Since the 2008 financial crisis, the central banks of Europe, Japan and the United States have pursued an unprecedented expansion in the money supply for their various economies, and thus the world’s economy.
{mosads}Nothing like this has ever happened before. Trillions of dollars, euros and yen have been printed and used to purchase assets and sovereign debt.
Traditional economic theory has been buried under this avalanche of money.
It can be effectively argued that the expansion of the money supply was a necessary reaction to stave off a worldwide depression that might otherwise have been precipitated by the financial crisis of 2008.
This massive injection of liquidity into these key world markets — the United States, Europe and Japan — kept them afloat. The depression did not occur.
This type of hyperexpansion in money across so many important economies would usually lead to some major problems with inflation and consequent destabilization.
But this has not occurred.
The laws of printing excess money, which have, in the past, led inevitably to inflation and thus great economic distress, seem to have been replaced.
Instead of inflation, Europe and Japan are still most fearful of deflation — even with the 24/7 operation of their printing presses. The United States is just barely moving forward in terms of economic growth, but there are no visible, significant signs of uncontrolled or compounding inflation.
What is going on here? The industrialized world seems to have cut itself adrift from the historically obvious fact that if you print a whole lot of money really quickly, you devalue money generally.
If this is not addressed, then the history of inflation will rear up and hit the global economy in the side of the head with a two-by-four.
First, one of the unique and historically differentiating facts of this most recent expansion of the money supply was that it was not confined to one national or regional economy.
In the past, a country such as Germany in the 1930s or Argentina in any given decade or the United States in the 1970s might allow the printing and expansion of its money supply to grow to a point where that specific economy suffered suffocating inflation.
This time, however, the expansion came across all the major economies with the exception of some high-growth regions, such as China and India. Thus everyone was doing the same thing — printing money.
The practical result of this was that, in relative terms, none of the major economies was being disadvantaged compared to the other major economies by running their printing presses. Everyone’s currency expansion was happening essentially in unison, so no one was gaining comparative advantage.
This, however, has now changed. Europe and Japan are continuing a frenzy of monetary expansion out of fear of deflation and economic malaise while the United States is beginning to rein in its monetary expansion.
We have separation.
The implications of this, though not entirely predictable, are on balance negative and substantial, especially for Japan and Europe.
It is likely that there are even harder times ahead for those economies, since they are depending on the printing presses for their growth and economic wellbeing. They are headed one way and the United States is now headed another. The comparative advantage goes to the United States.
This brings the matter to the second concern.
There is only one effective way to grow an economy: by increasing productivity.
The massive attempt to keep the world from slipping into a depression in 2008 and 2009 through artificially increasing the value of assets, especially equities, and expanding liquidity by super-charging the printing presses was necessary.
It worked. But it was not the cure for the disease of economic stagnation and possible collapse brought on by the financial crisis. It was simply a tourniquet.
Inflating the money supply not only does not help increase economic productivity. In the long run, it actually undermines it.
An expansive monetary policy may, in the short run, create political breathing room. But eventually, it mutes the factors that drive productivity.
Nobody really knows where this all leads. The divergence in the rate at which money is being printed could well undermine productivity in those areas printing it fastest — Europe and Japan. But the rest of the world needs these economies to participate in a real recovery.
Solving their deflation problem with massive quantities of new euros and yen will accomplish nothing if, in the process, they fundamentally undermine the forces that drive productivity and true growth.
Instead, they will simply generate an atmosphere for economic stagnation and social unrest that will spill over into the rest of the world.
They may have gotten out of the frying pan. But it appears they are about to jump into the fire.
Judd Gregg (R) is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations Foreign Operations subcommittee.