It’s early 2020, a virus suddenly hits the world, borders are closed, and cities stand at a standstill. The economy is a complex machine that doesn’t like sudden stops.
During the COVID-19 pandemic, most countries’ governments began to act unprecedentedly: they shut down businesses, sent people home, and started handing out massive amounts to keep the population afloat.
It seemed logical and humane, but economic laws cannot be fooled. This became particularly evident in the United States. Then, the frightening word “hyperinflation” appeared in the media for the first time in many decades.
Now that the pandemic has receded into the background, replaced by wars and sanctions, we should remember how the economic system nearly broke down and understand how to avoid such mistakes in the future.
Why Doesn’t Money Grow on Trees?
In the spring of 2021, the US Federal Reserve System (Fed) faced a unique problem.
Millions of people lost their jobs, businesses shut down, and life as we knew it came to a standstill. To prevent mass impoverishment, the Fed began printing money in quantities that had previously seemed unimaginable.
In effect, the US government created a situation in which money began to “fall from the sky.” These were the so-called “stimulus checks,” direct payments totaling hundreds of billions of dollars to US citizens. At the same time, the government gave large companies huge loans at zero interest rates. All this led to an excess of money in the economy.
The economy is stubborn, and the excess money instantly affected prices. Prices began to rise faster than Americans’ wages could adapt to the new conditions. Soon, analysts began to warn of hyperinflation, a phenomenon in which money rapidly loses its purchasing power and prices rise several times a month or even a week.
What Could Lead to Real Hyperinflation?
In 2021, the US economy faced several challenges, each of which could have led to real hyperinflation:
1. Excessive money supply (printing money)
One of the main principles of economics states that the more money is put into circulation, the less each dollar is worth. That is why printing money without restraint means devaluing it. In the US, trillions of dollars were circulated during the pandemic, which could have led to a serious rise in inflation.
2. Decline in production and shortage of goods
The shutdown of factories and plants worldwide has led to a global shortage of goods and components. This has resulted in too few goods on the market and too much money in the hands of the population, a classic scenario in which prices inevitably rise.
3. Labor shortage
A paradoxical situation has arisen in the US. Because the government has been handing out overly generous benefits, it has become more profitable for many Americans to stay home than work. This has created a situation where there are many job vacancies but insufficient workers. Wages began to rise, but that did not help bring people back to work. As a result, production costs increased and products became more expensive.
4. Logistics crisis and fuel problems
The oil and fuel crises have become another factor in rising inflation. Any disruptions in fuel supplies immediately affect the cost of delivering goods. In the US, in the spring of 2021, against the backdrop of the pandemic, there was also a hacker attack on the most significant fuel pipeline, Colonial Pipeline, which caused an acute fuel shortage on the east coast of the US. This crisis showed us how easy it is to disrupt economic equilibrium.
Why Was the Disaster Averted?
Contrary to the gloomiest analysts’ predictions, hyperinflation did not occur in the US. Prices rose significantly but did not reach a critical point. Several factors contributed to this:
- Timely response from the Fed: The Federal Reserve began to gradually raise interest rates, which slowed the growth of the money supply and stabilized the market.
- Restoration of supply chains: The economy proved flexible enough to gradually restore logistics and fill the gap in the market for goods.
- Labor market adaptability: Companies raised wages, began actively hiring, and the market gradually returned to normal.
However, it is crucial to understand that the US was only a few steps away from a real disaster.
Lessons to be Learned
The COVID-19 pandemic has gradually transitioned into a phase of geopolitical instability caused by conflicts, sanctions, and trade wars. Today, we are once again on the brink of economic turmoil. Here are three essential tips to help modern economists and policymakers avoid repeating the mistakes of the past:
- To prevent an uncontrolled money supply, printing money should be done moderately and thoughtfully. Excessive amounts of cash always lead to price increases.
- Stimulate work and production. Benefits should not replace wages. A balance is important so that it is always profitable for people to work and contribute to the economy.
- Protect logistics and supply chains. The world must be prepared for crises and shocks. Reliable infrastructure will help smooth out inflationary shocks.
The economy always moves in cycles: booms are followed by crises, and crises follow crises. Today, we are experiencing a new wave of shocks caused by war and global conflicts. However, the pandemic turmoil has taught us important lessons that will help us avoid total collapse.
Politicians and central banks must act cautiously and thoughtfully, learning from past mistakes and maintaining stability in the labor market and the financial system. Most importantly, we must remember that behind the economic figures are real people with their life stories, problems, and hopes for a better future.
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