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A 100 Year History Of Inflation Points To Trade War Calamity

Milton Friedman once famously said, “Inflation is always and everywhere a monetary phenomenon”.  It’s not.  The history of Inflation in the United States over the past century demonstrates that Inflation is not ALWAYS a monetary phenomenon.  Demand Shocks and Supply Shocks have frequently had an even greater impact on price movements than those caused by changes in the Money Supply.

The latest Macro Watch video compares Money Supply Growth and the Inflation Rate during each decade from the 1920s to the present.  What we find is that, at present, there is no link whatsoever between the growth rate of the Money Supply and Consumer Price Inflation.  Another factor determines the Inflation Rate now: Globalization.

Once the United States began running large trade deficits in the early 1980s, the supply of labor available to produce for the US market increased from 100 million or so people living in the US to billions of people living all around the world.  Most of these new entrants to the labor pool are willing to work for less than $10 per day.  Consequently, this Supply Shock has been extraordinarily deflationary.

Between 1980 and 2008, it caused the inflation rate in the United States to decline despite rapid money supply growth.  Moreover, it prevented prices from rising even after an explosion of the Money Supply during the years that have followed the crisis of 2008.

After considering the causes of inflation across ten decades, this video next discusses what this new non-inflationary environment implies for the financial markets and for government policy.  So long as Globalization persists, inflation and, therefore, interest rates should remain low; and that suggests that asset prices should remain elevated (all other factors remaining unchanged).

From a policy perspective, the deflationary pressures of Globalization mean that the government could adopt policies that would make the US economy grow much faster than would otherwise be possible.

However, Inflation will only remain low so long as Globalization persists.  A trade war that reverses Globalization would be certain to cause a spike in Inflation – and, therefore, a spike in interest rates. Should that occur, stock prices and property prices would be crushed and the US economy and the global economy would be plunged into a severe and protracted crisis.

Now that the first shots of the trade war have been fired, it is crucial that everyone understands the extraordinary price that the world will pay if hostilities intensify.

Macro Watch subscribers can log in and watch this 100 Year History Of US Inflation now.  The video is 30 minutes long and contains 29 downloadable charts.

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One comment

  1. I totally agree. Its indeed true that we have this very unique condition that allow us to print money without causing inflation. We are foolish not to do this , I love this quote a lot. Plus it will help lift poverty still around for so many millions of the 3rd world countries. so why not ? it’s a win win. To make america strong again is a good way to gain election, but if it will disrupt the global trading system /bring trade tariffs etc.. then it will eventually make not just US but everyone else worse off in the long run.

    I would like to hear your view on the usage of automation in production ( Artificial intelligence) impact on future economy growth. I saw this topic has become increasingly popular , most of the simple jobs already are and will be replaced by machine. Machines works hard and dont take annual leave, no shift hours, no minimum wages. But Machines dont breed, nor they consume. This will weaken economic growth in the long run and also causing income inequality ( political instability). We humans have never gone through this problem before. I have seen everywhere We kill ourselves for power for land for wealth in the past 2000 years. But it will be really devastating to see we being replaced by machines in the next 50 to 100 years. Yet machine does not contribute to the demand of economy , it only makes the top fews more wealthy causing more issues. So I suppose machines should be under control before it’s too late ??

    maybe i worry too much. I shall worry about our immediate interest rate movements on loans and asset price, index points, rather than machines taken over our shares 🙂 . But somehow I knew that the machines will come and get us one day….

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