Stimulating economic activity during periods of recession through monetary stimulus is a proven recipe for overcoming crises. It showed its effectiveness well in the period of 2007-2009, called the “Great Recession”. Subsequently, in the 2nd half of 2016, as well as against the backdrop of a pandemic in 2020, this topic was also actively raised in the United States, and even several government programs were adopted to increase the money supply.
In 2023, the US is well on its way to disinflation, reducing and containing inflationary trends that have intensified in 2022. However, if the government fails to maintain this balance and prices continue to fall, at some point, reflationary measures may be needed again. Therefore, it is important to understand how reflation works to prepare in advance for such a possible scenario.
When the Need for Reflation Occurs
In times of recession, economic activity slows down: the population loses jobs, businesses lose consumers, and all this turns into a vicious cycle. However, it can be exited with the help of a set of government measures aimed at stimulating the economic activity of the population and restarting the economy. Thus, reflation serves as a driver of business activity, influencing precisely those sensitive points in the economy that are beginning to form demand among the population and, as a result, business revitalization.
Basic Components of Reflation
The main task facing the government, the Central Bank, and the Fed is to increase the money supply, the excess of which will result in a willingness to invest in the development of production, the conclusion of trade deals, the purchase of durable goods, etc. Many measures can be taken to achieve this, including the following:
- Lowering interest rates;
- Purchasing bonds by the government;
- Lowering taxes;
- Direct lending to small and medium businesses;
- Investing in large capital expenditures;
- Direct payments to households, etc.
As a result of these measures, the money supply increases, and banks have additional funds that they willingly direct to lending to both businesses and consumers. When this goal is reached and full employment returns to the country, the task of reflation is completed.
Why Stimulation of Lending Is a Key Component of Reflation
High-interest rates, which the Fed approves during the fight against inflation, negatively impact business activity. Loans are needed to launch startups, develop a business, and simply implement long-term personal programs, but they become very expensive.
And if a person, if necessary, can take a payday loan by choosing the most lenient repayment terms on the Payday Depot platform, then it is much more difficult for a business. It is because to achieve business goals, much more funds are needed, which means huge costs for high-interest rates. Therefore, only by making the conditions for lending more attractive to businesses and the population, the government can count on the intensification of business activity.
So far, the Fed is not going to lower the rate until the end of 2023 and even reserves the possibility of its further small increase up to 5.6%. However, as early as 2024, it will begin to decline, which means that it will become more profitable to take loans, which will positively impact the US economy.