We are entering an era of high inflation, to judge by the massive growth of the money supply in the United States, Europe and Asia, and the stubbornness of central bankers who insist that high unemployment demands the creation of even more money. The last time the world went through a similar period was the 1970s. The term that defined the era was �stagflation.�

In a nutshell, stagflation back then was the result of a recession partly caused by stratospheric oil prices followed by the decision to print tons of money in the hope of inflating the economy out of unemployment. In other words, stagnation was not so much because of oil prices; rather, it was the result of the monetary response to the stagnant environment that the high energy costs had helped create. Inflation simply added a new ill to an already grave situation.

What is happening today is in essence not all that different. The response to high unemployment caused by the recession has been a massive increase of the money supply. Since the end of the housing bubble, the Federal Reserve�s balance sheet (assets and liabilities) has almost tripled while in Europe the money supply has increased annually by double digits. In China, official data are hard to come by, but the symptoms of the monetary expansion are visible in the growth of credit in the last couple of years�$1.1 trillion and $1.3 trillion respectively, although the real figure, as James Kynge has pointed out in The Financial Times, is almost twice as large if off-balance-sheet and black-market lending are counted.

We recently had a taste of what�s coming when news that price inflation was picking up in China set off major panic around the world, causing the stock market to fall significantly, triggering gloomy forecasts for the world economy and prompting a new round of mutual recrimination among U.S., European and Asian policymakers.

They are all guilty of what�s coming because all of them have pumped inordinate amounts of money into the economy. Of course, the symptoms are unfolding at different paces, which means that even when one country�i.e. China�is confronted with rising consumer prices and finally decides to reverse course, others, i.e., the United States and Europe, delude still themselves into thinking that the problem is deflation, not inflation. . . .

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