Global stagflation perfect storm clouds overwhelmed

Source: Taiwan Economic Daily

Economic Daily

Global inflation is like a wolf, always saying that it is coming but not coming, and now it is finally coming, and it is menacing. The consumer price index (CPI) of the United States, the world's largest economy, has been hovering above 5% for five consecutive months after jumping 4.2% annually in April, forcing The Chairman of the Federal Reserve, Mr. Ball, to change his tune, acknowledging that price increases may not be a temporary phenomenon.

The CPI, the world's second-largest economy, Chinese mainland, was stable, but the producer price index (PPI), which led the CPI, soared to a new high of 10.7% in September. A similar phenomenon has occurred in Japan, where the PPI has exceeded 10 percent; Germany is even more exaggerated, with the PPI soaring to 14.2 percent in September, the biggest increase in 50 years. The PPI is ahead of the CPI, and has generally seen record surges in major economic powers, heralding the beginning of this widespread inflation and intensity beyond imagination.

Equally of concern is the slowdown in the economy. Chinese mainland just reported an annual increase of 4.9 percent in gross domestic production (GDP) in the third quarter, less than the 5 percent market consensus expects. It is generally believed that the weakening of real estate activities and the dual control of energy consumption (power curtailment and production rationing) are the main downward pressures on the economy. In the United States, as inflation exceeds expectations, the Federal Reserve may announce early quantitative easing (QE) measures to reduce the monthly quota of $120 billion, which means that monetary policy has shifted from expansion to tightening, which naturally puts downward pressure on the economy.

If prices continue to rise and the economy continues to decline, there is a high probability that long-standing stagnant inflation will return to this world. In contemporary memory, the last and first stagflation occurred in the late 1970s and early 1980s, mainly against the backdrop of two oil crises in the 1970s.

The "Philip curve" theory, the most convincing of economic theories at the time and used to interpret the incommunicado between unemployment and inflation, was questioned by the late 1970s when stagflation emerged because it was difficult to explain stagflation. The original emergence of stagflation is related to the rare left shift of the aggregate supply curve, when the total supply curve moved to the left is the result of a continuous sharp rise in oil prices, so it is a rare supply-side phenomenon.

The severe stasis that occurred mainly in the United States finally eased in the 1980s due to two situations, one was the tightening monetary policy of unbridled RBI Chairman Volcker, which pulled the aggregate demand curve to the right; the other was President Reagan's supply-side economic policy with liberalization and marketization as the core concept, which promoted the right shift of the aggregate supply curve by improving efficiency and stimulating enthusiasm. This set of theories and experiences is undoubtedly still valuable today, 40 years later.

Observations on the current global large-scale stagflation crisis. The phenomenon of "inflation" is easy to explain, mainly as a result of sustained and extremely large-scale monetary policy easing in major countries led by the United States after 2008. Loose money has not led to serious inflation in the past decade or so because hyper-liquidity has not flowed into the real economy, but has flowed to asset markets dominated by housing and financial commodities. The housing and other asset markets are like a huge sponge to absorb a huge amount of liquidity, but after all, the absorption capacity has its limits, after reaching the limit, the housing market began to shrink, and the liquidity was squeezed out to flow to the commodity market, resulting in inflation. On the other hand, the development of anti-globalization and the rupture of the production chain in recent years, as well as the problem of container and transportation costs, certainly have their role in promoting price inflation, but they are not the main ones.

As for the phenomenon of "stagnation", it can also be observed from the perspective of the total supply curve, anti-globalization, the US-China trade war, the rupture of the production chain, the power curtailment and production limitation caused by the sharp rise in coal prices, the dual control of energy consumption and the protracted global epidemic, all of which have caused a major blow to global production activities. The rise in energy and bulk material prices caused by the demand side will further lead to an increase in production costs and then reflected in prices; at the same time, the rupture of the supply side (such as automotive chips) will be reflected in the stagnation of production through industrial linkages, pulling each other, which will lead to the left shift of the total supply curve, which is similar to the formation of a perfect storm.

It remains to be seen how the situation will develop, but perhaps the most worrying thing is the financial crisis that may erupt after the successive austerity policies adopted by various countries in response to the crisis. In this regard, the Chinese mainland situation among countries is relatively reassuring. Chinese mainland also adopted a major easing policy after the 2008 financial tsunami, but it has been adjusting since 2013, and the problem is not as serious as in the West; secondly, Chinese mainland has taken a step earlier to target problem industries such as real estate, which has had an impact on short-term growth but also reduced the risk of triggering a financial crisis.