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The tangled trouble behind all that money-printing

Sheets of U.S. one dollar bills roll off the press at the Bureau of Printing and Engraving in Washington.

Hillery Smith Garrison/AP

The world's central bankers will gather this weekend in Jackson Hole, Wyo., for their annual ruminations on theory and policy. Investors are looking for indications that the U.S. Federal Reserve and the European Central Bank will create yet more money. The monetary strongmen should be paying more attention to something else – string theory.

No, not the abstruse stuff of theoretical physics, but the effect of repeated pushes on monetary strings. That's the cynical description of the last four years of central bank policy – the combination of ultra-low policy rates and repeated doses of money-printing. These pushes haven't done much for growth, but they have created some dangerously large wads of string.

The ECB's Mario Draghi will miss the confab, but Fed chairman Ben Bernanke may well tantalize listeners at Jackson Hole with hints that more string is forthcoming, even though such "stimulus" is unlikely to do much for the real economy.

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While most money supply measures globally have increased faster than output for many years (albeit slowing in the euro zone since 2009), not enough of the new supply has been spent to create strong GDP growth.

Economists describe the monetary inaction as a decline in velocity. That's not very helpful, since some money is more turbulent than ever – think of derivatives markets and fast trading.

It is better to think of the accumulation of massive pools of stagnant money: $10.4-trillion (U.S.) of global foreign exchange reserves, $1.6-trillion of U.S. banks' free reserves at the Fed, €727-billion ($914-billion) of so-called Target 2 balances at the Bundesbank alone and $2.3-trillion in cash holdings of U.S. non-financial corporations.

If monetary stagnation were the worst danger, it might make sense to push in some more string.

But the more money sits around, the greater is the temptation to spend it. And if enough money is spent too fast, the result is inflation, perhaps even hyperinflation.

The Jackson Hole conferees should work on defusing the threat of the global economy getting all balled up in uncontrolled inflation, not in increasing its likelihood.

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