The New Politics of Inflation: Asian and Monetary

Both Americans and foreigners concerned about the incendiary potential of inflation and the devaluation of the dollar have good historical reason for concern.
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When future chroniclers describe the late 20th century and early 21st century global inflation now about to renew, the rise of Asia will be an even bigger causation than the massive money expansion set in motion over a quarter of a century by the U.S. Federal Reserve. And this will be true even though Chairman Ben Bernanke has been pouring trillions of dollars into the bail-out of a reckless and metastasized U.S. financial system.

In a nutshell, the rise of Asia - approaching 60% of the earth's population and on the cusp of a plurality of world wealth- is realigning global economics and political power. The history of such great realignments is inflationary. If it were not, prices would not have risen twenty or thirtyfold since the European Renaissance and the original Price Revolution five hundred years ago. As of 2009, from Turkey and the Persian Gulf east to Indonesia, China and Siberia, it's Asia's turn to make the waves, rock the global financial boat and set a new international course . Think of this upheaval as the Second Price Revolution. The United States will be a major participant, but more importantly a principal loser.

When I published my first book, The Emerging Republican Majority way back in 1969, I discovered that Washington politicians and pundits had trouble grappling with unanticipated watersheds in the political status quo. Now the same seems true again for the seeming incapacity of the New York and London financial power structure to deal with the economic upheaval now occurring. So here's a relevant bit of economic history - and an admission. The Second Price Revolution notion has been one of my theses since the inclusion of a chapter about it in my 1982 book on the radicalization of Reagan era economics (entitled Post-Conservative America)

During the original price revolution 500 years ago, when Europe gained global supremacy with the Renaissance, the rise of capitalism, and a new maritime supremacy in Arabian, Indian and East Asian coastal waters, coupled with the influx of huge quantities of precious metals from the Spanish-controlled new world, the increase in European price levels over roughly a century reached some 400-600 percent. Pleasure and pain were unequally distributed. Those with capital and skills enjoyed unprecedented opportunity. Peasants who did not understand what was happening usually lost purchasing power. The last three or four decades have been somewhat similar.

So powerful was the Renaissance-era version that the the New Cambridge Modern History went so far as to split the title of its 16th century volume, calling it The Counter-Reformation and the Price Revolution, 1559-1610. For many years, common wisdom attributed the first price revolution to the arrival in Spain and subsequent distribution across Europe of the gold and silver carried by treasure galleons from the Americas. But as the editor of the New Cambridge Modern History explained some years back, "we no longer regard the 'price revolution' as solely the sudden product of an influx of silver from America after the opening of the Potosi mine in 1543 any more than we think of the Renaissance as caused by the sudden influx of Greek scholars after the fall of Constantinople in 1453. Nevertheless, the flood tide of American silver, pouring in on top of other deeper and longer-term movements of population, of trade and of finance, did quicken and steepen the price rise and make this a more difficult time for governments and for all whose incomes were comparatively inflexible."

So much for the long-ago. Let us turn to the contours of recent, present and future inflation in what contemporary Americans may shorthand as the Alan Greenspan-Ben Bernanke era from 1987 to 2010. If Greenspan is now caricatured as Easy Al, Bernanke may be nick-named Printing-press Ben.

Okay, skeptics will say, but what does that have to do with Asia?

Actually, all too much. Let us begin with the major inflationary pressures of 1966-1981 - a drawn-out, expensive U.S. war in Southeast Asia and then a two-stage oil price increase put through by OPEC, an Asia-dominated cartel. During the late 1980s, U.S. economic policies were sufficiently coordinated with Tokyo that Chicago economist David Hale joked that the Washington-responsive Bank of Japan ought to register as a Republican political action committee. The Asian currency crisis, in turn, was a major financial event of 1997, the Russian mess drew headlines in 1998, and the three U.S. wars between 1991 and 2003 involved Kuwait and Iraq, Afghanistan, and Iraq again. Southwest-Asian religious extremists orchestrated the 9/11 attack on New York's World Trade Center and the Pentagon. These Asian-linked circumstances helped pressure Washington towards permissive fiscal and monetary policy.

This decade's ongoing overseas military imbroglios and corollary budget vulnerabilities involve Iraq, Afghanistan and Pakistan. Oil price pressures center in Asia, as do this decade's wealth realignments and huge overseas holdings of U.S. dollars -- $2 trillion in China alone - that menace the embattled greenback like a sword of Damocles. Both Easy Al and Printing-press Ben, as well as administrations of both parties, have depended on Asian willingness to tolerate and underwrite Washington-New York public and private debt expansion and bubble-blowing.

Something else New York and Washington have enjoyed is finagled U.S. inflation data, which during this decade understated price-hike reality by about one half. Bill Gross of PIMCO, the world's biggest bond manager and a critic of Pollyanna statistics, pointed out in 2008 that over the decade, global inflation had averaged nearly 7 percent even while Washington proclaimed an official U.S. average of 2.6 percent. "Does it make any sense," said Gross, "that we have a 3 percent to 4 percent lower inflation rate than the rest of the world?"

