got not so much into stores and the real economy, but into the stock market.
Finally, Biden's incentives are less than the first two covid packages under Donald Trump. They compensate for the falling demand of the population, respectively, the balance is maintained.
However, the recent rise in commodity prices will affect production costs, which will eventually affect consumer prices, says Mikhail Bespalov, an analyst at KSP Capital. Demand could increase due to the aforementioned fiscal incentives, as well as the effect of vaccination, if epidemiological restrictions are lifted. An indirect signal to this – retail sales in the US in January added 5.3 percent.
Analysts point out an increase in the yield of Treasury bonds – this figure is close to one and a half percent. This means that the market is worried about the likelihood of inflation returning. “A sharp jump could negatively affect both bond portfolios and stocks, especially those where profits are increasing at a rapid pace. The valuations of such stocks will be revised down in the first place,” says Olga Veretennikova, vice president of analytical company Borsell.
If inflation does rise to three to four percent, the Fed has mechanisms to stabilize the situation, said Igor Kuchma, a financial analyst at Trading View. The first step is to stop buying long-term Treasury bonds and mortgage-backed securities, which will result in an increase in the corresponding interest rates. The second is an increase in short-term rates. Finally, the Fed may abandon the market stimulus program – that is, the bond buybacks.