The macroeconomics of the COVID crisis

The fall in production due to the COVID crisis has given rise to a very particular macroeconomic equilibrium that poses several problems. The fall in production due to supply-side constraints should have driven down the incomes of households and companies, but this was prevented by very large fiscal deficits. The peculiar point is that these incomes could not be consumed or invested, due to the public health constraints, so they led to the accumulation of excess savings. The upshot is therefore the odd combination of public debt in exchange for forced savings. The public debt issued to stabilise private sector income was bought by central banks in exchange for money creation. If this money creation is irreversible, which is likely, then there is no public debt problem (the government bonds issued will never be repaid), but a problem of excess money creation and therefore financial instability. The economic outlook hinges on how the forced savings will be used. If they are spent, there will be excess demand for goods and services and therefore inflation; if they are invested in existing financial or real estate assets, there will be inflation in asset prices.