In order to fully understand the origins of the ghostly inflation apparition now haunting the financial markets, we need to go back to Alan Greenspan’s chairmanship of the Fed and the effects of globalization on prices. Let me post a quote from the economist James Galbraith from his book The Predator State chosen because it makes the point quickly and clearly and without a lot of unnecessary verbiage.
“After eighteen years at the helm of the Federal Reserve, during which time Greenspan was amply praised for keeping inflation under control, in retirement he writes that his accomplishment was not his doing. Rather he benefited from the collapse of the Soviet Union and the rise of China. And Greenspan is right. The collapse of the Soviet Union dumped huge supplies of industrial materials and of fuel – oil and natural gas – onto world markets, which depressed commodity prices. The rise of China, for its part, created a labor reserve at low dollar wages, against which no other low-skilled labor pool could effectively compete. With global commodity prices held down by one phenomenon and global labor costs by the other, global inflation was doomed.”
Greenspan himself mentioned his good fortune in this respect in Congressional testimony and various writings after his tenure at the Federal Reserve.
Now with the president-elect promising to introduce measures to essentially de-globalize the U.S. economy through various import restrictions, we could get an equal and opposite reaction. To what degree, remains to be determined though Ford’s decision to locate a manufacturing plant originally planned for Mexico in Michigan instead is an early and important example of what could become a wider trend. Keep in mind, too, that we do not know how this situation will affect the huge pool of money (quantitative easing) created during the post-crisis bailout of the banking industry. In short, Mr. Trump, knowingly or not, is in the early stages of standing a 20-year economic paradigm on its head. What forces it might unleash will be a huge X-factor in the weeks and months ahead.