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Central banks and disease outbreaks
So our Dear Leader has been desperate for the Federal Reserve to cut interest rates to prop up the stock market in the face of Covid-19. That by itself is a pretty good indication that it's probably a bad idea, but why?
Cutting interest rates and spending government money are both good strategies for stimulating an economy that’s in a demand slump, like 2008. A supply shock, like the 1973 oil embargo, is a different story: its first effect on the economy is likely to be inflation, which one normally fights by *raising* interest rates and *cutting* government spending. Indeed, the 1973 embargo arguably triggered ten years of “stagflation”, violating the then-article of faith among economists that you couldn’t have inflation and unemployment at the same time. Economists never did come up with a good fix for that, other than letting it burn itself out over time.
So far, the economic effect of Covid-19 has been mostly on the supply side, as companies around the world that relied on parts made in China suddenly lose access to those parts. If it continues, it’ll cause furloughs and layoffs, which will then cause a demand slump too, but only after a period of inflation.
Cutting interest rates and spending government money are both good strategies for stimulating an economy that’s in a demand slump, like 2008. A supply shock, like the 1973 oil embargo, is a different story: its first effect on the economy is likely to be inflation, which one normally fights by *raising* interest rates and *cutting* government spending. Indeed, the 1973 embargo arguably triggered ten years of “stagflation”, violating the then-article of faith among economists that you couldn’t have inflation and unemployment at the same time. Economists never did come up with a good fix for that, other than letting it burn itself out over time.
So far, the economic effect of Covid-19 has been mostly on the supply side, as companies around the world that relied on parts made in China suddenly lose access to those parts. If it continues, it’ll cause furloughs and layoffs, which will then cause a demand slump too, but only after a period of inflation.