July 19, 2021 - 4:30pm
What is the biggest threat to the West right now — China or inflation? Stupid question, you might think. One is a country, the other an economic indicator. They belong to different categories, so comparing them is ridiculous.
Except there’s a very deep connection between the two. Right up until Covid, we’ve enjoyed a twenty years of miraculously low inflation. Over the last decade, we’ve really pushed our luck — forcing interest rates down to zero and instructing our central banks to turn on the printing presses (or QE as it’s politely known).
In any other era this would have meant runaway inflation. But not in the pre-Covid 21st century. In fact, some countries have struggled to avoid deflation — i.e. falling prices. So how did we defy the laws of economics for so long?
A huge part of the answer is China. By opening ourselves up to cheap Chinese exports we kept inflation at bay. But that doesn’t mean there hasn’t been a price to pay. There has and there is — and it can be seen in the following chart from the The Economist:
Maps du jour: More trade with US or more trade with China (2000 vs. 2020) pic.twitter.com/qpsnSbJ744
— Michael Li 李之樸 (@mcpli) July 18, 2021
In just twenty years China has displaced the US as the number one trading partner of most countries across the world. That includes virtually all of Asia, Africa and Australasia; and also most of South America and the majority of European nations (though not yet the UK, France and Italy).
Worried? We should be — but expect endless excuses. For instance, some people complain this a comparison of China with America alone. For instance, the map would look different if the European Union were included. To which the obvious response is: how many divisions have they got?
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Subscribe“Clearly, governments need to ensure that post-Covid inflation is no more than a transitory phenomenon.”
Yea, right. Governments have dug the inflation hole to deal with their deficits (trade and treasury) as there is no way to ever pay the USA Debt back by actual tax, and also there is no way to service the debt if interest rates rise, it must be inflated away. As raising interest is how inflation is traditionally fought, that is impossible as servicing the debt would cost too much. Then also ‘Tapering’ (reducing the $130,000,000,000 the Fed spends buying bonds every month to keep interest rates down) cannot be done as then interest rates would rocket up – and stimulus may not be reduced as it is what stops the stock market from collapsing…..
So more spending MUST go on or the economy collapse, and the interest rates must stay zero or the economy collapses. And this will increase inflation (which many experts say is 10% in fact) The FED is caught in a trap of its own making, and no way out.
Inflation is a tax – this is universally known. The government spends more than it takes, then inflation reduces the debt, 2% has always been the ideal. The problem is the 2% inflation means savings are also dropping, so the person cannot save unless interest, Dividends, or bond yields (normal way to save, and for pensions) exceed the inflation by some percent – otherwise the savings are negative, this is the case now. Inflation is the tax governments use so they can spend more than they take in. It is a regressive tax.
Having negative ‘Real Yields’ means savers are forced into the Equities, (stock market) to get some gain, but this is risky, now very risky. The usual saving strategy of 60% stocks, 40% bonds, rising to 40% stocks, 60% bonds as one gets older and needs more stability in risk, is a thing of the past. The USA 10 year Treasury Note is 1.192% interest and inflation is 5.4% for a net loss of 3.5%! You HAVE to lose savings (and pension future), or speculate on risky stock market!
Then China – (which has some real issues in its economy too). By wrecking our own economy we hand them free run thought the world. I cannot believe the West (USA the worst) is destroying its self this way. And the Chinese virus is the excuse given for the most excessive spending ever done, Irony of the worst kind.
That’s a great comment. Having read it I look back at the first line of the article: “What is the biggest threat to the West right now — China or inflation?” So why isn’t Unherd posting full-length articles on the economy?
They have a series on The End of the World (current article considering the ramifications of a solar flare). I like those sort of thought pieces, but if Unherd can commission an entire series on what amounts to futurism, why can’t they write on the obvious economic challenges we face and what to do about it?
I still haven’t figured out the answer to the problem outlined in your comment: you get no return on saving and investing in equities or real estate is now highly risky. So what’s the average person to do?
Inflation is a tax. Basically more dollars are printed, but amount of goods and services remain constant, prices rise as more money chases the same goods. (That Tech is deflationary is another story) And now the Government has debt.
If inflation is 2% it means the $ is devalued by 2% per year. You just paid the government 2% of your purchasing power to cover the excess (M2, the money supply) production of money they used as Redistribution. (They printed money, gave it to whom they wish, then tax it back from you and everyone as inflation) Government Redistribution of $ is what deficit spending is, and it is paid back by the tax called inflation.
Do you approve of how the Gov spends its money? Because everyone pays. Inflation is really redistribution from the middle and poor as inflation, to the super wealthy as they end up with what the gov printed in the end. The wealthy own ‘Appreciating Assets’ (professionally managed stocks and hedge funds and such) which grow faster than inflation, and so make them money, and so do not pay the inflation tax – cool, isn’t it?
Unherd is now getting this feedback regularly and, i would assume, must be looking into it ??
A few people leave comments about the lack of economic coverage, but whether anyone at Unherd reads the comments, or cares, is another question.
Anyway, I’ve raised the issue more than once in the comments section and I think it’s time for me to stop. Unherd will run the stories it considers worthwhile. It’s their publication.
I should have added, in fairness to Peter Franklin, I thought his article was excellent and the visuals compelling (and scary).
You need to send them an email suggesting articles on finance and the economy, not just post in comments.
I think you’d need someone knowledgeable to volunteer to be a contributor! I’m in a voluntary organisation, the ‘why don’t THEY do something about xyz’ is a constant refrain!
My understanding is that Unherd contributors originally broadly identified with a’ post-Liberal’ political and social outlook.
However, given the largely failed status of economics as an evidence-based and agreed discipline, I’m not entirely sure we’d be much the wiser! Advocates of MMT, their opponents etc would be at loggerheads.
Sadly so many people do not recognize China’s aspirations to be the only superpower. I think I read the aim was about 2050. They are well on track and the champagne socialists, the hard left, the slumbering, the progressives, the baying lefties and the like will not know what has hit them.
It may well terrify the few members of the public who keep their eyes open, but how many is that? Will it “terrify” the governments of the west? With their eyes fixed on keeping up with the latest round of nonsense from the “woke”, I suspect not. Only if the west manages to dislodge the new establishment does it stand a chance of survival – let alone of competing with modern China. And the probability that it will dislodge these people is remote.
Europe and America need to replace China as the ‘workshop’ of the world. However, I do not know how this will happen without replicating the terrible work conditions of Chinese factories. Moreover, with so many people attending college these days, it seems highly unlikely that there will be queues of degree-holders lining up for factory work. I think many Western leaders are aware of this and therefore lining their pockets with Chinese money. It would also explain why many of the West’s cultural institutions are being dismantled and sold off to rich foreign investors.
Actually the US has a decent chance. Much of the unskilled manual labor will be replaced by machines as wage demands increase. In China many assembly workers desire to move into the middle classes but still need to support others. Nearly a third of Chinese live on low incomes primarily to feed China. There is no social safety net – work or die, as I understand it. The West needs to innovate robotic advanced manufacturing. That does take investment, but if investors decide China provides a better opportunity over US new technology, we will fall further behind.
China is a serious competitor of the West, but I don’t buy this doom-laden narrative of its inexorable rise to world dominance. It has plenty of internal problems, including institutional corruption on an industrial scale. Innovation is still far higher in the West, and the Chinese Communist Party leadership has recently started to bite the capitalist hands that feeds it. China did not become richer by becoming more communist.
And that is not to mention its blatantly colonialist attitude to many developing countries and their inhabitants.
The US and Russia need to rethink their adversarial relationship, taking China’s increasing world power into account.