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Zack's avatar

Occam’s Razor would suggest that handing out checks to people is a pretty good way to create inflation

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Henry Baker's avatar

I think the discussion of what’s happening to AD needs a closer look than just “what’s the current stance of fiscal and monetary policy? Loose? AD must be rising then”. A key component of AD is private sector borrowing from banks.

Sometimes (2008) you have an impaired banking system that won’t lend, and households/businesses (frightened by recession and with weak balance sheets) that won’t borrow… you can cut interest rates to zero and do a bucket load of QE, net bank lending will remain negative and the impact of these monetary policy moves on AD will be limited. That leaves fiscal policy / government spending as the only game in town. The 2008 fiscal stimulus was insufficient and the economy stagnated.

In other circumstances (2021?), household balance sheets are strong and corporate profitability is high because of muscular gov bailouts early on. Loose monetary policy spurs demand for housing and mortgage lending accelerates - this results in a more rapid increase in the money supply and then rising spending across the economy. Eventually we hit supply constraints, and inflation rises.

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