Yes and no. No, it doesn't have much statistical logic, but yes it does make tactical sense if you are a Fed chairman running a low-inflation pretense for Wall Street leverage gamesters, G-7 central bankers and Washington budget pseudo-balancers. None of these power centers can afford the various inhibitions attendant on recognizing a Second Price Revolution. Moreover, despite the Greenspan-Bernanke pretensions that the decade's inflation was in the 2.6 percent range, in mid-2008 the International Monetary Fund let the cat out of the bag by candidly acknowledging the "broadest and most buoyant commodity price boom since the early 1970s."

The IMF's published data on country-by-country average consumer prices for the 1980-2008 period - charts are available on their website - underscores the Asian depth and sweep. In a nutshell, the data presents the 2000 price level in each nation as 100 and shows the earlier and later inflation rates as percentages of that amount. Here are the progressions for Asia seven biggest economies: China - 25 (1980), 100 (2000) and 158 (2008); India - 18 (1980), 100 (2000) and 144 (2008); Indonesia - 13 (1980), 100 (200) and 201 (2008); Japan - 75 (1980), 100 (2000) and 100 (2008); Korea - 33 (1980), 100 (2000) and 128 (2008); Pakistan - 21 (1980), 100 (2000) and 159 (2008); and Russia - 21 (1995), 100 (2000) and 266 (2008). Note that the 2008 figures were based on IMF estimates. The average 400-600 percent rise is roughly comparable to the changes in Europe during that continent's Price Revolution.

A similar parallel exists in the convergence of 1980-2008 economic, demographic and geopolitical trends changing the relationships between continents and escalating Asia's new global centrality. With latterday petroleum movements playing some of the role of 16th and 17th century gold and silver flows, the U.S. National Intelligence Council in late 2008 summed up the emerging re-alignment: "In terms of size, speed and directional flow, the transfer of global wealth and economic power now underway - roughly from West to East - is without precedent in modern history." And NIC analysts also assumed that Asia, especially China and India, would account for the vast majority of new demand for food and energy and the related price pressures.

This, in turn, ties in with Spring's' renewal of predictions of predictions that China and India are on track for substantial economic growth even while the U.S., Europe and Old Asia (especially Japan and Singapore) go through their worst economic downturn in 50-70 years. Jim O'Neill, the Goldman Sachs chief economist who pioneered two related concepts - a realignment in favor of the "BRIC" nations (Brazil, Russia, India and China) and a "decoupling" between economic behavior in the U.S. and Asia - renewed his thesis in an April 23 commentary in the Financial Times. China could overtake the U.S. by 2027.

In the meantime, the United States, with an economy already in hock to Asian creditors and desperately requiring further funding and tolerance from China, Japan and the Persian Gulf, is suffering through the pre-inflationary agony of having to spend (and print) trillions of non-existing dollars to bail out the quasi-collapse of leading U.S. financial firms. These culprits, of course, are centerpieces of an overgrown, metastasized U.S. financial structure that crippled itself in an orgy of borrowing, speculation and issuance of unsound. By 2030, history books will remember these mistakes, for decades aided and abetted by the Federal Reserve, as a milestone in Asia's 21st century emergence.

The new debt and liquidity-related inflation being unleashed in the United States, in turn, comes on top of the early 2000s global commodity inflation identified by the IMF but cockily ignored by the Bush administration up through 2008. Both the White House and the Fed, waving very suspect government statistics, dismissed inflation as no problem. Then, as the financial system started to sink in 2007-2008, Washington reached back into Chairman Bernanke's academic bag of 1930s analogies for deflationary scare-talk remedies.

Unfortunately, that 1930s analogy had more holes than a torn sieve, not least the fact that the 1929-33 U.S. financial and economic implosion took place in a deflationary global context of collapsing commodity prices. Let me paraphrase one economic historian: between 1925 and 1929, the average price of the combined leading agricultural commodities fell about 30 percent and kept on tumbling during the Crash. In the U.S., the wholesale price index dropped from 93 in 1925 to 78 in 1930 and 59 in 1933, and so too around the world. In 2007-2009, by contrast, the underlying commodity pattern was strongly inflationary until the recession took hold in 2008, and as of May we can already see signs of commodity price inflation re-emerging. This was also the pattern in the stagflation of the 1970s - commodity prices would slump in the recession periods but go higher during recoveries.

The fallacy guiding Washington policymakers circa 2009 can be summed up. The global, but Asia-linked Second Price Revolution is the truth that U.S. officialdom seemingly cannot face. The current inflationary politics of trillion-dollar budget deficits and Federal Reserve printing presses are pouring gasoline on still smoldering red embers only barely covered by 8-12 months of gray deflationary ashes. Both Americans and foreigners concerned about the incendiary potential of inflation and the devaluation of the dollar have good historical reason for concern.

Kevin Phillips's 2008 bestseller Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism has just been published in a new updated and much-expanded paperback edition by Penguin.

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