Inflation is here to stay, globalization is not
History suggests we’re in for years of economic upheaval
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Stocks, bonds, and cryptocurrencies have all plummeted in lockstep for weeks now, as markets finally take the U.S. Federal Reserve seriously when they say they’ll tank the economy to fight inflation.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Fed Chairman Jerome Powell said at the annual Jackson Hole central banker conclave in August. “But a failure to restore price stability would mean far greater pain.”
How long will this “pain” last? Wall Street’s big brains -- led by Powell -- promised us last year that inflation was “transitory,” but nobody believes that now. So when might we see some relief?
Unfortunately, a look at history bears bad news: it could be years before things settle back down, with major turmoil in the meantime. Today’s prices reflect a world in epochal upheaval, and the revolution only shows signs of accelerating.
What Really Causes Inflation?
Conventional wisdom blames fiscal stimulus, loose monetary policy, or “printing money” for inflation, but this isn’t exactly true. A look at longer historic trends -- since 1900 -- shows that inflation comes in waves, and in each wave the printing and price hikes are co-symptoms of the same underlying condition: profound global political crises.
We’ve had three such waves in the last 100 years, each creating years of pricing chaos:
the shattering of the British Pound-based gold standard at the start of World War I
another round during World War II
the end of the Bretton Woods dollar-based gold standard in 1971
It is this sort of change that’s causing inflation to spike again now. That’s because money is power -- not just in the sense that having a lot means you can buy influence, but also in that the most powerful entities get to define what counts as money for each era.
For most of history, money meant metals, but paper or accounting money were always necessary for the biggest, most consequential exchanges. Whoever has the most gold has an upper hand in issuing and controlling that currency. Great Britain served in this role for much of the 19th century, but this fell apart when its European rivals all went to war in 1914.
Without a clear system for determining relative values, inflation soared until a global recession hit in the wake of post-war demobilization. After the Great Depression, World War II saw the same sort of inflation until an international summit in Bretton Woods, New Hampshire established a new dollar-based gold standard in 1944.
That system began to buckle in the late 1960s, as the U.S. struggled to tamp down Third World liberation movements, especially in Vietnam. The United States was running big deficits to fund the war, which meant a money supply out of whack with its gold holdings. Richard Nixon finally surrendered in 1971, ending the automatic convertibility of the dollar to gold and ushering in a decade of pricing havoc -- the system was up in the air again.
What’s Happening Now?
After the dust settled, a new global order prevailed, one that now seems to be at an end. Nixon’s move forced Global South governments into massive debt as they scrambled to prop up their currencies with devalued dollar reserves. Western creditors forced “free trade” principles on them all, opening up new, desperate labor markets -- “globalization.”
Now industry could outsource various stages of production to third parties all over the world, with transport costs held down by the U.S.-Saudi alliance established after the 1973 Oil Embargo. The United States didn’t need to stabilize prices by tying the money supply to gold reserves; it could use political and military power directly to keep inputs cheap. This meant no more worrying about the balance of payments for the United States -- how much wealth is flowing out of or into the country -- which paved the way for a dramatic credit expansion to keep middle class consumers afloat.
This 40-year era is now waning as two major contradictions finally ripen. First, China -- the largest and most important labor market -- never fully fell under the rule of U.S. free trade. They happily sold cheap labor to Western businesses and then directed the capital they gained into building out a middle-class economy, raising wages 162% between 2010 and 2020.
This would be enough to shake the foundations of the order by itself because the United States can’t use its military or political threats against China without putting itself at risk. Instead, both Trump and now Biden have sought to “decouple” from China, with China leaning into the trend by accelerating investment in the sectors where it still depends on the West. The era of worldwide, wide-open supply chains is giving way to regionalized blocs with less competition long-term.
Second, the COVID crisis has shattered globalization’s illusion that low-cost, low-risk natural resource inputs are effectively infinite. Whether deforestation exposed us to a new pathogen or bad lab procedures caused a leak, the pandemic is the consequence of an irresponsible relationship with nature.
This catastrophe snapped outsourcing's long chains of just-in-time deliveries, with misplaced investments whipping back and forth for years now, creating shortages across nearly all supply chains. When it hits strategically crucial ones like shipping containers, diesel, or fertilizer, it means inflation in nearly every market. Businesses are faced with only bad choices in response:
increase inventories and carrying costs
shorten supply chains and accelerate de-globalization
risk future ecological disruptions.
In any case, globalization’s basic justification -- it saves business money -- is quickly becoming non-operational. Until something stable replaces it, the shift in systems will make setting prices difficult, encouraging inflation.
What’s next?
Stability returned following the 1970s wave when Fed Chairman Paul Volcker dramatically tightened monetary policy, crashing the economy and rebooting prices in the United States -- the “Volcker Shock.” The bank seems to be trying to repeat this history right now with its aggressive rate hikes.
This is a lose-lose situation for markets. If the move works quickly, it will mean that the contraction is especially sharp, with years of recovery afterwards. Avoiding such a recession -- a “soft landing,” as Wall Street likes to call it -- will take at least a year, with months of careful loosening afterwards. Either way, a year or two of bear markets is an eternity for speculative plays like cryptocurrency and tech startups that have thrived on cheap capital. Highly indebted businesses may also find it hard to roll over their liabilities for that long.
That’s the best case scenario. If it doesn’t work, we will have an economy penned in by tight monetary conditions alongside high inflation -- stagflation. And then overreaction could actually cause price instability in the other direction, namely deflation. Either way, the pain we’re feeling now could continue for years.
But even worse is the 1914 scenario: political upheaval and economic regime change forming a feedback loop that culminates in mass death. U.S. sanctions policies in particular escalate conflicts while undermining globalization -- eroding the very system of power they are deployed to defend. The spiral may already be under way, as Russia has not only endured the most dramatic sanctions ever, the West has arguably suffered more than they have, especially from inflation. The United States will have to escalate or surrender -- the system erodes either way.
For now, politicians, advertisers, and the news media all have an interest in telling us that “it’ll all be over soon.” This begs the question: what exactly is coming to a quick end? History indicates that it can’t be this inflationary wave. Maybe instead it’s our way of life for two generations, giving way to something we can’t yet anticipate.
Disclaimer
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