WASHINGTONWe have heard every major world leader reject the notion that protectionism would be an appropriate response to the financial and economic debacle of 200708. And yet the signs are unmistakable: We are entering a protectionist era that does not speak its name.
Canadas supposedly laissez-faire government has banned the purchase of Saskatchewan-based Potash Corp., by BHP Billiton, an Australian natural resources company. China has stopped shipments of so-called rare earth metals (a collection of 17 minerals used for manufacturing various products that are now in high demand) to Japan. But these and other forms of open protectionism pale in comparison to the decision by the Federal Reserve to pump another $600 billion into the economy through the purchase of government bonds.
The United States is doing what every protectionist government doestrying to make its economy competitive by devaluing the currency, a perverse mechanism for making what comes in artificially expensive and what goes out artificially cheap.
The many protests heard around the world on the eve of the G-20 meeting in South Korea this week signal the strong possibility that other major powers will eventually respond in kind. German Finance Minister Wolfgang Schauble did not mince words: It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of the printing press.
The Federal Reserve has been trying to get people to consume and businesses to invest by creating money out of thin airits assets and liabilities have almost tripled since 2007. And so far the desired effect has not taken place. Convinced that no action on his part would lead to pernicious deflation and a prolonged depression, Fed Chairman Ben Bernanke has decided to double down. The government is fully behind this policy, as Treasury Secretary Tim Geithner and President Obama have made very clear.
The policy has not worked because the excess of debt and the unrealistic investments of the bubble years have not yet been purged from the system. It takes time and sacrifice. Deflation has little to do with this natural cleansing process. In fact, deflation is generally a good thing. The more productive an economy is, the less things cost. This is how everything from cars to computers eventually came to be affordable. Historically, productivity grew more than the money supply in the United States, so for very long periods the country experienced economic growth and declining prices.
Now, the fear of deflation is pushing the U.S. to do what Japan uselessly tried to do for the last two decadesspend and print its way out of a slow-growth environment. The authorities think that devaluing the currency will help the economy become competitive and create jobs, forgetting that a debased currency hurts more people than it helps. The result will inevitably be high inflation. That was the history of many Latin American countries in large chunks of the 20th century. I was there. It is not pretty.
It may not be so apparent, but some prices are already skyrocketing. Commodities are the obvious example. The price of gold has risen by 120 percent since early 2007 and the bulk of gold purchases are not related to buying jewelry but investingi.e., protection from a falling dollar and the inflation that all this money printing will sooner or later generate beyond commodities. Eventually, the inflation we already see reflected in commodities will percolate to consumer products.
How long before there will be a new round of massive money creation in Europe in retaliation against the $600 billion that the Fed will pump into the system? And how long before we see a protectionist response in those Latin American countries concerned about the effect that the flow of all this money into emerging markets will have on local currencies?
Perhaps there is one good thing about all this. Many mainstream advocates and outlets are beginning to contemplate radical change regarding money. Going back to the gold standard, getting rid of central banks or prohibiting commercial banks from lending their depositors money unless expressly authorized by themas Conservatives Douglas Carswell and Steve Baker have proposed in the British Parliamentare some of the ideas now entering the international debate. The more money becomes a protectionist weapon, the more these compelling ideas will grow in stature in the eyes of the public.