by Daniel Lacalle
All over the world, governments and central banks are addressing the pandemic crisis with three main sets of measures:
- Massive liquidity injections and rate cuts to support markets and credit.
- Unprecedented fiscal programs aimed at providing loans and grants for the real economy.
- Large public spending programs, fundamentally in current spending and relief measures.
However, they may cause deeper problems than those they aim to solve.
When governments try to artificially boost debt and demand in a supply shock, the risk is the creation a massive deflationary spiral driven by debt saturation that is followed by stagflation when supply chains start to become insufficiently flexible.