The world economy is experiencing a severe recession or depression. This has been preceded by a steep inflation in nominal stocks of money across the entire world. Central banks control these money stocks or money supplies. They engineered a global credit boom by inflating their local currencies.
They did not do this on their own hook. The governments of the affected countries wanted loose credit so as to engineer real estate, construction, and industrial booms. Along the way came stock market and commodity booms. The building booms were part and parcel of their national economic plans and manipulations.
Governments and central banks together fostered a global boom. Government spending and excessive bank credit invariably cause the engineered boom to turn into a bust. The ways they do this are complex. They do not always look the same in different boom-bust sequences. What generally happens is that a manufactured boom that is directed and instigated by government and central banks unbalances and distorts the market system of prices and interest rates. The government actions alter economic activity so that it no longer is consistent with the underlying time, risk, and goods preferences of those who invest and consume. Excessive credit most favors industries and consumption that are sensitive to lower interest rates and lower risk. Their buying and selling distorts the economy’s prices. The boom is unsustainable.
Governments also distort important world economic factors, having to do with taxes, manufacturing location, foreign direct investment, labor and labor mobility, capital movements, and manipulation of exchange rates. Free market coördination is essential to economic stability. Government actions void free market activity in many instances and create imbalances in many of these areas. When a credit boom interacts with these other problems, the distortions and imbalances magnify. The result is depression.
To see how large the worldwide currency inflation has been, I obtained money supply data from the web sites of 22 central banks. The following table shows money supply growth. The period is the 6 years from June, 2002 to June, 2008. In several cases, shorter periods had to be substituted. This creates some minor irregularities in the rankings.
I used the M2 money supply wherever possible; M3 was necessary in a few instances. M2 is reasonably close to the Austrian money supply definition.
The countries shown are among those chosen by Mike Hewitt (see here) who has done some very good work in compiling annual growth in money. My results confirm his over a longer time period.
Column 1 shows the gross factor by which the M2 money supply has gone up. A 75 percent M2 inflation shows up as 1.75x.
Column 2 converts the gross factor to a per annum percent growth, which is continuously compounded. Continuously compounded growth rates are lower than annually compounded growth rates.
Column 3 shows the name of the country.
- 1.09x 1.64 percent Japan (5.5 years)
- 1.27x 3.94 percent Switzerland
- 1.38x 5.43 percent U.S.
- 1.51x 6.84 percent Canada
- 1.54x 7.25 percent Singapore
- 1.62x 8.10 percent European Union (ECB)
- 1.68x 8.66 percent Norway
- 1.57x 9.00 percent Sweden (5 years)
- 1.57x 9.00 percent Venezuela (5 years)
- 1.76x 9.40 percent United Kingdom
- 1.87x 10.4 percent Poland
- 1.90x 10.7 percent Denmark
- 1.92x 10.9 percent Indonesia
- 1.95x 11.1 percent Mexico
- 2.01x 11.6 percent Australia
- 2.14x 12.6 percent Kuwait
- 2.53x 15.4 percent Brazil
- 2.54x 15.5 percent India
- 2.06x 16.0 percent China (4.5 years)
- 3.92x 21.9 percent United Arab Emirates
- 4.57x 25.3 percent Turkey
- 8.13x 34.9 percent Russian Federation
Between 2002 and 2008, the central tendency (or median) of the world’s M2 inflation has been a near doubling of M2 in a six-year period. This is a continuously compounded growth rate of about 10.6 percent per annum. It is no wonder that the world economy has crashed.
We do not have money supply data that go back for centuries. We have some data on prices of various goods. Since the M2 inflation feeds through to inflation in the prices of goods, the price data proxy for money growth. The English data that go back to 1200 suggest that between 1200 and 1914, price inflation over 40-year periods typically was negligible. It varied between —1 percent and +1 percent mostly. Between 1500 and 1600, with the influx of silver from the Americas, the inflation rate got up into the 2 percent range. When gold was largely the basis for money and when central banks did not have the power to divorce themselves largely from gold convertibility, inflation was not a substantial problem.
After 1914, when central governments take a larger share of national product and when central banks support their endeavors, inflation in money and prices takes off into the 6—8 percent and higher ranges prevalent today. This is especially the case after 1971 when international links to gold are severed even more. The only remaining links are that central banks still retain some gold as backing. If they did not, their currencies would lose even more value.
Textbooks in economics construe inflation far too narrowly. They dismiss it as neutral, as in the case of helicopter money spread evenly over all persons. That is a serious error in the economics that fails to see the economic imbalances that inflation introduces. But an even larger problem is that they miss the bigger political picture. Textbooks tacitly accept the status quo in politics.
In the big picture, inflation supports big government. It is a major method of financing governments. With the help of inflation and the inflation tax, government is orders of magnitude larger. Inflation therefore supports the evils of big government. For example, big government quite often chooses armaments and warfare. In this way, inflation helps states to maintain belligerent postures toward one another that lead to waste, frictions, and wars that undermine economic progress. Inflation helps governments to control their peoples or peoples they claim sovereignty over. They often are then enabled to make war on dissident and breakaway movements. Inflation enables governments to finance social programs, many of which undermine the society they purport to support. Inflation benefits some in society at the expense of others. This invariably undermines social cooperation.
The world isn’t such a bad place, although it is plenty bad for plenty of people in many regions and respects. It isn’t so bad partly because we can make it into a nicer place. We have been given the tools to gain the knowledge to do that, technically and ethically. There is a large reservoir of good will and even ethical consensus among the world’s peoples. Artificial barriers are coming down. Old animosities are dying down, if slowly. We have more knowledge, especially in scientific and technical fields, although we are quite capable of misusing it. Amidst these positives, it is dismaying that economic knowledge has, in important respects, either deteriorated, fallen by the wayside, and quite often been thrown away.
We took a wrong turn on politics and economics a hundred or so years ago or longer. It was also an ethical wrong turn. We attributed all manner of economic failings and shortcomings to the wrong causes, and then we compounded the error by thinking that government was the remedy. The harmful results have been and are coming in.
Money is one of these areas where we have gone wrong. We cannot be at peace with one another while attempting to cheat one another with depreciating currencies, and we cannot look to inflation as salvation or insurance against inevitable economic errors that come with any economy, free or government-managed. We are only falling over our own feet in these attempts. We are hurting ourselves and hindering the progress of the human race.
No person or institution, bank or government, should have a largely unchecked power to create a society’s money to the exclusion of others. It is too large a blank check that enables them to enlarge their powers and exercise arbitrary authority over others in other ways. On the other hand, any person or institution should have the power to issue coins, credits, and any other instruments that other people, in their own wisdom and choice, can accept or reject as money; for that acceptance or rejection provides a check on the money-creating power.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.