The US has been spreading monetary inflation globally for over a century. This has been highly damaging at times to its global alliances and to the cause of world peace.
Exceptionally from the mid-1960s to the late 1980s, there were patterns of strong and successful resistance to this inflation by US allies, pre-eminently Germany, but also on occasion Japan. That resistance ultimately helped to pull the US back from the brink of monetary disaster, salvaged and even strengthened the relationship between the US and its allies, whilst weakening its enemies.
Yet in the quarter century of reinvigorated US monetary inflation since the mid-to-late 1990s, with its origins in the staged adoption of the “2 percent inflation standard,” resistance abroad has at best been sporadic and weak with Germany notably missing in action. There are serious grounds for concern about the long-run consequential damage of this failure. We can gain insights into the danger for the US and allies by looking at three illustrations of absent or failed resistance in practice — Japan, Germany, and Israel.
One reason for the lack of resistance has been the camouflaging of monetary inflation in goods and services markets by powerful nonmonetary forces of disinflation during most of this period. Asset inflation does much damage, but the long-term nature of this (including first, cumulative malinvestment and the related prosperity loss and second, financial fragility leading to credit and stock market crash and severe recession) and the difficulty of recognizing causal links means that it does not in general trigger strong political forces of resistance domestically or globally.
Typically, asset inflation during phases of increasing virulence is associated with widespread capital gains, albeit appreciated by only a minority of the population, and so it enjoys then considerable popularity. The essence of asset inflation is the dominance of widespread irrational behavior (impaired mental processes) of investors driven by the inflationary monetary conditions — whether in the frantic “search for yield” or “positive feedback loops.” It is the corruption of asset market price signals by such irrational behavior, which underscores the long-run damage.
When the bust comes — whether triggered by a tightening of monetary conditions or by an endogenous worsening of business conditions, including a slowdown or fall in profits — the scapegoats do not include the monetary policy makers and their political bosses. The accused in the court of public opinion or in legal process are an assortment of individuals and institutions. The top officials of the flawed monetary regime, rather than facing indictment, don the hats of regulators, system-saviors, and recession-fighters, winning praise for their prompt and massive interventions during and after the crisis.
Hence asset inflation weighs in the political scene neither during the heating-up phase nor during the subsequent bust and its aftermath. By contrast high goods and services inflation, as recorded by rapid rise in consumer prices, is widely unpopular and recognizable by all without any required sophistication. This distinction is key to explaining why resistance abroad did emerge to US monetary inflation in the late 1960s, 1970s and 1980s, but hardly at all in the past quarter century.