Executive Summary
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The past ten years saw the clash between China’s semi-command saver economy and the market economies of the West. Interaction between supply and demand for goods, services, factors of production, and assets has been polarized on a global scale. Inflation or deflation in the modern world has to be analyzed in the framework of the balance between global demand and supply.
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The low-inflation decade that preceded the overheating of 2007 and early 2008 gave central bankers God-like status. But they fell seriously behind the curve by failing to grasp the profound global changes at play and their implications for economic, financial, and price developments. The central bankers’ mistakes could cost the world a dangerous lurch into deflation.
Introduction
The surge in global consumer price inflation in 2007 and most of 2008 caught many by surprise. The low-inflation decade that preceded this overheating had given central bankers God-like status. But improved monetary policy had at best a supporting role in the global Goldilocks story. The protagonist was the Eurasian savings glut. The setting was the process of globalization. Central bankers across the world fell seriously behind the curve by failing to grasp the profound global changes at play and their implications for economic, financial, and price developments. Their mistakes could cost the world a dangerous lurch into deflation.
The past ten years saw the global clash between China’s semi-command saver economy and the market economies of the West. China’s supersonic expansion turned it into the manufacturing hub of the world. But final demand for manufacturing goods came from the developed borrower countries. China provided the world with an endless supply of low-cost labor and mispriced, cheap capital. Developed countries provided most of the supply of real and financial assets. Interaction between supply and demand for goods, services, factors of production, and assets has been polarized on a global scale. Globalization did not alter the nature of inflation. But inflation in the context of the modern world has to be analyzed in the framework of the balance between global demand and supply.
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