CONTINUING from my essay from last week about debt, I want to discuss another important aspect of the global economy: money printing.
There is a certain school of economic thought which argues that countries with mature or developed economies can never run out of money, and in a sense, this is true. Countries with strong currencies could never “run out” of money because they can always print more, and people will continue to use those currencies so long as their economies remain credible.
However, “money” is not the same as production and resources, because the former cannot exist without the latter. Governments can produce infinite amounts of money but they cannot print resources or productive economic activity. Likewise, they can pump liquidity into the market, but they cannot control where that capital will go, short of implementing “totalitarian” measures.
Thus, when a government prints more money to raise economic activity, it can keep doing so as long as the amount of production exceeds or rises at the same level as the rate of money printing. In this scenario, the government will never “run out” of money because the debt burden (i.e. the total amount of debt relative to the productive capacity) does not rise even if the debt amount itself is rising, and so long as the currency remains viable.
But what if economic/productive activity doesn’t rise? What then?
Then government must prevent the debt burden from rising and maintain the credibility of its currency by preventing high inflation. There are a few mechanisms for this process, some of which include taxes, inflation, capital transfers and various arcane policies that could take up several essays.
So what does any of this mean? Basically, it means that the global economic system – which now has a total debt of $250 trillion – has limits, and those limits are defined not by debt or prices, but by resources, production and demographics.
Some argue that this limit is further down the line, while more pessimistic analysts will argue that we have passed that point a long time ago. In any case, at the level we’re at now, the debt burden is becoming untenable, and if globalization falls apart, which seems to be the long term trend at this point in time, then let’s just say that the 2020’s will be an interesting decade for everybody, rich and poor alike./PN
