# Will printing more money during COVID cause hyperinflation?

When COVID started, many countries started printing loads of money and handing it out to their people. Here are some examples

US is printing money to help save the economy from the COVID-19 crisis

We’re Paying for Coronavirus Stimulus by Printing Money

14 countries that are paying their workers during quarantine

Coronavirus bailouts

Why Countries Are Giving People Cash Amid the Pandemic

There are definitely people that need the support but also many that won't bother finding work because the handouts are more than what they were earning before. So if there are less people working, doesn't that imply a drop in 'Goods and Services' produced by the country? And with all the money being printed and handed out, that's an increase in money being circulated.

The article The problem with printing money does a good job of explaining the effects of unrestrained money printing when the 'Goods/Services' of a country remains constant. However, I'm arguing that goods and services are decreasing but the money being circulated has increased which is even worse.

I know of hyperinflation in Germany after WWI and Zimbabwe in more recent times from all the money printing. I'm sure there are other examples in history.

So are the countries doing all this money printing on road to hyperflation? If not, why not?

• When COVID started, many countries started printing loads of money and handing it out to their people. — really? Which ones? – gerrit Feb 23 at 13:55
• USA, Japan, Australia ... I'm sure there are lots more – kevin Feb 23 at 14:05
• Could you either drop the Covid bit, or explain what difference it makes? Don't you think printing more money pretty-much defines causing inflation? How is that related to hyperinflation, or Covid? "… why not?" is because in Germany then, Zimbabwe now and several others in between, long before their governments started printing extra notes their currencies were externally branded worthless. – Robbie Goodwin Feb 24 at 1:20
• Welcome to the site. Thanks for contributing. Could you address @gerrit 's comment with a link to a news article providing a specific example? This could greatly improve the quality of this question. Thanks – jmbejara Feb 24 at 2:05
• Your linked news articles are just talking about countries where there are recurring supplementary payments available to people because of covid. As far as I understand it, these don't necessarily mean that the government is printing more money than usual, just that they're paying more (offset against tax income or recorded as debt). So is your question about the impact of printing money generally, or just about the impact of recurring supplementary payments during the pandemic? – Xono Feb 24 at 3:18

Will printing more money during COVID cause hyperinflation?

Likely not for several reasons. First, the article from economicshelp.org you mention is oversimplifying the economics, which is understandable as it is article written for non-economists, but to understand this issue we need to go little bit further.

Inflation, is simply just positive change in price level and price level of an economy is determined by the equilibrium at money market. The money market equilibrium, in its simplified form (more complex models include expectations of the quantities as well but this should suffice for this answer) is given by equation of exchange (See Mankiw Macroeconomics pp 87) as:

$$MV=PY.$$

Where $$M$$ is the money supply, $$V$$ velocity of money, $$P$$ price level and $$Y$$ output.

Solving for price level and log-linearizing (so % changes in right hand side variables give us the % change in P) we get:

$$\ln P=\ln M+\ln V−\ln Y.$$

Hence, it is true that inflation depends on increase in money supply but it also depend on changes in velocity of money and real output. If money supply increases by $$30\%$$ and real output decreases (due to pandemic) by $$10\%$$ and velocity drops by $$40\%$$ these effects cancel out and even $$30\%$$ increase in money supply would not lead to any inflation.

In fact one of the main reasons why we did not see much inflation recently is that velocity of money dropped significantly as you can see from Fred data. It is not clear if velocity will pick up in near future and as long as it remains low it will be offsetting considerable amount of increase in money supply despite of significant drop of real output.

Next, it is important to understand what hyperinflation is. Following Cagan The Monetary Dynamics of Hyperinflation, hyperinflation can be defined as an increase in price level that exceeds $$50\%$$ per month.

This means that in terms of the simple model $$\Delta M + \Delta V - \Delta Y = 50\%$$ per month. There is simply not enough money creation going on in most countries to hit that $$50\%$$ per month value to classify as hyperinflation. For example, in the US the money stock as measured by $$M2$$ increased during last year by $$\approx 19\%$$ (see Fred data). While, that is without doubt large increase relative to previous years, it is far cry from increase in money supply that would lead to hyperinflation, even taking into account drop in output due to covid. Hyperinflation would not be caused by changes in velocity either because even though it is possible it would pick up later velocity usually does not increase fast month by month.

Lastly, if there would be any signs of hyperinflation independent central banks would start acting. In countries like Zimbabwe central banks are not independent and often they are forced to expand money supply rapidly by politicians. In most developed countries central banks are independent and for most part run by technocrats. Central banks have plethora of tools to sharply reduce money supply.

Even though people often just label all money creation money printing this is really just analogy as it is easier to explain money supply increases to people that way, but in reality most money are created by banking system via lending and central banks control the amount of money that can be created by changes in interest rates on its reserves (see for example McLeay, Radia, & Thomas; 2014). Next money are also created when Fed borrows money to the government via its open market operations. Only very small fraction of money are actually printed each year and similar picture holds for most developed nations.

