Hopeful News among Global Jitters

The spread of extreme globalization that began in Taiwan has proliferated in China and has continued in the Southeast Asian countries. Inexpensive everyday goods produced through cheap labor has flowed into the global market, creating a rare era of low inflation that has lasted 30 years. In a number of countries, such as Japan, it has even caused long-term loss and deflation.

An abnormal period such as this led some non-mainstream economists to directly challenge the wisdom of prominent economists throughout the study of economics. They believed that governments, particularly governments with mintage capabilities, could unscrupulously print money to increase the money supply. According to them, this would likely not cause inflation because having an almost inexhaustible supply and printing money to stimulate aggregate demand is sufficient to invigorate economic prosperity. For several years, countries, led by the U.S., have continuously printed money without exacerbating inflation. This new theory went mainstream, and countries have increasingly continued to print money to address various crises.

The good times are finally over. In recent years, inflation has run out of control. After a few consecutive quarters of misjudgment, the U.S. Federal Reserve, leader of the world’s central banks, was forced to dramatically change course. It denied that inflation is permanent but is remedying it, though, through aggressive rate hikes. After the Fed raised interest rates by 0.75 percentage points several times, inflation in European countries is in the double digits and continues to worsen. However, the rise in the price of goods in the U.S. seems to be slowing, and the Fed may slow that pace of interest rate hikes.

Nevertheless, aggressive rate hikes are only suppressing the forces driving demand-pull inflation. For more than two years, U.S.-China confrontations and the COVID-19 pandemic have caused breaks in the global supply chain. Supply side forces that increase inflation, such as setbacks in China’s global factories and increased shipping costs, have not been controlled. Additionally, the global effects of the Russia-Ukraine war, especially price increases for European oil, natural gas and grain, have worsened supply side issues. Strongly suppressing aggregate demand will unfortunately not end inflation, but will instead cause dreadful stagflation similar to that in the 80s.

While a recession in Europe’s economy is a forgone conclusion, the U.S. estimates that this year and next year, America will maintain low levels of growth; however, an ominous number may very likely make that impossible. In August, Nobel Prize winner Steve Hanke* pointed out that next year, the U.S. will enter a severe recession, caused by consecutive years of a rapidly expanding supply of money. In August, supply had already been stagnating for a few months. Further observation shows that since February, after the money supply value peaked, by October, it had declined consecutive months by 1.4%. A look at the combined money supply of the U.S., Europe and Japan reveals the value has dropped 8% since the peak at the beginning of the year.

When the glorious era of extreme globalization and stable global prices passed, China shifted to become an inflation-exporting country, and the aforementioned supply-side factors coincided, creating unprecedented inflation. The myth that printing money wouldn’t cause inflation should have been shattered. Conventional money theory tells us that when the amount of money supply, especially that of three big countries, noticeably declines, it is a bad omen. Unfortunately, the U.S. and the rest of the world will have difficulty escaping a recession and stagflation.

There might be one exception at this time. These past two years, China has endured the bitterness of zero-COVID policies and a real estate market crisis, and its growth rate has repeatedly been downgraded. After the 20th National Congress of the Communist Party of China, however, the government is taking a three-pronged approach toward the real estate market, going all out to save real estate companies and the market. It is even covering up the financial regulatory guidelines, called “the three red lines,” that caused the crisis. Great effort should be enough to stabilize the real estate market and rid the economy of that one danger. At the same time, three years of lockdowns have created anger among the Chinese people. A fire in Ürümqi, Xinjiang, that killed 10 people, triggered the White Paper Movement, a protest made up of mostly students. Communist Party authorities immediately relaxed restrictions, starting in Shanghai and Guangzhou, slowly lifting them in more than 30 cities. Many factories have taken advantage of this to rush back to production. As long as the situation develops positively, China’s economy, which has been depressed for two years, might rebound. If this happens, China’s rebound will stand out even more in the midst of a global recession and will be even more precious.

The author is an economic commentator.

*Editor’s Note: The original Chinese only refers to “Hanke” which is taken to mean Steve Hanke, a professor of applied economics at Johns Hopkins University. While he worked with Nobel Prize winner Merton Miller, Hanke himself has not won a Nobel Prize to date.