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The fear that a central bank could cause inflation by printing money is justified--except these days. Inflation in rich countries is caused largely by rising wages. How can that happen at a time when unemployment is sky-high? New autoworkers in Michigan are making $14 an hour, less than half the union rate of a few years ago. Youth unemployment in Spain is about 50%. Under these circumstances, wages of Western workers are far more likely to fall than rise.
In an essay for the Financial Times, Mallaby provides a highly intelligent history lesson. After the Japanese tsunami, the Bank of Japan (the country's central bank) printed trillions of yen to stabilize the economy--and it worked. Mallaby contrasts that with the aftermath of the San Francisco earthquake of 1906, a much smaller natural disaster but one that took place in an America that did not have a central bank. Within a year, GDP collapsed, the stock market declined by 50%, and unemployment almost tripled, to 8%. This was not an anomaly. In the recessions of 1873 and 1893, the economy went into free fall while unemployment rose to more than 10% for years--five years in the case of the 1890s. (By comparison, U.S. unemployment hovered close to 10% for three months in the current crisis.)
Modern economies have benefited greatly from having lenders of last resort that act wisely in a crisis. We should discuss how they should use this power. It will take special skill to withdraw, carefully, the cash that all the world's central banks have put into the system in the past few years. But had they not done it in the first place, we would all be discussing a different problem--how to get out of a global Great Depression.