Consequently, if Fed or any other modern independent central bank would spot signs of not just hyperinflation but even high inflation (like $$10\%$$ per year) they would quickly start hiking interest rates which would slow money creation and eventually even destroy part of new money, they would stop buying government bonds or even sell them again destroying part of money supply and so on. Independent central banks are quite good 'inflation fighting machines' and empirical literature, for the most part, shows that there is negative relationship between central bank independence and inflation (e.g. see Jácome & Vázquez; 2008).

Of course, it is not literally impossible that the situation will be mishandled, and heads of central banks are still typically appointed by politicians in most countries so there is possibility of political capture of central banks, but as the things look like now I would say that hyperinflation in most developing countries is astronomically unlikely in near future.

• Great answer, the equation of exchange and log linearising is a big help – kevin Feb 23 at 12:14
• I strongly suspect that if prices rose by 49% per month (11873% per year) it would still be viewed as hyperinflation. Even 20% per month is enough to make most peoples' savings completely worthless in a couple of years, and force the government to issue new denomination bills several times. – user253751 Feb 23 at 13:20
• @user253751 I am sure some people would call even 15-20% inflation per year Hyperinflation. However, if we want to discuss this in fact based manner we have to rigorously define hyperinflation and it is just natural to take the definition used quite often in the literature – 1muflon1 Feb 23 at 14:39

There has been talk of these sorts of policies being inflationary. It looks like the problem will more likely be too little inflation, rather than too much.

The larger cost, however, is to do nothing. These handouts have helped bolster consumer spending and helped consumers meet their debt repayments. Without these handouts, you would likely see far more business failures and more bankruptcies, pressuring the financial system.

• That seems to combine two different issues: (a) balancing total supply and demand so overall prices do not fall or rise too quickly and (b) keeping going companies and jobs which will be viable post-lockdown/social distancing so the frictional costs of losing them and later replacing them can be avoided – Henry Feb 23 at 10:03
• @Henry note the second part would've been a lot easier if we'd chosen to stop the pandemic in, say, April, instead of continuing it. – user253751 Feb 23 at 13:22
• Hi, could you please consider adding sources to your answer we are trying to improve the level of discourse on this site (see this meta) – 1muflon1 Feb 23 at 13:42

There are two logical explanations why printing money may not lead to inflation in the prices of goods and services (which is what official inflation tends to measure).

The first is that the printed money is not going into the consumption of goods and services, but to the purchase of assets (including intangibles) and the servicing of debt (the receivers of which are not primarily engaged in spending the returns).

There is ample evidence that asset prices are in fact continuing to soar. There is also ample evidence that, without printing money, debts would be getting neutralised through default and bankruptcy - so effectively what is occurring is sustenance (if not outright inflation) of the value of investment capital (including capital invested into consumer lending).

This leads me to the next explanation, which is that the reason for the absence of inflation, is because the underlying economy is in a state of grievous deflation, with buyers becoming loath to buy goods and services at their actual production cost (probably mainly due to fear and insecurity). Here inflation is forcing a reallocation of capital from tardy buyers to prompt buyers, in order to promote effective demand, and from buyers generally to sellers generally (the latter of whom, if effective demand were permitted to enter crisis, would soon be selling their wares for a song). Despite many people shovelling away savings and running cash surpluses, the printed money supports effective demand and ensures that the goods and services in the economy still get purchased at reasonable prices, whilst the real value of these cash hoards is then abated to compensate (and if the hoarders later attempt to spend their reserves, they'll find them worth considerably less than when they were first saved).

The same underlying deflation is present in the value of debt capital held by borrowers, mentioned earlier. Debtors' ability to actually service or repay debt is in freefall, and the value of such capital invested in lending would otherwise fall. But by printing money that is used to refinance such debts into the future at low rates, an imminent crisis in the capital value and recoverability of such debts is avoided.

And because lenders who achieve the repayment this way are not reallocating their capital to consumer spending, there is no inflation effect in the market for consumer goods and services. Again, the most likely outlet for such recovered capital is other kinds of assets, and inflation in those areas is indeed soaring (e.g. gold, silver, bitcoin, etc.).

• So when can we expect consumer prices to catch up, in your opinion? – user253751 Feb 23 at 13:27
• @user253751, they don't necessarily have to catch up, provided the other outlets for the cash continue to inflate (or inflate and are then written down, due either to a localised or generalised crash). – Steve Feb 23 at 15:47
• Wages, and production and consumption of necessities do not change significantly by printing money. Basically, it only affects financial markets, which are largely disconnected from the real economy (with the exception that owners of agricultural futures may decide to export to a country that isn't printing money instead of putting produce on the domestic market, but guillotines have been invented and serve as a deterrent). – Simon Richter Feb 23 at 17:45
• @SimonRichter, indeed. Of course the printed money is mainly being made available to the financial markets, to support lending and refinancing, not to consumers directly, so that at least partly explains why it is only affecting financial markets in the first round. Obviously, this life support is allowing many wealthy capitalists to quietly withdraw from (or diversify) exposure to markets which they think eventually must falter, which is helping various kinds of assets to soar as this capital looks for a new home (mainly assets that they don't think the state will intervene against later). – Steve Feb 23 at 17:58