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.
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