Hidden Inflation: It Will All Hit the Fan in 2007, Part 10
Alan Greenspan has received a lot of credit for taming the inflation bugaboo by masterfully manipulating interest rates using the power of the Federal Reserve.
But does he really deserve that much credit?
Let's examine two other factors that probably played a bigger role in controlling inflation over the past decade:
1) Access to dirt-cheap labor in China
and
2) The artificial link between the Chinese currency, the renminbi (RMB, also called the yuan), and the U.S. dollar.
First, let's tackle Item #1.
Under Greenspan's watch, the world seemingly experienced over a decade of economic growth with little inflation.
Usually, due to the scarcity of goods and labor, economic growth causes inflation in commodity prices and wages. It's a simple result of the relationship between supply and demand. There is a finite amount of resources and available labor, and economic growth increases the demand for resources and labor.
Here's how it works:
As the economy grows:
1) More jobs are created
2) More people are hired
3) The available pool of labor shrinks
4) The competition for labor/people increases
5) Wages go up
6) Inflation occurs
But that didn't happen during Greenspan's tenure. Why?
Due to the opening of China's markets, cheap Chinese labor has become available on the global market. Now, as the world economy grows, new jobs are shipped to China, at super-low prices.
There's a huge new pool of available labor to tap. That's an option that wasn't available 20 years ago.
Not only has cheap Chinese labor influenced the manufacturing sector, but with the easy transfer of information via the Internet, it has also influenced white-collar jobs such as engineering, computer programming, and telecommunications.
And we're not even counting the new pool of cheap, highly-educated labor available from India.
So how does Item #2, the link between the renminbi and the dollar, affect this situation?
Despite recent token moves towards a more market-driven policy, the Chinese government has fixed the exchange rate between their currency and the dollar at around 8-to-1.
As the U.S. dollar depreciates against other major currencies, U.S. goods become more price-competitive, and other country's goods become less attractive. But because of the renminbi-dollar link, Chinese goods become neither more or less attractive. Prices for Chinese goods and labor stay the same.
Thus, the prices for goods made in China don't go up. And a huge percentage of what's available in U.S. stores is made in China. If not for the artificial link between the renminbi and the dollar, prices for Chinese-made goods would be skyrocketing.
So there is inflation, but it's been hidden.
But it's not so hidden any more, is it?
We can therefore conclude that low inflation through the 1990s and early 2000s wasn't the result of Alan Greenspan's masterful control of interest rates. Instead, he was the beneficiary of a sea change in the world economy.
Perhaps Greenspan wasn't such a "Maestro" after all.
**********
Links to previous "It Will All Hit The Fan in 2007" posts:
Part 1, Part 2, Part 3, Part 4, Part 4 (Addendum), Part 5, Part 6, Part 7, Part 8, Part 9
posted by The Phantom Republican @ 2:56 PM
2 comments
2 Comments:
What about the influence on the expanding marketplace, in terms of what is being produced, how it is being produced, and who is consuming it.
This is an overlooked factor in your analysis.
The economic pie does not stay the same size it is always growing.
For instance. There is now a HUGE sector of the US economy that DID NOT exist in 1990. I speak about all the internet related businesses. All the tech jobs, sales jobs, marketing jobs, inventory jobs and acillary jobs specifically everything surrounding shipping product, did not exist circa 1990.
The economic pie got demonstrably larger.
Secondly these are all higher paying jobs than before. More people can buy more things.
Again the economic pie got larger.
The argument that we are shipping more jobs overseas belies the point that there are more jobs being created than can be shipped overseas.
All these are factors that are not going away. They will only increase.
It's like looking at an income statement or a balance sheet.
You are looking at the balance sheet, the snapshot. You need to look at the income statement and perceive how things will change through time. For they will not stay the same. And they will not shrink. They will grow by leaps and bounds.
Greg,
What you say is true, but the fact remains that inflation has not been tamed by a "vigilant" Fed, as widely believed, but instead has been hidden by a sea change in the world economy.
I agree that the economic pie has grown larger. However, the point of my post was that there was inflation through the 1990s and early 2000s, but it was not noticed because it was hidden by:
1) A huge new supply of low-cost labor.
2) An artifical pinning of China's currency to the U.S. dollar.
I believe that the inflation we are beginning to see now is the result of the pent-up inflationary forces caused by these new global developments. Even China and India are beginning to run short of skilled labor, which should lead to wage increases in those countries, which, in turn, should lead to the unleashing of inflationary forces throughout the world economy.
PR
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