Andy Xie's recipe for an inflation comeback
Shanghai-based economist Andy Xie wrote this in August:
Inflation, not deflation, will dominate the global economy. The deflation scare causes the central banks in the developed economies to sustain a loose monetary policy. It will fuel inflation in emerging economies. Through trade, currency markets, and ultimately inflation expectations, inflation will hit developed economies.
Step No. 2 is now happening. No sign of Steps 3 etc. And it's hard to believe we'll see them anytime soon with so much excess economic capacity in developed countries. But Andy Xie is smart.
Comments
Please understand the origins, evolution, and mis-application of the excess capacity=no inflation argument.
It originates from the Phillips curve. Phillips' original research only dealt with the relationship between unemployment and wages. He observed that when unemployment was high, wages were stagnant, and vice versa. This makes sense. Subsequent economists corrupted his work to broaden its application from wages to general price level. This does not make sense for there are many components to the general price level besides wages.
Ultimately this corrupted Philips curve argument does not outweigh the quantity theory of money argument whose application is completely consistent both with common sense, as well as the foundation of all economics, the Marshallian cross diagram.
Posted by: Josh Dowlut | January 24, 2011 2:38 PM
Interesting hypothesis, especially considering it was written so many months ago.
I have to say, I agree with Andy. We may have a lot of people and resources that could be put to good use, but if we keep the taps open on monetary policy while simultaneously discouraging job growth with regulation and high taxes then it might not matter.
Posted by: John J. Walters | January 25, 2011 2:34 PM