OPINION: Guess what happens when China shuts down its economy, just as Western central banks are pumping up the money supply and consumer demand?
always asserted that inflation was everywhere and forever a monetary phenomenon. Central banks and post-Keynesian economists were very happy to ditch this thinking at the first sign of instability in the relationship. Monetarism was “cancelled”. Inflation targeting based on forecasting became the dominant way of thinking about inflation and the running of policy.A shopper in Berlin as inflation pushed the European Central Bank to its first rate rises in a decade.
This is pushing down purchasing power in Europe and Japan. The dashed line in the chart shows what the path of global money would have looked like in US dollars if the exchange rate had remained fixed at the level in June last year.Instead of minus 3.8 per cent, the number would have been 5 per cent to 6 per cent. That differential of 9 per cent to 10 per cent reflects the cost-of-living pressures being transmitted outside the US by the dollar.
Japan’s easy policy is a long-standing Mercantilist belief in exchange rates to stimulate exports. The ECB case is more complex. They are stuck in their ill-conceived currency union. They don’t want to blow-up Italy and take Europe back into its shadow currency crisis of 2009-10 that manifested itself as a sovereign debt crisis. Higher rates might do that.The other element in the inflation story is the path of the “China shock”.
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