The Capital Note

Pandemic Inflation

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Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: why stimulus isn’t likely to cause inflation, how the pandemic is strengthening large corporations, and some links from around the web.

Monetary Aggregates and Inflation

Congress is nearing a deal on a second major COVID-19 stimulus bill, which would put $900 billion in the hands of American consumers through cash transfers and enhanced unemployment insurance. That would bring 2020’s fiscal stimulus spending to $3 trillion, on top of the trillions in Federal Reserve lending.

The upshot is an expansion of the M2 money stock — which includes hard currency, bank reserves, and certain debt instruments — by more than 25 percent. In the past, this large an increase in the money supply would have been expected to put upward pressure on prices, with more money chasing fewer goods. But financial markets and survey data predict inflation well below the Fed’s 2 percent target for the foreseeable future.

How is this possible?

In part, it reflects the caution of businesses and consumers navigating the pandemic. While the amount of credit and currency in the U.S. has expanded, so has the savings rate. As Tyler Cowen pointed out in a Bloomberg column today, corporations’ preemptively borrowing to cushion their balance sheets leads to an increase in monetary aggregates but not in aggregate demand. And that borrowing is unlikely to spur inflation in the next few years because businesses will only spend this new debt if the recovery is weak and demand is low. Otherwise:

[The] recovery will proceed at a rapid clip, and businesses will have extra cash on their hands for a while. That likely would translate into lower borrowing for the rest of the year and a smoothing of monetary flows — and no major increase in inflationary pressures.

The same dynamics apply to household spending. If the recovery is slow, individuals will use stimulus and unemployment checks for fixed costs. Otherwise, they’ll likely save it. In other words, economic strength could be inversely correlated with inflation in the next year or two.

The pandemic has also brought about other medium-term deflationary forces. For instance, widespread adoption of remote work means less spending on travel, food, transportation, etc., while the relocation of workers to lower-cost geographies could reduce wages.

So don’t expect price increases anytime soon. The more the economy gathers steam, the more the money supply will stabilize.

Around the Web

Congress is nearing an agreement on a second stimulus bill. The package is expected to total $900 billion, the lion’s share going to $600 checks to households and an extension of enhanced unemployment insurance.

SEC charged stock-brokerage platform Robinhood with misleading its customers. The company will pay $65 million in penalties for neglecting to disclose the revenue it received from firms executing its customers’ trades:

“Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money — namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as ‘payment for order flow,’” the SEC said.

“One of Robinhood’s selling points to customers was that trading was ‘commission free,’ but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices,” the statement added.

Quantopian, a startup backed by hedge-fund manager Steve Cohen and venture-capital firm Andreessen Horowitz, closed shop in October. The platform gave users data and tools for building trading algorithms and used the best of those in a proprietary hedge fund. The crowdsourcing model ended up underperforming:

Even high-priced hedge fund managers are struggling to outwit the market these days. “If you needed surgery done in a hospital next week, would you let someone who’s just read books on medicine do it?” asks Mathew Burkitt, a veteran trader and quant who shut his own hedge fund four years ago.

Quantopian’s bet was that this kind of elitism might give it a competitive edge. By offering everyone on the internet free access to data, tutorials, and tools, it sought to beat the army of Ivy League Ph.D.s by picking the best quant strategies from the world’s untapped geniuses. It was the wisdom of the crowds, applied to the nerdiest corner of Wall Street—radical, sure, but a logical extension of a burgeoning gig economy and a tech revolution that was opening up access to ever-deeper market data.

Random Walk

Large corporations have fared much better during the pandemic than small businesses have, largely due to more robust balance sheets and access to capital markets. A new NBER paper finds yet another way in which COVID-19 has made big business better off:

The COVID-19 pandemic shifted the focus of job-seekers toward larger and more resilient companies. NBER researchers Shai Bernstein of Harvard Business School and Richard Townsend of the University of California, San Diego, in joint work with Ting Xu of the University of Virginia, study job search behavior on the AngelList Talent platform (27907). They find greater relative interest in job postings from larger firms, particularly among searchers with more education and experience, after the onset of the pandemic. Searchers also relaxed their reservation criteria for new positions, becoming more receptive to opportunities that promise lower wages or might require relocation. The findings raise questions about how the pandemic, or other economic downturns, affect the flow of talent to start-up entrepreneurial firms.

— D.T.

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