The latest inflation numbers
- USA: 9.06% in June
- China: 2.10% in May
- Japan: 2.50% in April
- Euro zone: 8.64% in June
Reflections on the management of inflation
Discussion of Pettis’ Tweet
- This, to me, is intellectual laziness: “China and Japan have handled inflation well, despite being exposed to sharp spikes in energy and food costs. Both have exercised reasonable control over their money supply and credit.”
- There is an implicit assumption here that the only problems that matter are the problems of the United States and Europe. Since rising inflation is a problem in the US and Europe, the fact that it is low in Japan and China must be a good thing and a sign of political success.
- This also assumes that Japanese and Chinese monetary policy works the same way as the United States and Europe, and that all four economies suffer from the same set of imbalances.
- This is simply not true and suggests an almost unbelievable lack of nuance. Japan and China have the reverse problems of the United States and Europe. Both suffer from very weak domestic demand, driven by extraordinarily low consumption shares of GDP.
- Japan has been trying unsuccessfully to reverse this trend for 30 years and China for 15 years. The fact that neither has been able to do so to any significant extent is not a sign of political success, but rather of political failure.
- It is also why they do not suffer from the same inflation problems as the US and Europe. With consumption so weak and most policies focused on the supply side rather than the demand side, it is not surprising that CPI inflation is low and is likely to remain low.
- The article argues that Japan and China have kept inflation at bay due to their tight control over monetary and credit expansion, but this only suggests that no one has bothered to look at monetary and credit data, especially in China.
- It makes little sense to congratulate the BoJ and PBoC for “solving” their US and European monetary problems, as well as congratulate the Fed and the ECB for solving their Chinese and Japanese problems. These are not the relevant problems.
- Unfortunately, many Chinese economists also have the same US / Eurocentric orientation. They see low inflation in China as a sign of the success of monetary and fiscal policy rather than a sign of continued weakness in domestic demand.
Probably the best management (using the term both loosely and crudely) goes to Germany.
So far, Germany has not had swings to the high side like China and the US, or to the low side like Japan.
Like China and Japan, and unlike the United States and China, Germany is an export-dependent economy by design.
One size fits all for Germany so far
One of the flaws of the Eurozone is that there is no single interest rate that makes sense overall given the huge differences in productivity, work rules, pension plans and economic benefits.
Until recently, Germany has benefited from an ECB interest rate policy which I have described as “one size fits all for Germany”.
The issue now Europe is at the mercy of its own senseless energy policies with Germany at the mercy of Russia and global sanctions on Russia.
Has China handled anything well?
The rise of China has been the envy of the world for four decades.
However, the last decade has been a mirage bubble of improper investment in property and infrastructure.
And for the past decade, I have made fun of those who promoted the ridiculous idea that the yuan (renminbi) would replace the US dollar as the world’s reserve currency.
For at least a decade, China hasn’t handled anything well, most notably its housing bubble and Covid. And now it’s time for a refund. China’s housing bubble burst and imaginary wealth evaporated.
This is very bad for domestic consumption, which makes China even more dependent on export mercantilism which desperately needs to shrink.
All three export giants – China, Japan and Germany – are in serious risk of implosion.
Germany has further problems of high inflation, Russian energy addiction, foolish EU policies, foolish ECB policies and rapidly growing internal conflicts within the Eurozone.
How do we measure inflation?
Before praising any country, we need to take a serious look at how inflation is measured.
Let me suggest that every measure is fatally flawed.
These two percent central bank targets are a huge source of the problem. In the US, the Fed blew three consecutive bubbles by not counting asset bubbles, especially housing as part of inflation.
The graph above shows the absurdity of all this. China is just as bad, if not worse, and incidentally, so are Canada and Australia.
China’s housing bubble has just burst. If you take that into account for Chinese inflation, it would likely be negative right now, not 2.1%.
No praise anywhere!
Given that there is no central bank on the planet that has yet predicted a recession in advance or shown any clues as to how to let asset bubbles ferment, there should be no praise anywhere.
There is a lot here for central banks to think about. But rest assured they won’t (at least for the right things).
Scroll to Continue
The Fed, ECB and Bank of Japan still have ridiculous inflation targets of 2.0% with no clue as to how to measure inflation.
As for the attempt to reverse export dependency, China and Japan have failed for decades and Germany does not want to change at all.
Root of the crisis
Few even understand the root of the crisis. The troubles began when Nixon closed the gold window on August 15, 1971. For discussion, see Nixon Shock, the Reserve Currency Curse, and A Pending Currency Crisis.
In 1971, President Nixon appointed the then Democrat John Connally as Secretary of the Treasury. It was then that things began to turn.
Our currency but your problem
Shortly after taking office at the Treasury, Connally famously told a group of European finance ministers concerned about exporting US inflation that the dollar “it’s our currency, but your problem. ”
On August 15, 1971, Nixon ordered Connally to suspend, with some exceptions, the dollar’s convertibility into gold or other reserve assets, ordering the gold window to be closed so that foreign governments could no longer exchange their dollars for gold. He also issued Executive Order 11615, imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the US government has enacted wage and price controls since World War II.
Reserve currency irony
The move was not temporary and allowed governments to inflate at will.
Importantly, the reserve currency has become as much a curse as it is a boon.
The irony of the reserve currency is that, despite protests of the US advantage, no country wants the supposed benefits the US supposedly receives.
Last Resort global consumers
The US is stuck with the reserve currency because we have the largest and most open capital markets in the world, the largest bond market in the world, and a far better economic climate than the EU, China or Japan.
To ensure that the US remains the holders of the curse, the EU and Japan still have negative or zero rates, China does not float the yuan but supports corrupt SOEs and Germany punishes the rest of the EU.
Everyone wants to export to the United States and they do.
Praise where? For Nixon? Central banks?
The problem cannot be solved as long as governments can inflate the currency at will. A gold standard was the latest mechanism that forced governments to stay on the line.
Please don’t express your ignorance by saying that Bitcoin solves this problem because it won’t. The central banks that matter will never adopt it. Actions in El Salvador and Africa are meaningless globally.
And even this whole discussion about a new BRIC axis of Brazil, Russia, India and China is ridiculous.
Global reserve status is not achieved by declaring intent. The conditions must be met and China does not come close.
The Yuan will not replace the US dollar, nor will it be backed by commodities
Please note that the Yuan will not replace the US dollar, nor will it be backed by commodities
Also note that China is looking for ways to avoid US sanctions, but a deadly hug complicates matters
It’s a complicated mess globally, literally for the whole world.
The Eurozone is more stressed than ever, China’s housing bubble is imploding, global supply chains are a mess, and Biden is looking for extremely inflationary clean energy policies.
Furthermore, there is a potential war between the US and China over Taiwan.
I don’t know when this will explode into a major currency crisis, but it will. Gold, not Bitcoin will be the beneficiary.
This post originated on MishTalk.Com.
Thanks for tuning in!
Sign up for MishTalk email alerts.
Subscribers receive an email notification of each post as soon as it occurs. Read the ones you like and you can unsubscribe at any time.
If you have signed up and are not receiving email alerts, please check your spam folder.