Paul Krugman has an interesting and alarming post here, in which a key question that is posed is: “So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures?”.
I have often thought that China may provide a partial answer to the question: an elastic supply of Chinese workers meant an elastic supply of Chinese goods, that were vented onto Western markets at a fixed exchange rate and financed by internationally mobile capital. Presumably many others have said something similar in the past, since it seems like an obvious point to make. I wonder if you could make the case that similar forces were — at least at part — at work in the 1920s, with an overhang of primary products on international markets following the disruptions of World War 1 helping to keep a lid on commodity price inflation. (The international monetary context was obviously very different.)
And, while I’m not a theorist, it has often struck me that it wouldn’t be so surprising if inflationary pressures that don’t show up in commodity prices showed up in asset prices instead.
I was once at an after-dinner talk by Tommaso Padoa-Schioppa in which he said something similar, and then went on to make the point that whereas commodity price inflation is self-limiting — it makes us unhappy, and tends to lead to retrenchment by private agents and/or central banks — asset price inflation makes us happy and encourages expenditure, and is thus a process that feeds on itself (until it goes into reverse).
If there is anything to this, then when China and the rest of Factory Asia eventually hits its “Lewis point“, Western inflationary pressures may once again begin to show up in commodity price inflation. If Western economies were less able to finance imports from Asia, or if their currencies started weakening, then something similar might happen. Perhaps that wouldn’t be such a bad thing.