Inflation in Developed and Developing Countries: Why the Disconnect with Money Printing?
It is often believed that developed countries with strong currencies, such as the United States (USD) and the Euro, never experience inflation, no matter how much money is printed. On the other hand, it is argued that countries like India, Venezuela, and Lebanon see inflation whenever they attempt quantitative easing and stimulus measures. However, this is not universally true. In fact, developed nations have also experienced inflation, as seen in the UK and the US in the early 1970s. This article aims to clarify the reasoning behind the monetary policies and their impact on inflation in both developed and developing countries.
The Case of Developed Countries: Inflation in the 1970s
The early 1970s saw both the UK and the US grappling with a phenomenon known as stagflation, where inflation occurred alongside high unemployment rates. This period was marked by a global oil price shock and supply disruptions, leading to a confluence of economic factors causing inflation. This example disproves the notion that developed countries with strong currencies are immune to inflation.
Why Little Inflation in Developed Countries Today?
Trillions of dollars (or euros) have been printed in developed countries since the 2008 financial crisis. This monetary expansion was aimed at saving the faltering banking sector. Central banks injected liquidity by buying debt from financial institutions—essentially providing them with cash. The intention was that banks would then lend this money to businesses and individuals, thereby reviving the economy. However, this did not happen as envisaged.
In reality, large banks opted to invest these funds into financial products such as derivatives and stock buybacks rather than reinvesting in the real economy. This resulted in a disconnect between the financial sector and the real economy. As a result, consumers did not receive more purchasing power, leading to limited inflation.
The Disconnect between Financial Industries and Real Economies
This dynamic is particularly visible in the current state of the US stock market. Despite millions of people being unemployed, the stock market is performing well. The lack of noticeable inflation is a direct consequence of this disconnection. In the UK, US, and Europe, financial industries are thriving, but the real economies continue to struggle, leading to a situation where inflation is not as pronounced as expected.
Inflation in Developing Countries
Developing countries like India, Venezuela, and Lebanon face different economic challenges. The tried-and-true method of quantitative easing and stimulus measures often results in inflation in these nations. This is due to several factors, including lack of effective regulatory oversight and structural weaknesses in their economies. Governments using these measures without proper economic reforms can lead to undesirable consequences, such as hyperinflation.
Conclusion
The relationship between money printing and inflation is complex and varies significantly between developed and developing countries. While developed countries have seen inflation in the past and may experience it under certain conditions, it is not a constant phenomenon. Likewise, developing countries face unique challenges in managing their economies. Understanding these dynamics is crucial for policymakers and economists in formulating effective monetary strategies.