It’s the Inflation, Stupid

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.

– John Maynard Keynes, The Economic Consequences of the Peace(1919)

It appears the market understands this Trade War was nonsense from the beginning.

It’s a fire the Donald set himself.

As it is, as we’ve often discussed, America’s $400 billion trade deficit with the Red Ponzi wasn’t caused by bad deals made by the Donald’s allegedly stupid predecessors.

Nor was it due to the nefarious actions of the Chinese state.

It reflects the metastasized economics of bad money.

The Federal Reserve has deliberately inflated the hell out of domestic prices, costs, and wages over the last several decades.

Our monetary central planners have driven production and good jobs offshore. And they put workers who managed to keep their jobs on a treadmill that hasn’t kept up with the Consumer Price Index.

The U.S. trade balance plunged into deep deficits from which it’s never recovered in 1979.

Since then, average hourly wages of production workers have risen 275% in nominal terms. But inflation-adjusted wages for full-time workers are 5% below where they were 40 years ago.

The Fed’s apologists insist that a 2% inflation target is good for everybody. It promotes optimum real economic growth and full employment. A relentless rise in the price level is no sweat because wages, prices, and living costs rise in lock-step.

That’s the argument. And it’s demented.

Wages, prices, and living costs do not rise in lock-step. It’s nonsense because it assumes the U.S. is a closed economy completely isolated from the cost and wage structure of the rest of the world.

Some Keynesian academics claim it all comes out in the exchange rate. If America inflates faster than competitors – China, for instance – the dollar will fall, making America more competitive, the Chinese yuan will rise, making China less competitive, and no one will be worse for the wear.

It’s a fine hypothesis. But it’s never been true in practice.

There’s just no evidence inflation is a growth tonic – at least not since Tricky Dick started the world down the path of fiat money, monetary central planning, and dirty floats way back in 1971.

In fact, bringing it all back home, the Chinese yuan exchange rate versus the U.S. dollar is weaker – not stronger – than it was in the early 1990s, after Deng Xiaoping’s slogan “to get rich is glorious!” had taken root in the Middle Kingdom.

Deng launched the massive mobilization of cheap labor and cheap capital that created withering competition in manufactures out of China’s impoverished Maoist economy.

Indeed, the Fed’s pro-inflation policy since Alan Greenspan’s arrival at the Eccles Building in August 1987 has been sheer folly.

Fully loaded manufacturing wage costs (including payroll taxes, health insurance, pensions, and other fringes) were about $12 per hour then. They’re more than $30 per hour now.

Chinese manufacturing wages in U.S. dollar equivalents have risen from under $1 per hour to around $5 per hour during the same 30-year period.

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