A few weeks ago, the Federal Reserve announced unlimited asset purchases to keep the economy afloat during the coronavirus pandemic. The government is also about to release a $2 trillion stimulus package (that’s $2,000,000,000,000). This is by far the most ambitious effort to support the economy in history.
There are probably going to be more measures passed in the coming months to better support businesses and our communities. Injecting new money into their hands will surely be part of the solution. A lot of that money will simply be printed by the government.
Adding money supply to the economy can create inflation. A carton of eggs which used to cost $3 may soon cost $5, or even $10. In this article, we examine the current economic conditions, evaluate the possibility for inflation, and show how you can profit with solar.
The government is really good at creating money out of thin… paper
We’ve been through a money printing episode before. In the wake of the 2008-09 financial crisis, the Federal Reserve engaged in “quantitative easing”, which was a financially nerdy way of saying, “we’re printing a lot of money and injecting it into the economy”.
Given that there are now over 6 million people filed for unemployment over the last two weeks, the amount of stimulus actually required to support our economy relative to this initial $2 trillion may soon be dwarfed. A single $1200 check is probably not going to be enough to support out of work Americans much longer than a month, let alone through the summer:
There is noticeable concern about the risks of inflation under these conditions. Inflation is what happens when there are too many dollars chasing too few goods. Zimbabwe completely destroyed its currency by continually injecting new currency into the system.
The Brookings Institution recently noted, “if central banks create too much money, they will produce an increase in inflation or will have to raise interest rates to slow the economy to restrain inflation. We are not yet at that point.”
Many pundits then suggested hyperinflation was a given after the Federal Reserve “eased into” $5 trillion in government bonds and mortgage backed securities by 2015, though it never happened.
While the government’s response to COVID-19 has been similar to in the 2008 financial crisis, the context of these two events is quite different.
Simultaneous shocks in supply and demand. A setup for stagflation?
Since people are not working as much and supply chains have been disrupted, labor and production have been hampered. That is a shock to supply.
Because of the need for physical distancing, the travel industry, restaurants, and other businesses were forced to close. That is a major shock to demand.
The coronavirus has created simultaneous shocks in supply and demand. These are clear ingredients for a powerful global economic recession.
Inflation occurs when there’s too much demand for a shortage of products and services.
Under virus conditions, there has not been much demand for much outside of food and healthcare. Even if the government prints $100 trillion new dollars, buys up debt, and finances new programs, it may be challenging to see how inflation could be much of a short-term risk, since most people aren’t able to spend much money right now even if they wanted to.
Things get a lot more uncertain in the longer term, as people become more confident in going out in public, shopping, travelling and going out to eat again after risks from the virus abate.
Demand could surge while interacting with increased supply of money, possibly creating the groundwork for inflation and hyperinflation (an even more rapid loss of dollar value).
While the Federal Reserve could take steps to slow economic growth by raising interest rates, the likelihood of that happening with this current administration seems low.
In these conditions, the most pressing threat is not just inflation, it’s stagflation. Stagflation occurs when there is a combination of high unemployment and inflation:
Getting out of a stagflation jam really hamstrings the government. Measures taken to improve unemployment usually causes more inflation, and measures to keep inflation in check usually are not good at all for unemployment.
A flight to dollar safety in an interconnected world
We are now seeing a strengthening dollar instead of a weakening one – even in the face of all this new money printing. One of the biggest reasons for that is US dollars are the gateway to world liquidity.
Most debts between trading partners in the world are housed in dollars, and when those debts, loans, and margin calls need to be paid back, the parties need to sell their local assets, buy dollars, and then satisfy their debts.
When there is an economic collapse like what we’re seeing right now, there is a dollar shortage across the world as global businesses race to liquidity to settle debts. Demand outstrips supply and the value of the dollar increases.
After World War II, the U.S. gave a lot of loans to many countries so they could get back up on their feet. The U.S. owned a lot of global assets right after this time period. Now, the tables are turned. Many more countries own U.S. assets than the U.S. owning foreign assets.
Federal debt has also exploded over the last decade, nearing 80% of our country’s GDP. During the 2008 financial crisis, that figure was 35%. This shift increases the chances of inflation, since the creditors who own government debt may choose to limit their exposure to the dollar, knowing its foundation is saddled with a risky debt load.
The other side of the ledger is often ignored by the dollar bull camp. Foreigners own $39 trillion of U.S. assets. (The U.S. only owns $28 trillion of foreign assets.) pic.twitter.com/l7R8GCjCCP
— Lyn Alden (@LynAldenContact) March 30, 2020
The government hopes much of the world doesn’t sell their existing U.S. treasuries, creating a flight from the dollar. If that were to happen, there’d be a cavalcade of chaos: When large world economies start shedding U.S. dollars as their reserve currencies, we’re all left holding and working for dollars with far less purchasing power.
All of these dollar swap lines that the Fed is doing with nations is not out of the kindness of their heart. It's to avoid the prospect of foreigners selling $39 trillion in U.S. assets, including especially $7 trillion in U.S. treasuries, by biding time.
— Lyn Alden (@LynAldenContact) March 30, 2020
One of the steps the Federal Reserve has taken to make sure that doesn’t happen is to provide dollar swap lines of liquidity so foreigners are less likely to sell their U.S. assets, but specifically those treasuries. The U.S. also cannot really take out more debt at low interest if treasury holders sell.
A related risk is a run on banks as people attempt to withdraw their funds and convert them to other securities. Indeed, Egypt has just announced temporary limits on bank withdrawals after its citizens withdrew 30 billion Egyptian pounds ($2 billion) over the past few weeks. This move was designed to control inflation and hoarding during the coronavirus spread.
How home solar fits into this picture
This is a very financially uncertain time without precedent. Nobody knows for sure what will happen to the value of the dollar through this coronavirus storm, and there are pundits with as many opinion flavors as there are types of ice cream.
Regardless of what does happen, there are huge benefits to owning assets which either generate income or save you expenses during inflationary conditions. An asset like solar panels on your home ensures that even if your purchasing power were to decrease with inflation, you still come out ahead.
Rising prices not only increase the resale value of your home, they increase the value of your home even more with solar panels installed. Each dollar you save by not paying your power company could be considered multiplied by the same inflation factor.
Your solar panels save you from paying for a known quantity of electricity in the coming years. Even if your power company decides to raise their rates in line with needed adjustments to the consumer price index and inflation, you are well protected because you’ve shielded yourself from depending on them to supply you with a valuable resource. You are creating it for yourself instead.
Investing in solar for your home allows you to diversify your assets with a very low risk investment with steady, guaranteed returns which appreciate every day the sun rises.
To explore how much you can now save with solar on your roof, connect with one of our local experts, who will at a safe distance walk you through the numbers.
Last modified: April 3, 2020