Inflation is not just a matter of numbers – and at the moment several factors are fueling the hypothesis of a generalized rise in prices: it is time to take shelter …
The models, as we started to see yesterday, are always fancy. The Fed’s 2,000 economists are preparing models to predict GDP growth, for example. Inevitably, these models have to be constantly reviewed… so that the ultimate curve on the graph ends up matching reality.
When Milton Friedman modeled inflation to reduce it to a “monetary phenomenon” he had to put aside mystery and poetry … the moral side of the matter … surprises … politics, panics and madness … and all the other things that come together to make a real inflationary episode.
That is to say, he must have emptied the swamp of everything that didn’t fit into his model – the tides of fear then greed… the wild animals… the lapping and stickiness of virgin mud.
What did he have left? Numbers. Figures that follow his orders. Figures that do not complain or moan when he passes them through the mill. Figures that do not ask questions.
It’s not just the numbers, however …
In the clean, simplified version, German hyperinflation was caused by the numbers. In 1918, Germany had some 32 billion marks in circulation. In 1923, when the architect of German monetary policy, Rudolf von Havenstein, died of a heart attack, she had 500 trillion.
But Germany had also just lost a devastating war. She had lost her industrial heart – the Ruhr Valley. Its unemployed veterans were fighting in the streets… the Communists against the National Socialists.
Finally, she had been forced to pay almost all of her real currency – gold – in reparations to Britain and France.
These things were not numbers. And they weren’t strictly monetary. But they also mattered.
In the United States, if they had been less docile, the numbers might have risen in 1971, when Richard Nixon separated the dollar from gold, and ask: ” now that authorities can print money at will, won’t they inevitably borrow too much? Isn’t that the lesson of 2,000 years of monetary history? “
Eight years later, they would have had other questions: “China is joining the world economy, what consequences will that have?” The country has around 500 million people ready to be put to work. What will be the effects on inflation? “
The “Chinese price”
In a recent book, The Great Demographic Reversal [« Le Grand renversement démographique », NDLR], Charles Goodhart and Manoj Pradhan say it has done a lot.
Much of the credit for the relatively low consumer prices of the past 30 years, they argue, goes not to the Fed’s smart guys, but to the Chinese. It was the “Chinese price” that kept consumer goods from rising more sharply.
Since taking the “capitalist route” in 1979, China has added hundreds of millions of very low-wage workers to the global labor pool. Combined with efficient infrastructure, qualified technical expertise and an economic climate that made it possible to undertake more quickly and more freely than in the West, this created fierce price competition in world markets.
But we don’t stop the tide: Goodhart and Pradhan are now telling us that this sweet spot, for consumer prices, is going wrong.
China has already gutted its cheap labor campaigns. Wages are climbing. The Chinese are aging, inevitably shifting from producing goods to consuming them.
This “reversal,” say the authors, will drive up prices in the West … force real interest rates to rise … and cause a crisis that Jerome Powell, Janet Yellen and the others cannot manage or control.
Get on high ground, in other words; in the mudflats, the water begins to rise.
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