World has forgotten about inflation

 Quarantine will end one day, and the economy will start working again. And then there will be a lot of money in the world.

Since 2008, the world's financial authorities have found a universal tool to support the global economy. The authorities have learned to respond to almost all economic challenges by turning on the printing press. And in this matter the authorities are apparently not afraid of anything.

The coronavirus problem is no exception and has already led to massive liquidity injections. Earlier in January-February, the People's Bank of China poured trillions of yuan into its economy, and now it is the turn of the US Federal Reserve. And the Fed did not hesitate and wasted on trifles. The US Federal Reserve, seeing the record collapse of the financial market, began to "beat" with all its weapons.

Last week, the Fed announced that it will provide $ 4 trillion in repurchase agreements by the end of March (a secured loan with future repurchase). This instrument allows the banking system not to sell its assets if they have problems with liquidity, but to take money from the Fed secured by these assets with the obligation to buy them back in the future. This tool cannot be called a printing press, because it is more of a temporary provision of an opportunity to receive money, and rather it is insurance that avoids a liquidity shortage. But the Fed didn't stop there. And already on Sunday, March 15, urgently, on a non-working day, he lowered his main rate to the range of 0-0.25%. That is, in fact, up to 0%, and in addition to this, he announced a new program for quantitative easing in the amount of $ 700 billion, where it is planned to buy out US government treasuries for $ 500 billion and other securities for $ 200 billion, such as mortgage - and this is already an inclusion printing press.

And it is possible that soon this example will be followed by other central banks of the world, and the ECB, and the Bank of Japan, and the Bank of England and others, and the FRS in the future may also add gas in this matter. And the world will "drown" in money, increasing the risk of depreciation of this money, but for the real economy this will be of little use.

By pure logic, everyone probably understands that no printing press can start a plant that has stopped due to quarantine. After all, the financial system is so structured that the printed money may simply not reach the affected real sector, and once again get stuck inside the financial system. Because the mechanism of filling the economy with money is as follows. The central bank lends money to the banks, which lend to the rest of the economy. And in this chain there are two links, between banks and the central bank, and between banks and the real economy. And if in the first bundle a wide door suddenly opens, this does not mean at all that in the second it will be the same.

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The lack of this connection can be explained by the example of risks. For example, we can assume that due to the coronavirus and the imposed quarantines, the magnitude of the risks increased by 5%. For banks, this means that the risk of loan defaults has increased. And if earlier they gave out $ 1000 on credit and these $ 1000 were returned to them in full, now 5% of the issued loans will most likely not be returned. That is, the risk of non-repayment of debt increased by 5%. In these conditions, in order to continue lending, the bank will be forced to raise interest rates on the loan in order to fully cover the non-repayable volume of loans, and this will happen on the condition that the interest on the loan grows by 5.3%, where $ 950 loans will return $ 1000.

At the same time, the US FRS lowers its rate, first by 0.5%, and then by another 1%, which together gives 1.5%. For banks, funding becomes cheaper by this 1.5%, but they do not cover 5% of the risk. And the bank still raises the interest on the loan by more than 3%. And in this formula, it turns out that the risk exceeds the Fed's rate cut. And this is the problem with the current financial situation. The monetary authorities of the world had basic rates and were very low earlier, and they had no room for maneuver to further relax their policy. The resource for easing monetary policy has already been used up in past years, and no amount of easing of policy can cover the increased level of risk.

The world will "drown" in money, increasing the risk of depreciation of this money, but for the real economy this will be of little use

Therefore, even despite the Fed's rate cut, the real terms of lending to the economy may become tougher, and real bank rates may rise. And because of this, enterprises that are suffering losses due to quarantine will not get any benefit from loosening monetary policy and the Fed's money will not reach them and will not save them from potential bankruptcy.

The gist of all the logic is that the risk from coronavirus and quarantine exceeds the capabilities of the Fed and other central banks of developed countries.