/biz/ - Business & Finance

Ok lads, so I think this is how it works. Please correct me where needed.
So, crisis is inherently defationary, right? Losses in stocks reduce the money supply, defaults of big companies or banks do, get fucked over on longs or calls, you get the point. Deflation means that if you leave your money in the bank, you will be able to buy more goods in the future. This with the layoffs resulting from companies going bad and consumer defaults, results in massive decreases in spending. This decrease in spending fuels this deflationary death spin even more, due to lower profits which came from lower consumer spending. This spiral is very dangerous for capitalism, because it is very hard to get out of. Lay offs make your more competitive and lower your cost of producing, but when no one wants to buy your stuff, because the value of their money increase when they keep it, it won't really make a difference. Central banks all over the world are trying to prevent this by, providing liquidity, buying assets, bail outs or straight up minting 2 trillion dollars. They do this in an effort to increase inflation and help the system stay liquid. This might result in a few things. One, they provide so much liquidity and print so much money, that we get massive inflation. (very unlikely, the Euro zone can't even hit 2% with a decade of QE) Second, it all works and the economy returns to normal. (you faggots should have bought the dip) This won't happen, due to the fundementals of the economy being shit and corona demand shock. Oh btw, this scenario doesn't take the demand and supply shock of corona into account. Finally, the most likely scenario, deflation death spiral. As explained previously this can mean credit drought, liquidity shocks and self perpetuating lowering of demand. To sum this up, get ready for massive deflation.