Overdone medicine

The much-anticipated inflationary danger posed by quantitative easing is creeping up on us. Without large scale money printing the entire western financial system might have collapsed. We would have certainly had a still-worse credit crunch and decline in global trade. The US Federal Reserve deserves special praise for intervening decisively to prevent that. But now the picture is changing. There is a global recovery, even though the euro periphery remains dire and Europe as a whole soft. But it is time to take the inflationary dangers of QE seriously.

Global inflation is not yet strong, but is above target. And global monetary policy remains highly expansionary. Broad money growth is now quite rapid in the world’s two largest economies. It grew at 9.9 per cent in the United States and 13 per cent in China — where monetary policy has tightened in the past year to rein in inflation. Though the European Central Bank has shunned outright QE, it has expanded its balance sheet by a half since mid-2011 and trebled it since 2006.

Inflation, meanwhile, is 2.9 per cent in the United States and 2.7 per cent in the euro zone. Inflation in China has moderated to 3.2 per cent. But at 5.8 per cent in Brazil and 9.1 per cent in India inflation remains problematic in emerging economies.

Part of the reason is very high oil and commodity prices. The possible existence of a causal link between QE and commodity prices is contentious, but bursts of money printing have been accompanied by rises in financial markets generally and commodity prices specifically.

Japan’s persistent deflationary problem has encouraged policymakers - and especially the Fed — to lean towards keeping monetary policy very loose. But the United States - and other parts of the world — may respond to large amounts of QE differently to wealthy, old and stagnant Japan. It is not as if central banks have to choke off nascent recovery by raising interest rates. But it is time for them to use more restraint on money-printing.

As economic recovery takes hold, inflationary QE will threaten the very stability previous rounds of money printing have achieved. Central banks must remember that the seeds of the next crisis are often sown trying to mend the last one.