How ‘stagflation 2.0’ affects West and East
The global problem is no longer just inflation. A new type of recession is to be included, adding to a situation described by a mixed term (circa 1965 UK), “stagflation”. I’ll embellish the idea, making it Stagflation 2.0. This is a problem that exists all over the world, in Asia as well as in the West.
The recession part of version 2.0 is, curiously, accompanied, at least so far, by relatively low unemployment, but high levels of citizen complaints and general dissatisfaction. Consumers have jobs and money, sometimes money they haven’t even had to work for. But store shelves are often empty, while packaging and portions are shrinking.
In Asia, dollar earnings from sales of goods exported to the US are not buying as much as they used to, due to US inflation. US interest rates, which are expected to rise from March, will depress the value of fixed-rate Asian investments in US debt securities, as these funds were earned and accumulated days before the President’s tariffs. era, Donald Trump, is only beginning to make it slightly more difficult for Asian companies to sell things to Americans.
Trump believed (and said so) that the tariffs would be paid by China because President Xi Jinping’s government would depreciate Chinese money, so American consumers could buy enough Chinese money to avoid having to pay the Chinese price plus the tariff. Trump was right for a while during his tenure. The exchange rate moved in favor of the United States, from 6.68 yuan per dollar in February 2019 to 7.17 in September 2019.
At that time, China was experiencing weaker “terms of trade”: it had to export more goods and services than before in order to maintain the purchasing power and international investment of its export earnings. But since September 2019, the yuan has strengthened. The average exchange rate in 2019 turned out to be 6.91.
During President Joe Biden’s tenure, the rate moved about 2.3% in favor of China, from 6.47 in January 2021 to 6.32 in January 2022. However, over the course of 2021 , US inflation was around 7%, more than offsetting China’s exchange rate gains. in American purchasing power. US inflation hurts the rest of the world.
In December last year, China’s domestic inflation rate was 1.2%, but this figure excludes food and energy costs, the rise of which is having negative effects on Chinese public opinion in the future. regard to government policy. (By the end of the year, vegetable prices in China were up 6.8% from November 2020, according to US trade network CNBC.)
As China’s gross export sales to the United States brought in $457 billion in China in 2021, US inflationary monetary policy has contributed to China’s inflation.
There is an interesting similarity between China and the United States in terms of the particular nature of the recessionary element in stagflation 2.0. Much of the (inflationary) spending by the US government that has taken place recently has resulted in the flow of new funds to “factors of production” (workers, investors, suppliers, landowners) who, in turn, were producing “infrastructure”. or who were paid. for the losses suffered by them due to the Covid-19 pandemic.
The problem is that, regardless of whether this spending was good policy or not, the result was the production of a particular type of national revenue (new roads, bridges, hospital ships entering New York Harbor, citizens whose covid suffering and losses were partly mitigated) which was not, could not be purchased in the market by consumers who came into possession of the money originally paid to produce this ‘public good’ income .
In other words, the fresh money paid to produce public goods is not quickly absorbed because this non-market production is obtained “for free” by all, but the money remains in circulation, thus increasing the pressure to buy. on private goods purchased on the market.
In China too, the stagflation 2.0 version of the recession exists (or at least as a potential source of dissatisfaction for fully employed consumers). In China, a large part of national expenditure since the reforms started in 1979 has been devoted to public goods.
The export-led growth strategy driven by Deng Xiaoping also poses the problem of the money paid to the factors of production whose production is sent abroad; however, evaluated in terms of GDP, these factors employed do not produce private production purchased on Chinese markets.
These factor payments must somehow be reabsorbed, otherwise they produce inflationary pressures in the domestic markets where goods are normally purchased. But Chinese social stability requires, if not immediately then at least in the short term, full consumer shelves. In the East as in the West, empty shelves are not a good political result. Full-time workers becoming dissatisfied consumers are a problem.
East and West 2.0 stagflation will present a serious challenge to policy makers. Higher levels of employment, if they occur with, for example, the objective of delaying global warming, can aggravate the problem of empty shelves, or at least put on the shelves products less appreciated by consumers than products that were previously for sale.
Thus, economic figures in the East and West that sound good coexist with citizen dissatisfaction, even social unrest.
The US economic growth rate between October and December 2021 was 6.9%; US unemployment in December was 3.9%; China’s economic growth rate averaged 9.23% between 1989 and 2021, but was 4.0% in the fourth quarter of 2021. Unemployment currently stands at around 5.0%, but is estimated to be 11 to 14% for people aged 15 to 24.
The International Monetary Fund’s “World Economic Outlook” for January 2022 indicates that the current global economic growth rate of 5.9% will fall to 4.0% this year and 3.8% by 2023. Reports from the Organization for Economic Co-operation and Development indicate that the current 5.5% unemployment rate shows that there are 1.5 million more unemployed people than before Covid in their statistical area.
These figures, although mixed, do not explain the degree of general dissatisfaction that can be observed all over the world.
Stagflation 2.0 suggests that much of the world’s Covid-related money and indeed much of the money spent on other non-marketed ‘public goods’, ranging from global warming/green programs to increasingly inclusive health and wellness programs around the world, put people to work, led to investment projects (such as the electrification of the US car and truck fleet) that, regardless of either the degree of public support (or lack thereof) behind this new allocation of economic effort, has not, and is unlikely to have, put goods on empty shelves, or reverse poll numbers that show , in many countries, a lack of support for existing political programs and the people who sponsor them.
Spending on public goods is inflationary, whether financed by debt or new taxes. The choice of financing does not solve the underlying problem, which is that fresh money is paid to the factors of production that produce (for example) a flood barrier, but the services of the dam are not sold on the Marlet.
Existing tradable goods must absorb the “shock” of the new currency, and unless new tradable goods appear, the prices of existing goods will rise as the excess money is absorbed. Tax financing might reduce inflationary pressure slightly, but only if taxes permanently remove the money spent to build the dam from circulation.
Taxes would deprive those so taxed of purchasing power, thus reducing inflationary pressure. But in today’s real world, spending on public goods is financed by debt. The debt is contracted by central banks, which lend by de facto issuing paper money: the banks buy back the public debt issued to pay, for example, for the construction of infrastructure.
In addition, debt (domestic government bonds) is purchased by foreigners, whose purchase money then enters into circulation in the borrowing country, driving up prices. Prices may fall in lenders’ home countries, but modern international bond purchases are funded by foreign central banks, whose citizens are unlikely to personally feel the loss of liquidity.
There will be no quick fix to this problem. Covid spending will fade, with a lag, as the disease itself becomes part of the “background radiation” of existing health risks (like influenza).
But the increasing degree to which public spending is focused on public goods, and the associated degree to which economic production is “abstract” or removed from the view of ordinary households (such as “green spending” that could improve global temperature, but not before the year 2062) means that future economic statistics, even abstractly “good”, will not produce the level of citizen satisfaction necessary to produce “good” political poll results.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has been a Visiting Professor at the Board of Governors of the US Federal Reserve, the US Congress and Chair of the North American Studies Program at McGill University and Professor in the Department of Economics at that university.