Globalization and the Great Moderation

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.

18 replies on “Globalization and the Great Moderation”

Would the lack of inflation have anything to do with the total victory of capital over labour ?

Well known golf club Guardian reader Henry Blodget expands on the issue

“because right now the biggest problem with the world economy is this tug of war between capital and labour. Capital is winning big time.”
As long as I am in charge, the goal will never be to maximise profit in some nearterm period
Wall Street’s focus on quarterly results has led to record corporate profit margins but a slump in wages as a percentage of gross domestic product, Blodget argues. As an analyst, I ask, didn’t you contribute to that short-termism? “I certainly was not as passionate about that then as I am now,” he concedes. He worries, however, that relentless cost-cutting will end badly. “The endgame of that is that the economy is going to collapse because … there will be nobody to sell anything to any more,” he says, both hands chopping the table.
“The moment you even breathe a word of this now, people start … saying, ‘socialist, communist’ [but] what I’m talking about is the owners of corporations simply recognising that their wealth is created by the people who work on their teams, and sharing more of that wealth with them.””

From Kruggy:

“Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth…..”

It appears to me that this repeated throwing-of- the-hands-in-the-air about the supposed outrage of the self-defined ‘virtuous’ rich seems to miss the point that the real targets being hit by a future of low interest rates are those who have not already amassed wealth or savings and haven’t followed advice to invest it in a non-cash or non-near-cash form.

A future with near zero interest rates everywhere fabulously boosts the value of anything with a yield (property, bonds, shares etc) – things which the rich have already. That drawbridge is on its way up guys! (to save the world though – all in a good cause). Its a sort of crysta- meth version of ‘haves’ and ‘have-nots’ .

Meanwhile those attempting to “save” (the cheap bastards!) can have negative interest rates on their unsophisticated little bank accounts undermining their accumulation of enough cash to buy some of those super-assets that are held, at officially protected bubble valuations, by the rich.

Are we to have a new Nobility – for the public good?

Is it possible that there is a point beyond which, determination to outwit and do away with the concept of “the business cycle” becomes, a game not worth the candle?

Just a few points. Most forget the land changes near the cities throughout the 20s. These changes were in train from about 1900 but the first war drew the energy. But the change in the transport picture released vast amounts of land. Or to put it another way. It made land near the city cheap.
I think what’s missing from you analyses is the stable bit. You cannot have an asset bubble unless at least one aspect is certain. Usually the cost factors of a performing asset that will be mortgaged. Glanbia and Kerry can play ducks and drakes in the US and elsewhere because they are certain of the price they are paying for milk. If another played entered the market they would be up that yankee water course without means of propulsion.


fyi…if my memory serves me correctly…an Irish friend has been working in China for the past 4 or 5 years and a few months ago told me that (in China I think) they analysed some newer statistics and they now believe that China actually passed its “Lewis Point” a while ago (maybe about 18 months ago he said, or 2 years ago by now).

Grumpy ,
Define “trying to do away with the concept of the business cycle”. Would that mean abandoning QE?

The system of money and credit creation that emerged after 1971 was like a game of “whack -a-mole”. The money created was bound to pop up somewhere. In the 1970’s, it poped up as higher consumer prices and it took a very hard whack by Paul Volcker,in the form of higher interest rates,to force it back into its hole. But the mole reappeared in the form of asset prices, at which point the central banks ignored and refused to whack. Indeed ,to corrupt the analagy,they offered the moles some juicy titbits to tempt them to the surface.
Central banks never tried to pop these bubbles, for ideological reasons i.e Greenspan’s love affair with Ayn Rand, inertia,and because of the absense of consumer price inflation because of cheap imports from China.

The ‘China price’ or falling manufacturing prices ended some years ago.

While China’s labour force shrank last year there is still a lot of potential for development with good infrastructure including bullet trains providing easy access to the interior.

Working hours are long.

US manufacturing has a high degree of automation while China has many low margin manufacturers making low quality goods. So there is a lot of room to improve productivity.

Shanghai and Hong Kong have some of the most expensive real estate in the world but it has a lot of cities.

Elsewhere, frontier economies such as Myanmar are underdeveloped. Less than a third of the population of Yangon, the former capital, has access to electricity.

A big supplier to Apple in Malaysia can get workers from Nepal.

China’s industrial subsidies have been a problem for several industries e.g solar, steel and paper.

It has been suggested that steel is a highly fragmented industry and has no scale economies or technological edge but Chinese steel sells for 25% less than US and European steel. An estimated $33bn in subsidies from 2002 to 2009 resulted in China tripling paper production to overtake the US to become the world’s largest paper producer.

Inflation is OK when one is compensated for it or dare I say have a pension linked to current earnings.

It seems a bit circular. Central Banks worry a lot about wage or (some) goods inflating. But they refuse to worry about asset price inflation. And what do we have? Economies where wages are squeezed but asset bubbles keep inflating? Isn’t this just a result of policy? It seems a lovely world to be in banking, particularly if you’re too big to fail.

Martin Wolf addresses the topic:

‘Why the Future Looks Sluggish’

“The underlying argument that more has happened to high-income economies than just a financial crisis is persuasive. It is also hard to believe that a surge in business investment in these countries would manage to absorb the excess desired savings of the world. Why, after all, should one expect any such thing to happen in countries with ageing populations, high wages and sluggish economies? But these countries do then confront a challenge far bigger than the damage done by the crisis alone, big though that is. They may face a far longer-term future of weak demand and enfeebled supply.

“The best response, then, is measures aimed at raising productive private and public investment. Yes, mistakes will be made. But it will be better to risk mistakes than accept the costs of an impoverished future.”


Is the conclusion then that we’ve peaked? The growth train has finally run out of track?

Good question Sarah.

My limited take is that 30 years of increasing share of capital going to companies and the very rich rather than labour has slowly eroded buying power and was covered over for a while with increased debt. Worth watching ‘The Middle’ for what that actually feels like in middle America. For whom are all these dishwashers being made?

The articles above seem to suggest that companies would now rather sit on cash or pay dividends than invest in new stuff for which there isn’t sufficient market.

But it is a funny world, as the feel of it at times is that there is more better cheaper ‘stuff’: computers, phones, TVs, cars, cheap flights, so it is a strange combination of feeling stressed: two incomes required to keep a household going rather than one as it used to be, whilst seeing that there is more stuff than the previous generation could have dreamed of. ‘Grot’ as the Dork used to call it.

And then there’s the issue that whilst it would be in one sense, happy days, for long term growth to carry on, but that ups the rate at which humans despoil the planet.

hmmm it IS tricky isn’t it. The obvious answer is to tax the hell out of the companies (and the 1%) and governments invest in public projects. Even if that could be achieved (it would require mass co-operation between governments), there are side effects of raising more boats: environmental + endless consumption etc….It would be more just, yet bring its own problems….

What would you do?

That is the obvious answer. Good luck finding anyone in the media in Ireland who actually put it forward. If anyone so much as suggests it, the inevitable refrain “but then the rich will leave!” is put forward as if it were a knock-down argument.

So, instead, Ireland has repeatedly chosen throughout this crisis to do the opposite: spare the 1% and hammer the poor and anyone who might be so déclassé as to depend on the public sector. The idea seems to be that the rich can only be motivated by more (“we’ve gotta make it worth their while to stay here”) while the poor can only be motivated by less. Carrots for the rich, sticks for the poor.

Martin Wolf, in that FT article isn’t a million miles away from the Marxian analysis that David Harvey and Richard Wolff have been putting forward for years now.

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