Inflation or deflation, what will hit us first?
In order to keep an economy in great working conditions, it is commonly agreed that there should be an inflation of about 2% per year. This means that the average prices for goods and services tend to increase every year by a little margin.
In the present situation a lot of people are fearing a hyperinflation because central governments are printing a lot of money to distribute to the people and the companies. They try to prevent a total economical meltdown at a local level. We might face a hyperinflation but I'm not so sure about it.
The lockdown all over the world has a direct impact on prices but also on the monetary mass (the money in circulation). We can see a steady decline for both demand and offer.
How is money produced?
For every dollar in circulation, there is somewhere a dept of one dollar. Let's say a bank loans you 100'000 USD to buy a house. They will create an account and they will deduct 100'000 USD from this account. They will transfer this money to your savings account.
There will be:
One account with –100'000 USD and one account with +100'000 USD.
Did we create money? No the amount of money stays the same. If you add both accounts together you still get 0 USD. However the bank needs to have a part of the money that they give away as a collateral. It's somewhere between 7 and 9% of the money that they give away.
You want to pay this 100'000 USD to buy your house. It goes from your account to the account of the house seller. Now the bank of the seller has 100'000 USD more on it's accounts and it can be used as collateral for further loans. This is how money can be produced. In normal conditions 90% of the money mass increase is produced by commercial banks and not the central banks. They produce only about 10% by printing new money.
The circle of economical destruction
Let's say your country is in lockdown, the future of companies and people is much less secure than before. Will jobs be lost, will the income be lower? These are all questions that have to be asked. How can companies deal with the losses that they generate when they can't do business?
We will see many different effects like less investment, less consumption and defaults. All this means that people will spend less and slower. In order to sell goods, companies will have to lower their prices because the demand drops. Companies might also have to decrease salaries and this will again have a negative impact on the demand. The circle of deflation is started. People will get aware of it and instead of buying today, they will wait till prices drop even more. For companies and people it will become more and more difficult to adapt to the situation.
Since everybody will earn less, your dept will increase relatively in value and even if interests are low it will be more difficult to pay the rates. This will make the real estate sector come crashing down. Let's now go back to your house that you bought. The bank gave you 100'000 USD loan. At the time, the house was worth 150'000 USD but now it is worth only 80'000 USD. The bank is scared that you can't pay back your dept and they will foreclose your house. They will make 20'000 USD loss and you will keep this dept on your shoulder but you won't have a roof to sleep under...
My opinion is, let the governments help the people and the companies
If we are lucky we will manage to turn things around but I believe that we shouldn't be afraid to let governments help their economies. It's maybe the only thing that can still avert the economical catastrophe.
It's a bleak picture in economic terms amigo @achim03
The truth is, we do not know exactly what will happen, but what is clear to me is that the world economy is in a tailspin, and many governments can probably help their citizens, but there are certainly many who cannot, and who are not interested either.
When I look at countries like Venezuela, I don't believe that the governments shows much interest in helping its citizens. However, even if the governments plan to help their people, their funds are also limited.
Thanks a lot for your comment!
@achim03 first we will be hit by inflation, as now only demand is more then supply . prices are slowly slowly increasing . the world will soon face a meltdown. just keep your money safe for any future situation.
You are right about food prices in general. Other goods tend however to go the other way round. To keep your money safe will be the most important.
Dear @achim03
Interesting choice of topic. I often wonder, how will world economy look like once this storm will hit the fan.
Hyperinflation usually only occures within smaller economies, and also mostly when they accompany currency crash. So I would also expect inflation (in a long term), but not hyperinflation.
I've been always wondering - what does happen if person who borrowed money, or company which took a loan - stopped to exist.
Let's say that I got a morgage, 100k euro. So 100k new euro will be created (based on my new debt). And let's say I die after paying only 10k. What then?
In theory. I believe, that in reality - banks would be to scared to do that. It's like asking to have riots on your hands. In times of C19 crisis it could be very unwanted.
Yours, Piotr
I think this depends on the country. Normally it goes into the whole package of inheritance. Before any inheritance is distributed, the loans are deducted and paid back. The Kids can then decide to accept or not their inheritance. Normally the bank will have the paper of the house and it can sell the house to cover the loan.
Thanks a lot for your comment my friend,
Achim
Dear @achim03
Thanks for being always so reponsive. Have a great sunday ahead,
Yours, Piotr
Resteemed already. Upvote on the way :)
The explanation is detailed, the truth is we are not certain about what is going to happen next, the market may either become friendly or totally collapse whichever one happens we will just have to find a way to survive around it.
Thanks a lot for your comment. It's true that it is difficult to define where the future will lead us.