Not politics, economics: usually the arguments against a central bank merely creating money are 1. Hyperinflation (money supply is radically too big) and 2. Moral hazard (rewarding imprudent risk). Seems to me neither of these apply. Is it possible for governments to just "make good" on these vast losses and unemployment without disastrous borrowing from the future? My first impression is neither of the arguments above apply because 1. We’d only be getting back to the status quo ante and 2. Moral hazard in this case is dubious.
This crisis will likely lead to a restructuring of society and hence the economy at least for the short to medium term - as long as the epidemic is ongoing. Many services rely on personal interaction and are thus not able to operate at the same scale if the epidemic is to be ended effectively. Thus, for many businesses revenue will fall dramatically, down to below 10% of previous revenue during lock-down. This will result in many businesses laying off staff in order to cut costs in order to be able to survive on the little remaining revenue, cash reserves and sale of non-essential assets. Still, for some this may not be enough and even if revenue after the epidemic returns to pre-epidemic levels, such a business is not merely illiquid but insolvent since the cash flows required to make up for the losses/service the loans taken during the epidemic do not arise.
Further, many businesses even outside the service-sector were using the already very low interest rates to take on debt in order to invest in projects viable only for low interest rates and similar demand or buy back some of their own stock which increases their equity and hence increases collateral for further loans. Since the cash flow required for this to be viable has all but dried up due to demand sharply declining, many firms have trouble servicing their debt.
Businesses (and also consumers) not able to service their debt will reduce the balance sheets of the banks. If the banks do not have sufficient equity to reduce accordingly, they may themselves not only suffer illiquidity but become insolvent and hence give rise to a financial crisis. Since the debt to equity ratio (leverage ratio) of the banks is quite high due to a high amount of borrowing at very low interest rates from the central bank, there is not a lot of a buffer for loans to become non-performant.
Adding to the above, the cause of this crisis is in large part due to imprudent risk taking by governments. Firstly, the previous bail-outs not being conditional on regulations that adequately ensure the solvency of banks during larger downturns and the central banks keeping interest rates low inflating debt and asset bubbles rather than spreading the failure/restructuring of unviable businesses out in time and secondly the wholly inadequate preparedness (or lack thereof) for an epidemic. The moral hazard is then keeping the people responsible in power/out of prison.
Further, data from Q4-2019 indicates that the economy was already contracting, so the epidemic is not the cause of the downturn but rather an exacerbation that may turn a recession into a deep recession if not a depression.
The fiscal expansion could also be reframed as an attempt at fending off deflation from falling demand (as you seem to describe). Still, this only affects the demand side. Assuming that demand is maintained, inflation will likely still arise from the decrease in supply due to labour force reduction all the way down the supply chains. Fiscal policy cannot address this directly. Thus, attempting to maintain production requires countering the labour force reduction through safety measures and generally by making workers feel confident that going to work will not endanger them and/or that they will not endanger others. If firms have to bear the cost of this, prices will likely increase further. In sum, if government manages to uphold demand, this will likely lead to stagflation.
