Too much money is not a good thing

(breakingviews.com) -- Money is a powerful drug. The global economy is digesting unprecedented doses of the stuff. It has responded positively to the treatment, but there are already signs of adverse side effects -- not least in the commodities and bond markets.

The money medicine has been administered in various forms: huge government deficits, bank rescues, central bank asset purchases and near zero policy interest rates. These financial drugs have helped the global economic news move from frightening to just mixed. The threat of serial bank failures and debt deflation has been banished.

Investors certainly have money to throw around. The prices of almost all financial assets are up sharply. But all is not quite well.

The immediate problem is that money is by nature fungible, so the authorities cannot make sure that the extra supply goes only where it is intended to be helpful. The bank accounts of oil buyers, for example, are now too amply funded. The price of crude has more than doubled since February, from $33 to $72 a barrel, even though supply can more than meet current demand.

That sharp rise suits oil company bosses fine -- Tony Hayward of BP (BP) now thinks $60 to $90 is "the right sort of level" -- but it risks aggravating trade imbalances and reducing non-oil consumer spending.

Longer term, the money flood could leave the world with too much cash chasing too few goods: the recipe for retail price inflation. There are no signs of this as yet. Prices are still falling in the U.S., Japan and U.K. and rising at a glacial pace in the eurozone.

But inflation could rush in when better times come and workers and companies try to catch up. The fear of that happening helps explain the price decline of one important financial asset, government bonds. The fall has pushed up the yield on 10-year U.S. Treasuries from 2.1% to 4% in four months.

Higher bond yields, like higher oil prices, slow the recovery by cutting into the funds available for spending. In response, some economists are calling for central banks to buy even more long-term government bonds. That would amount to an even more intensive monetary treatment. It brings to mind an old truism of medicine: some cures are even worse than the disease.