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Will Covid-19 Cause Hyperinflation

The Coronavirus induced economic slowdown has caused economies to enter into a period of stalled growth. Although the vaccination has been released in almost every country, there is still some time before we return to normalcy. In the meanwhile, governments around the world are adopting different techniques to tackle the effects of Covid-19.

Governments have been issuing support packages including economic stimuli with all sorts of relief for businesses, individuals, and economies as a whole. These measures seem necessary now to keep the economies afloat and to save people from economic hardship, but there is no denying that these measures will have repercussions on the economy.

The major impact of the Covid-19 pandemic has been the lockdowns. Small businesses cannot survive this and are scared of going bankrupt, while individuals fear lay-offs by struggling employers. Governments needed to give relief to each and every sector of the economy. This resulted in huge cash injections which were allowed by central banks to stimulate economies all over the world.

Economic relief packages and stimulus packages have been awarded under a new financial strategy called Modern Monetary Theory or MMT.

As opposed to traditional economic theories, MMT says that the government doesn’t need to worry about large central bank debts as well as money creation. Instead, this new theory considers money creation as a useful tool to stimulate economies.

Modern Monetary Theory provides governments with a base to print as much money as they deem necessary. The only thing to pay attention to under this theory is keeping inflation low. Money must also cover the interest on government debt.

The supporters of traditional economic theory argue that that printing of money at the government's discretion isn't the right approach as it will cause increased taxes and a rise in interest rates.

Additionally, printing money can also result in the devaluation of the currency, which can cause hyperinflation. But the real challenge faced by the government right now is to save the economy from immediate crisis.

The following are major steps taken by governing bodies in different parts of the world;

  1. The United States government and the Federal Reserve Bank of the US adopted a rather radical strategy. Under Universal Basic Income (UBI), the government gave $1200 to every qualified citizen and $2400 to married couples. In addition, $500 was given for every qualified child. The size of this package diminishes gradually for high earning individuals and families. Citizens earning more than $198,000 were not able to receive any cash relief. However, businesses and high earners can apply for relief in the form of loans, tax reliefs, struggling industry support, and other local/state government aid.

  2. UK government is not closing its hand when it comes to relief. The Bank of England and the Chancellor of the Exchequer set an ambitious plan to rescue pandemic affected nations. Commitments from UK authorities for COVID relief include extending statutory sick pay, Coronavirus Business Interruption Loan Scheme, small business grant funding, and business rates relief. For SMEs, £20 billion will be available with a reduction in interest rates and an SME Term Funding Scheme. Overall, the relief package from the Bank of England will cost around £200 billion to boost the economy.

  3. Other governments, irrespective of strong or weak, have followed these two leaders, including the EU and European Central Bank. The ECB has promised to purchase €750 billion worth of government and corporate bonds to calm down sovereign debt markets under its ‘Pandemic Emergency Purchase Programme’.

One might argue that the above-mentioned measures by different governments and authorities look like a recipe for hyperinflation. However, it is also true that these measures were necessary to keep economies from slowdown or recession.

These measures could result in balancing economies, which leads to high employment and a thriving social system while mitigating the coronavirus fallout. At the same time, there are also fears that these measures will lead to increased inflation, debt, and interest rates.

On the positive side, some experts argue that the lockdown has also cramped the demand for goods and services. The buying pattern of consumers has also changed, and we may not see a buying spree due to the injection of money. Only time will tell where coronavirus and measures to tackle its effects will eventually take us.