The Great Central-Banking Experiment: Will Unlimited Cash Solve Problems or Cause Them?

January 29, 2013 by TIME Business & Money

The Bank of Japan folded as easily as a hot slice of New York pizza. After a few weeks of pounding by newly installed Prime Minister Shinzo Abe, the BOJ’s (officially independent) managers capitulated on Jan. 22 to his demands that the central bank hike its inflation target to 2% (from 1%) and undertake the necessary monetary easing to meet that target. That means the BOJ will keep printing cash until Japanese deflation is reversed. “One can say that it marks a ‘regime change’ in managing macroeconomic policy,” a victorious Abe declared.

A regime change it is, and it isn’t just taking place in Japan. With the BOJ’s surrender, all three of the world’s major central banks have committed themselves to open-ended, cash-pumping programs to stimulate economies and protect financial stability. The Federal Reserve has pledged to keep easing until the U.S. job market improves. And in September, the European Central Bank promised to purchase unlimited amounts of certain government bonds for any troubled country that signs up to a reform program — a move ECB President Mario Draghi took to help quell the euro zone’s debt crisis. These moves, of course, are on top of the already generous policies the three banks have implemented since the 2008 Lehman Brothers collapse.

We’re in uncharted territory for monetary policy here, folks. Never before have the world’s most important central banks engaged in this sort of limitless largesse. If you don’t believe me, believe William White, chairman of the Economic Development and Review Committee at the OECD in Paris. Central banks “have embarked upon one of the greatest economic experiments of all time,” White wrote last year. “The size and global scope of these discretionary policies makes them historically unprecedented.”

(MORE: Will Japan’s New Prime Minister Start a Debt Crisis?)

Whether these experiments in supereasy money are wise or not, well, that’s another matter. The classical economist in me immediately hears sirens go off. Money is like any other commodity — the more of it there is, the less it is worth. At some point, the deluge of cash could create a tsunami of inflation. Prices of assets could get distorted, blowing up more bubbles that can pop and crash economies.