Yahoo Finance senior columnist Rick Newman details how the recent bank failures and uncertainty in the financial system could contribute to deflationary conditions and the Biden administration’s inflation-fighting policies.

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LEARN MORE ABOUT: Bank Failures

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Bank failures are typically considered a negative event in the economy. However, in the current economic climate, bank failures could provide some potential benefits to President Biden’s fiscal policy to curb inflation.

Inflation refers to the general increase in prices of goods and services over time. When inflation is high, it can erode the purchasing power of consumers and damage the economy. Recently, inflation has been a serious concern for the President Biden administration.

One method that the President could use to control inflation is through fiscal policy. Fiscal policy involves adjusting government spending and taxes to influence economic activity. In this case, President Biden could increase government spending to stimulate the economy and prevent inflation.

However, increasing government spending could lead to an increase in the money supply, which could potentially exacerbate inflation. This is where bank failures could come in.

When a bank fails, it may be taken over by the Federal Deposit Insurance Corporation (FDIC). The FDIC will then sell off the failed bank’s assets, including loans and securities, to other banks. This process could reduce the money supply.

When the money supply is reduced, there is less money available for consumers to spend. This decrease in spending can lead to a decrease in demand for goods and services. When demand is low, prices tend to fall. This decrease in prices can help curb inflation.

Additionally, bank failures could lead to an increase in competition among the remaining banks. When there are fewer banks, the remaining banks have more market share. This increased competition could lead to lower interest rates and fees, which could also help control inflation.

Despite these potential benefits, bank failures are not without their downsides. Bank failures could lead to a decrease in confidence in the banking system, which could cause consumers to withdraw their money from banks. This decrease in deposits could lead to a further reduction in the money supply and a decrease in economic activity.

Overall, while bank failures may not be desirable, they could potentially aid President Biden’s fiscal policy to curb inflation. The reduction in the money supply and increase in competition among the remaining banks could help control inflation. However, this must be weighed against the potential negatives that come with bank failures.