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How Coronavirus Stimulus Could Cause Deflation Rather Than Inflation

When money is pumped into the economy, like it is right now with stimulus checks, it is oftentimes a question of how it will impact the inflationary rate in the country.  But have you thought about stimulus deflation?  It seems backwards – I am here to show you that it’s not!

When you’re in the middle of a global pandemic, thinking about money is definitely not the first thing that comes to mind for most people.  Hopefully we’re through the worst as there is optimism about a cure and vaccine as well as the curve is beginning to flatten as people have been great at social distancing.  Things are starting to open back up including offices, theme parks and sporting venues, so hopefully that means that the coronavirus is really being contained!

And, hopefully that means that this little crash was somewhat of just a blip on the radar!

Part of the reason that the crash wasn’t worse than it was and it rebounded so quickly was the government putting $1200 into everyone’s hands that makes less than $99K/year.  IN addition to that, there was an increase of $600/week, on top of normal unemployment, that went to all that were unemployed. 

On top of that, there were many small business loans that were given out to companies where they didn’t have to pay them back if they used them for qualified expenses such as labor.

You might be reading all of this and thinking, “dang, this sure does sound like a potential case for inflation, Andy.”  And I would agree with you.  But there’s many other important factors that we need to think of for the case for deflation.

First – what is deflation?

With inflation, your money can now buy less than before.  Think of it like this – if you’re used to buying something for $1 and there’s 10% inflation, that item might now cost $1.10.  You can’t buy that item with the normal allotment of your salary now because it costs more.  You likely haven’t received a raise steady with inflation so you can’t buy as much as you’re used to.

Want another example?  Do you remember when Subway had all subs as “$5 footlongs?”  Me neither (sarcasm).  It seems so long ago but it actually was awesome.  I think the only sub that you can buy now for $5 is the baloney one.  Do you know what I say to that?

BALONEY!

With deflation, the value of the dollar is now worth more than what it was previously, which might be a good thing to a consumer, right?  You can now buy more with your dollar today than you could yesterday, and that certainly seems like a positive but it isn’t always good.  Essentially, business are now “overpaying” employees because their labor expenses are the exact same but the revenue, they’re receiving from these items is now much lower.

So how does this play into today’s stimulus with the coronavirus?

Andrew and Dave go really in depth on their podcast about their thoughts on it but to me, it’s all about supply and demand.

People are spending way less than they used to

People are not going out to restaurants, theme parks, sporting events, anything like they used to.  People just are saving tons and tons of cash.  Nobody is irrationally spending money like they used to and I think that’s a great thing – in a vacuum. 

It’s great that people are saving all of this money, but that also means that they’re spending less.  Generally speaking, this means that companies are earning less revenue and that their businesses might not seem as sustainable as they used to.  Once the stimulus stops, these small businesses very well might face the harsh reality that they can no longer pay their bills and they will go out of business. 

Those employees will lose their jobs and now they will have even less money to spend, further decreasing demand and worsening deflation.

I think that all of the stimulus, while in a vacuum is a great thing, is causing businesses that normally might’ve closed shop to continue to stay closed longer than they normally would’ve just because they have less of an incentive to go back to work.

I want to be very clear when I say that I am not advocating for a business to open back up earlier than they feel comfortable and in fact, today, on 5/31/20, many places are opening back up and it actually makes me mad.  I personally think that things are opening back up too early but time will tell I suppose, and I do understand the flip side as well, but the fact of the matter is that the longer the shutdown goes on, the more deflationary risk that we have.

The longer that the stimulus continues, both for people and businesses, the more that we realize that we can live without.  We will start to cut things that we don’t need like cable options, gym memberships and grocery shopping online instead of inside.  If we’re allowed to work from home more, we might cut down to one car for the household, move out to the suburbs or even out of state, or just quit our job to pursue a company that will offer that advantage.

All of these things are now on the table that previously were somewhat unknown to us.  All of these will drastically impact businesses. 

Think about the impact of shopping online only – there will be a major shift in the grocery store.  Maybe the entire layout of the store changes.  Cashiers are much less necessary.  You won’t have salons, Starbucks, etc. inside the grocery stores.  All of these could create either job change or maybe even job elimination for employees! 

Eliminating jobs means eliminating income means even less demand for other items meaning more deflation.

In general, I don’t think that we’re going to experience a deflationary period but I think it’s something that is extremely important for us to keep an eye on not only as investors but also just as people in general.  We need to pay special attention because I feel like inflation and deflation are in a sense playing tug of war right now.

We’re certainly in uncertain times but please, go take a listen to the podcast episode that goes much more in depth – it will greatly benefit you.