It’s no secret to anybody that the COVID19 pandemic has had devastating effects on the global economy, but with quarantine measures becoming laxer, or even being completely abandoned by some countries, economies seem to be managing their way towards reactivation. Slowly but surely, some businesses are starting to open and many people are leaving their houses again, taking the necessary precautions, while the number of COVID19 cases seems to be relatively controlled. It seems as if the worst part has already passed. There is, however, an important consideration that investors have to take into account when assessing their possibilities in the long term, which will affect them even if the economy manages to recover. That is, the oversupply of money and its effects.
Most people with some level of economic knowledge are familiar with the concept of Keynesian economics, an approach to macroeconomic management around which there is a lot of debate. Regardless of one’s position on Keynes’ approach, it’s particularly important to understand it at this moment, because a lot of governments in the world are applying these principles, in one way or another to face the ongoing recession. In simple words, Keynesian economics are the idea, procured by the economist John Maynard Keynes, that higher government expenditure can bring short term macroeconomic growth. This expenditure can come in many forms, whether it’s by generating employment from building public infrastructure or lending public services, or by issuing liquidity to increase the cashflows of the general population to incentivize them to spend money. This latter method is the one that is being most commonly employed by governments in face of the pandemic, and as a natural consequence it tends to increase the money supply.
One very evident example of these Keynesian measures is in the recent “stimulus check” issued by the U. S. governments to its citizens, which was meant for them to spend freely to maintain the country’s economic flow. A similar principle was applied when the government injected 1.5 trillion dollars to the stock markets in April. In Europe, the ECB has taken aggressive measures to issue money in the form of loans. These types of measures lead to people having, and thus spending more money, which also means that retailers get to sell more.
Money, however, is like any other product in a market, and as such abides to the market’s principles. A higher supply of money means that money will have a lower price, and the price of money is measured as interest rates, which are close to reaching record lows in both the U. S. and Europe. With lower interest rates, people are more prone to get loans and credits, consuming an investing more. There’s thus a higher demand of products, services and assets, and with a higher demand comes higher prices. In other words, inflation. With this context in mind, the apparent recovery that economies are starting to get does not seem sustainable in the long term.

Learn more in: https://financialnewsjournal.com/the-oversupply-of-money-and-how-to-remain-safe-from-it/