Cost-push stagflation as political revenge

Cost-push stagflation as political revenge?

9 May 2007

The most intriguing conundrum of the new century must be this: upstream inflation and yet downstream price calmness.

From a long-wave perspective, it should be a symptom of the forthcoming US-led debt deflation, which I discussed. However, the surge since 2003 in the prices of energy and commodities can’t be explained properly, except by way of China’s relentless growth, which presumably sucks in huge amounts of resources for the sake of outward processing for the rest of the world, as well as its scintillating rise as a “superpower” in contention. As China remains manifestly humble regarding its “peaceful” objectives, this has produced a global symbiosis of sort---in which China recycles much of its BOP surpluses into US treasuries and other securities… etc. That shouldn’t be sustainable in the long run, of course, as either party may break away from the precarious game when it becomes too dangerous for the authorities and the power elite.

But the Saudi Arabian stock market crash of 2006 and the presently brewing bubble in Chinese shares highlight another possibility, which I’ve sensed for some time. Even with the flood in liquidity, global capitalism has been able to keep upstream inflation just where it is, through worldwide supply chain management---shifting to lower-cost production centres should labour in any territory misbehave. The trouble is that the paper money it thereby earns has to go back into the circuit. Large parts of that have already been turned into financial instruments, which yearn for further returns. In the meanwhile, though, downstream inflation has been suppressed---because the downstream has no bargaining power, until recently.

Nevertheless, a grand revenge seems to be surfacing. It has taken many implicit and explicit forms, country-wise or class-wise. The political rebellions in resource-rich Middle East and Latin America, some of which are sponsored by sitting governments or governments in the waiting, are among the symptoms. In China, warnings have been served for several years by the drying up of cheap labour in the coastal areas and the increasingly restless rural populace, which have been drowned by the glaring success of the listing of state-owned companies whose stock prices multiply, with the help of international capital.

Asset inflation must somehow feed back into the price chain, sooner or later, either via the demand side, or the supply side. On the demand side, the US is stretched to the full. But the “hyper-power” is happy to wait for others to take up the torch, provided that the greenback doesn’t go into a free fall. Others, however, are constrained by income and wealth inequality (in “emerging markets”) or maturity (in Europe and Japan). So, supply-side pressure, intended or otherwise, appears to be the most probable channel.

In this so called age of globalisation, cheap labour in many of the third world economies still can’t do much in directly asking for higher wages. But in the less under-developed regions, workers can shirk or produce inferior products and let their exporting bosses suffer periodically. Quite a few of the owners/managers of small and medium-sized enterprises have an incentive to cheat anyway, if only to keep up with the unabashedly rich, newly adorned elite.

Further down the road, the implicit and explicit rebellions might become overt storms, with inflation going downstream. With profits seemingly on the rise, many companies could be tempted to hoard resources and to increase pays to bid for employees. Authorities would be caught in the dilemma of either stepping on the monetary brake and pinching the bubble or facing cost-push price pressures and stronger public dissent.

The financial pyramid would be at risk. Things might then go back to square one.