Reflation

The word reflation comes from recession plus inflation

We are used to hearing economic terms like inflation, hyperinflation, deflation, etc. The reason it is not so common to hear reflation is because it is an induced phenomenon and it has been used very rarely. The confinements caused an adverse situation in the markets for which the economy suffered. From here, governments, with the help of central banks, began to artificially stimulate the economy. This phenomenon is what is known as reflation.

The economic implications of reflation vary depending on the circumstances that have led to its implementation. For this reason, we are not only going to explain what it is about, but we are also going to explain why it is being implemented today and what differences it has with the past. If you are interested in knowing the impact it is having, keep reading!

What is reflation?

The economic reflation tries to emit a lot of money generating inflation expressly to overcome a recession

Reflation is a scenario in which the government, through monetary stimuli, aims to create inflation to avoid going into a spiral deflationary. Although it is not the best scenario, it is much better to a general drop in prices with all the damage it would cause to the economy. Getting out of a deflationary spiral is difficult, as lower profits push companies to find themselves in very difficult situations. In addition, it is difficult to redirect the economy to return to the path of growth.

On one hand, we have inflation, and finally, because of it, a recession. The recession is expected to be temporary, and even if there is a general rise in prices, growth can pick up again. In fact, the word reflation is a combination of recession plus inflation.

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Reflation today

The lockdowns due to the current problem brought most of the economic machinery to a halt. After that, the industries and almost all the part of the service sector stopped. That translated into huge losses, lack of income, and a general intention to save for fear of the crisis. The main indices of all countries panicked, and in a few days the stock markets plummeted at a rate not seen before.

Governments around the world began to massively inject money to their economies, with the USA in the lead, which only in April 2020 already had 3 trillion. The objective of this reflation was to finance the countries through the acquisition of bonds, so they all increased their debts, and to give aid to the population to avoid the effects. Among the most common in Spain, ERTEs, on the other hand, aid to people who had ended their unemployment in the middle of confinement, etc. Each country also adopted new fiscal measures. For example, France lowered many taxes, or the case of Germany where 75% of the income was paid to businesses that by law had to close.

The United States issued large amounts of money and went into reflation

Image taken from Wikimedia Commons

All this movement resulted in a greater security perceived by citizens, which was also accompanied by a desire to resume "normal life", consumption and social ties. This meant that a large part of the population could save more than normal, which began to cause a increased demand for certain goods, like real estate. The price of housing began a strong rise on average in all countries, also to a greater number of purchases in various sectors. What finally today prices in general have increased. All this without talking about the current energy crisis that also affects most of the countries.

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Curiosities about reflation

Classical economic theory supports that inflation is essentially a monetary phenomenon. Quantitative expansion can be channeled into greater production and / or supply of goods. All that greater money supply may or may not go towards productivity. However, if productivity is not improved, it will translate into greater rise in prices, as there is greater demand than productive capacity. This point was precisely what has happened after the health crisis. Due to the forced closure of industries, there are still delays in deliveries and meeting that existing demand.

In fact, so much is the fear of inflation and that there are no products for the next Christmas season that it has generated a bottleneck. The very fear that future demands cannot be met is feeding back a loop from which it is already difficult to get out.

Fear of rising prices is further accelerating purchases and creating upward pressure on prices

What can we expect?

At the rate that fiscal stimulus is inflating the economy and raising prices, a possible scenario is that governments began to gradually withdraw stimuli. This is the expected "tapering". With this, interest rates would begin to rise, which is also necessary. Nails rates so low like the current ones with an inflation that is increasing it is not healthy. However, they cannot be withdrawn abruptly, as it is not intended to create a debt crisis either, since many sectors and countries are already heavily indebted.

On the scenarios that have been shuffled and are being shuffled, there is the one that inflation may be temporary. Once the bottlenecks disappear, everything would return to "normal". On the other hand, there are more and more voices saying that inflation has come to stay, at least for a long time. Bridgewater, the investment fund led by Ray Dalio, says this decade will be nothing like 2010 in terms of inflation. The current figures for now support this theory, having reached an inflation both in the USA and in Europe not seen since 2008. Both periods have been treated in a similar way, the housing and health crisis, with quantitative expansions that have tried to avoid recessions. But where the first inflationary periods were expected that did not come close to appearing, this time it has appeared in a generalized way.

The world is not linear, and for now they are possible theories and scenarios. In any case, now you know what reflation means, and you can better understand what is happening in the world today.


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