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“The fundamentals of the economy were very strong prior to the virus scare and, if we can alleviate or mitigate the adverse effects of the virus, I believe that markets will continue to respond in a positive manner. Again, everything is dependent upon our ability to control the virus and even develop a vaccine for the virus."”
John Jahera, professor emeritus of finance in Auburn University’s Harbert College of Business, comments on the possible effect of the coronavirus stimulus packages on the national debt, the prospect for inflation and how citizens can protect their financial well-being.
Do the stimulus packages significantly affect the national debt?
Yes, the stimulus packages will indeed affect the national debt. Without some increase in tax revenue and/or cuts in other spending, the debt will have to increase. As of last week the federal debt is about $24.7 trillion dollars and we are on track to have the highest debt level as a percentage of GDP since WWII. The U.S. government will finance this debt by issuing U.S. government securities, i.e., borrowing from investors who buy those government securities. Of course, there is a downside to the government continuing to borrow by issuing Treasury securities. We could see higher inflation among other things. But these are unprecedented times and similar in some respects to the World War II era. Even with a strong economic recovery, it will take time to repay the massive federal debt that we have in the U.S.
What is the normal rate of inflation and do you expect it to change?
The normal rate is not well defined. However, the Federal Reserve, as part of its monetary policy actions, has a targeted inflation rate of 2 percent. In 2020, we will likely see an inflation rate of less than 2.5 percent and perhaps lower than 2 percent. Inflation for 2019 was around 1.8 percent. As of right now, I see no reason for significant inflation to occur. With the economic disruption due to the coronavirus issue, people are simply not spending money as they had been doing, and so prices are not expected to go up. Also, the cost of oil is remarkably low and that will keep inflation low. All of that could change, however, if people start spending again and drive prices upward.
How is inflation controlled?
The Federal Reserve uses the tools of monetary policy to control inflation to the degree possible. By that, we mean they take actions to increase or decrease the money supply to either stimulate economic activity or slow down economic activity. In the U.S., inflation has not been a significant problem for a number of years now since the 2008 financial crisis. In fact, the highest inflation in the last 20 years was in 2008 when the rate hit 3.8 percent, still a low rate. So inflation has not been a major concern in recent years. In fact, some have been concerned about possible deflation.
What should citizens be doing to protect their financial well-being?
In terms of citizens protecting their financial well-being, the best thing to do is stay the course. We saw the stock market drop significantly last month and then rebound rather nicely. The wrong time to sell is when the market has such a drop. Actually, that is a great time to buy stocks and mutual funds. One can think of stocks as being “on sale.” So people should continue to invest and don't panic at market drops. We've always had ups and downs in the market and we will have them again in the future. And for those who have funds available, now is a good time to increase holdings of stocks and mutual funds. The fundamentals of the economy were very strong prior to the virus scare and, if we can alleviate or mitigate the adverse effects of the virus, I believe that markets will continue to respond in a positive manner. Again, everything is dependent upon our ability to control the virus and even develop a vaccine for the virus.
Anything else we should know about inflation?
Inflation should not be a major concern right now. Of course, that could change in coming years as we will still have the massive federal debt. Overall, our economy was very strong prior to the emergence of the coronavirus situation. Now, with unemployment soaring, businesses closed down, manufacturing closed down, etc., federal tax revenues are dropping, too, making the deficit even higher. On a positive note, the economy was strong even in the fourth quarter of 2019 so it is reasonable to expect that we could see a major rebound whenever the coronavirus is contained and people return to work. This will not be immediate and make take a year or two to more fully recover.
About John Jahera:
John Jahera is a professor emeritus who served as the Bobby Lowder Professor of Finance in Auburn’s Harbert College of Business. He is the author of more than 100 articles in a variety of academic and professional journals including the Journal of Financial Research, the Journal of Law, Economics & Organization, Research in Finance, the Journal of Real Estate Finance & Economics and the Journal of Banking & Finance. The primary focus of his research has been in the area of banking, corporate finance and corporate governance. He serves as co-editor of the Journal of Financial Economic Policy and is on the editorial board of Corporate Finance Review, Review of Pacific Basin Financial Markets & Policies and International Journal of Business & Finance Research.