WASHINGTON—We have heard every major world leader reject the notion that protectionism would be an appropriate response to the financial and economic debacle of 2007–08. And yet the signs are unmistakable: We are entering a protectionist era that does not speak its name.
Canada’s supposedly laissez-faire government has banned the purchase of Saskatchewan-based Potash Corp., by BHP Billiton, an Australian natural resources company. China has stopped shipments of so-called rare earth metals (a collection of 17 minerals used for manufacturing various products that are now in high demand) to Japan. But these and other forms of open protectionism pale in comparison to the decision by the Federal Reserve to pump another $600 billion into the economy through the purchase of government bonds.
The United States is doing what every protectionist government does—trying to make its economy competitive by devaluing the currency, a perverse mechanism for making what comes in artificially expensive and what goes out artificially cheap.
The Federal Reserve has been trying to get people to consume and businesses to invest by creating money out of thin air—its assets and liabilities have almost tripled since 2007. And so far the desired effect has not taken place. Convinced that no action on his part would lead to pernicious deflation and a prolonged depression, Fed Chairman Ben Bernanke has decided to double down. The government is fully behind this policy, as Treasury Secretary Tim Geithner and President Obama have made very clear.
The policy has not worked because the excess of debt and the unrealistic investments of the bubble years have not yet been purged from the system. It takes time and sacrifice. Deflation has little to do with this natural cleansing process. In fact, deflation is generally a good thing. The more productive an economy is, the less things cost. This is how everything from cars to computers eventually came to be affordable. Historically, productivity grew more than the money supply in the United States, so for very long periods the country experienced economic growth and declining prices.
It may not be so apparent, but some prices are already skyrocketing. Commodities are the obvious example. The price of gold has risen by 120 percent since early 2007 and the bulk of gold purchases are not related to buying jewelry but investing—i.e., protection from a falling dollar and the inflation that all this money printing will sooner or later generate beyond commodities. Eventually, the inflation we already see reflected in commodities will percolate to consumer products.
Perhaps there is one good thing about all this. Many mainstream advocates and outlets are beginning to contemplate radical change regarding money. Going back to the gold standard, getting rid of central banks or prohibiting commercial banks from lending their depositors’ money unless expressly authorized by them—as Conservatives Douglas Carswell and Steve Baker have proposed in the British Parliament—are some of the ideas now entering the international debate. The more money becomes a protectionist weapon, the more these compelling ideas will grow in stature in the eyes of the public.