Will currency printing re-inflate stock markets?
There is an expression –
‘There is no problem which can’t be fixed by throwing money at it.’
And during these times of viral contagion, this is exactly the course of action that the Governments of the world are taking, to keep their economies alive.
Over the past 4 weeks the Australian Government has announced a range of Covid19 stimulus initiatives worth $214 billion.
In the US, a huge $US2.2 trillion stimulus package has just been passed by US Congress to keep their economy alive.
And the story is the same in most countries around the world.
There is much debate going on as to whether this currency printing is right or wrong. Regardless, the massive quantities of currency flooding into the world economy, is a macroeconomic factor which the Financially Awakened must consider when making investment decisions.
Consider the stock markets of the world – they are down circa 30% off February highs. And nobody knows when the bottom will be. All one can do is analyse the information and hand and make strategic decisions accordingly.
Consider present circumstances. There are a number of macroeconomic factors which are stock market negative. These factors could drive stock prices down further. They include:
- Falling production levels.
- Substantially reduced domestic and international trade.
- Rapidly rising unemployment rates.
- Uncertainty around Coronavirus containment.
However, a greater impact may be felt from two positive countermeasures now in play:
- Currency printing (discussed previously).
- Low and negative interest rates – meaning negative real returns for holding cash.
Huge amounts of currency are being injected into the world economy with virtually nowhere for it to go but back into stocks – either through expense support, sales revenue or direct share purchasing. And fortunately for financial markets, currency can be ‘printed to infinity.’
I take the view that these countermeasures could succeed in re-inflating stock markets… along with most other asset prices.
What do you think?
Furthermore, previously in our Good Money posts, we have mentioned how currency printing has the effect of devaluing cash savings.
There are finite resources in the world and currency represents a claim over those resources. Printing currency does not increase the resources, it merely creates new claims over those same resources.
Historically, the result of excessive currency printing has been always been high inflation.
Will it be different this time?