What happens when you add a mix of a global pandemic, political tension, and a sprinkle of bad management to a capitalist economy that relies on the markets to subsist? You get a lot of politicians and economists biting their nails and the economy ultimately slows down. This is the sad truth for today’s America. Amidst high tensions in eastern Europe, US government institutions are trying to figure out how to avoid a catastrophic collapse in the economy. Many unfortunate events are stacking up Joe Biden’s agenda, but should we worry about inflation the most? We are indeed about to experience a period of high inflation.
The pandemic has severely impacted the US economy. Many people lost their jobs; people stopped spending money; many places remained closed for almost a year. As a result, the government had no other option but to print more money to keep the economy alive. According to USA Today, the Federal Reserve’s goal is to maintain markets when they are caught up in fear. More money supply and lower interest rates also make credit easier to obtain. Through fiscal policy arrangements, they generated a fund for stimulus checks that went to most Americans. This is a short-term solution to keep the economy running and eventually creates high inflation rates.
Imagine this: Congratulations, the government gave you $2,000! The bad news is that you can buy fewer things with this money. According to the IMF (International Monetary Fund), inflation is the measure of how much more expensive a set of goods and services has become over a certain period, usually a year. This is usually the result of having more demand than supply. When you give a higher purchasing power to the general public, more people will buy certain things in the market. However, the problem comes when the market can not produce as many products as the public demands. The capitalistic solution for this problem is to raise the prices of the goods to lower the amount of demand. Typically, the problem turns into a domino effect, and everything becomes more expensive.
How is this all even related? Well, it is a complicated problem. On one hand, people stopped spending money because of the pandemic, which slowed down the economy. On the other hand, the government’s solution was to print more money to give to the people, hoping to restart the economy. Although the solution works at first, it creates several externalities that branch out to many societal problems, one of them being inflation. We are seeing a rapid increase in inflation levels that analysts did not expect. According to Bloomberg, we are currently experiencing the highest levels of inflation (7%) since June of 1982. That is the reason your Starbucks latte is costing you more.
Once again, Biden’s administration is under tremendous pressure as problems arise. Inflation levels are not looking well for the United States. Some analysts anticipate it not being as bad as expected, and others call it a doomsday level crisis. One thing is true: there is an excessive amount of liquidity in the country that will eventually burst into even more inflation. As of January 30, 2022, the markets have already crashed a couple of times; everyone seems to be scared of what the future beholds. It seems to me that the storm is coming, and it is inevitable.