From Coronavirus to Inflationavirus?

The economic meltdown is confirmed. The recession will be profound all over the world; it is estimated at around 5% to 10%, depending on the country for the moment by the official statistical bodies, but at the end of the year the situation could turn out even worse. We have to go back to the 1929 crisis to find an equivalent shock. Above all, beyond strict confinement, the fight against the coronavirus could last for months and depress the economy for a long time to come, especially tourism, air transport, trade fairs, entertainment, the hotel industry, etc.

Moreover, business failures could seriously affect the economic fabric and hamper the return of growth. Large companies will be helped by governments- because of their weight and notoriety- but not all SMEs can be saved, and batches of independents will silently disappear. In any case, when GDP falls by 10%, there is simply not enough income to support all the businesses that existed before. There will also be fewer employees and an explosion of unemployment. Supply and demand will remain permanently depressed.

Governments are taking action to support demand, guarantee corporate loans and extend fiscal deadlines, but the players that are deploying the most resources are the central banks. The Fed is announcing 2.3 trillion dollars in new loans to support the US economy, the ECB is promising 750 billion euros to buy back sovereign debt, the Bank of England will directly finance government spending, and the government will no longer even need to issue treasury bills. And these figures are considered as a first step, no limit is set, according to their leaders.

With a sharp drop in GDP and an unprecedentedly high level of bank notes, we are entering the scenario we analyzed on February 6: money printing + fall in output = hyperinflation. Both mechanisms are, in our view, necessary for price slippage to occur, and here we are. Inflationavirus is coming.

The slow exit from the confinement risks triggering this phenomenon: a fall in international trade will generate surpluses in each country for some products and shortages for others, a wave of business bankruptcies will add to the general disorganization, agriculture is likely to run out of steam, and so shortages will appear with the price rises that go with it. All that is missing now is state intervention, which will want to control prices, requisition and fight the black market, but which will only precipitate the dysfunctions. The state will also want to compensate for the economic depression and the explosion of poverty with unlimited public spending financed by the central bank, and this is how we "become" Venezuela....

Beyond everyday consumer goods, this economic depression will weigh on asset prices (shares, real estate), putting households- even those who own property- in great difficulty: what you own is losing value, and what you need (food) is becoming increasingly expensive. A formidable scissors effect.

And finally, the rise in prices will push up interest rates, despite central banks running their printing presses at full speed to avoid it. States will go bankrupt, the bond market will explode and the mountain of debt will collapse in an apocalyptic crash to give rise to a second crisis even worse than the one we are experiencing.

This is what we have in mind if we think that inflation can be an easy and discreet solution. Will governments and central banks be reasonable? This is a bad start. Under the pretext of fighting the "coronavirus crisis", they are going to amplify the expensive and lax policies they practised before, which would have led to disaster one day or another in any case, since the virus was, in fact, merely a trigger. Here is what they do not understand: as in the Great Depression, we are not looking at a difficult year, we are looking at a decade.