The coloring of an economist appears to be produced primarily by his stuff of nightmares. The mainstream of American economic thought, that is to say the Keynesians, because of the experience of the Great Depression, see the spectre of deflation as their main bogeyman and so advocate inflationary measures for the health of the macro economy. The European mainstream, dominated as it is by Germans, instead recall the horrors of the Weimar hyperinflation as most fearsome, and so argue for restrained growth of the money supply.

In fact, both the inflationary and deflationary regimes as they have been experienced by real economies have proven to be both persistent and destructive. The measures necessary to restrain the inflation of the 1960s and 70s in the US necessitated the deliberate inducement of a sharp and protracted recession, and the Great Recession that began in 2008 can be seen as an involuntary result of the loose monetary policies of the Fed through the 1990s and 2000s. Even the Great Depression can be seen in a similar light, as a result of overcapacity created by the easy credit of the 1920s, which itself can be traced to surreptitious currency debasement in which all belligerents engaged to fund the Great War. Parenthetically, we can see the evidence for such debasement in the inability of these governments to meet their gold standard obligations in the wake of the 1929 market crash. Conversely, the general deflationary regime stemming from the overcapacity created in the 1920s also proved impossible to overcome until a world war created sufficient demand to absorb it. It was the great fortune of the United States that the war resulted in nearly complete destruction of productive capacity of the rest of the developed world, making the US the sole supplier of high-value goods well into the 1950s and creating that vaunted prosperity pined for by the middle-income classes that it created and invoked ever since by politicians.

It should be clear to any unbiased student of economics that the correlation between the growth of the money supply and economic output which looks so obvious and clear on the charts does not in fact imply bilateral causation, at least in a fiat currency regime, although an argument can be made such a relationship exists in a hard currency system. The United States has experienced resource-constraint inflation in the 1990s that was the result of rapid growth — which growth was most likely created largely by the liberation of resources from their Cold War allocation — but the conjecture implied in the Phillips curve that inflation can create real and sustained growth has never been demonstrated in practice. Instead, as we saw in the 1970s stagflation episode, the uptick in inflation caused no growth.

We did see that the inflation caused by repeated monetary easings perpetrated by the Greenspan and Bernanke Fed creating asset bubbles that  migrated from one asset class to another rather than initiating sustained growth. Bubbles sometimes masqueraded as expansion, but were all the more destructive when they popped. Furthermore, the bigger and longer the bubbles ran, the greater that overcapacity that was created by them and the larger the pain of adjustment to the post-bubble regime.

The endgame to the Great Recession has not yet played out, but it seems clear that the enormous expansion in the money supply has not created the growth predicted by the correlation charts. An instructive lesson to monetary manipulators may well be found, like so many such, in history which demonstrates that the temptation to debase the currency is far from new. In fact, debasement has been the remedy of choice for leaderships of nearly all states faced with large fiscal shortfalls, usually out of the need to pay their armies. Rome, Byzantium, the Caliphate, China, all found that — unless they were able to cover the shortfall through foreign conquest — devaluation merely postponed the inevitable fall of the regimes attempting it.

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