Originally posted this on twitter –https://twitter.com/ICOResearchGRP/status/1302306966207901697
(1/7) This is the AD/AS model which shows the aggregate demand and supply for goods and services within an economy. Changes in AD (Demand) and AS (Supply) effect the prices of goods and services. Price is shown on the Y axis.
Changes in AD and AS also effect the national income and employment level in an economy. National income and employment is shown in the X axis. Assume that at level Y1 the economy is running close to full employment (pre corona level). AD and AS is at equilibrium here. 🙂
(2/7) Let’s throw in the corona FUD. Everyone goes on lockdown… What happens to demand for goods and services? They go down since no one is out buying stuff (consumption makes up most of an economies national income, like 60%-70%).
Therefore we shift the AD (demand) line to the left (AD1 to AD2). National income takes a massive hit, moving from Y1 to Y1.1 which will translate into unemployment because people are not buying stuff so companies don’t make money so they start firing people.
(3/7) Prices will adjust back down to the equilibrium level since companies want to maximise revenues/profit. So price declines from P1 to P2 and national income / employment increases from Y1.1 to Y2.
(4/7) Since businesses are going bust and supply chains are being disrupted, that’s a negative supply shock right? That means that AS1 needs to move over to the left to AS2. So prices go up from P2 to P2.2 and national income and employment goes down from Y2 to Y2.2.
But….. governments and central banks are thinking “well fuck, we need to get the recovery going and get back to full employment.”
(5/7) So what do they have to do? Get demand up by making people buy stuff, which means shifting AD2 to the right to AD3, enough so we can get back to Y1 (full employment level).
How do they make people buy stuff?
FREE MONEY, LOW RATES, EASY CREDIT, LOWER TAXES and moar PUBLIC SECTOR JOBS FUELED BY DEBT.
Ok so if they do all the artificial demand boosting to get AD up to the Y1 level of full employment… what happens???
Prices go up from P2.2 to P3… that’s a fuck load of inflation …
(6/7) What they need is to do is keep businesses afloat and keep the supply of goods and services as high as possible (near pre corona levels) by pushing the AS curve out from AS2 to AS3 all whilst creating small amounts of inflation while pre corona level of demand comes back…
But how long can businesses stay afloat for… How much new money/credit needs to be made until the Corona FUD is over… It’s like walking on a tightrope, fuck it up and you go full inflation or full deflation.
(7/7) If any economists are out there reading, feel free to correct me because it’s beeen quite some time since looking at these funny charts. And to all the people moaning about the fuck load of debt and money being created…
If it was not being made right now, we would all be in a world of pain if everyone went bust and I guarantee no one could handle it… THE SHOW MUST GO ON!
The legend Richard Werner commented on our post.