Coming era of stagflation and wealth destruction will be boon to working class
- While investors tremble at the prospect of falling asset prices and tighter monetary policy, the working class is set to benefit from rising wages
- Strong wage growth could drive higher consumption and prop up the global economy while overvalued stocks and real estate fall sharply
The US dollar-renminbi peg is an anchor for currency stability, reducing the urgency to fight inflation. Tighter monetary policy will be sufficient to trigger asset deflation, though, reversing the trends of the past two decades and causing a downturn in global capital expenditure.
Money and inflation are reconnecting after decades of easy monetary policy failing to lead to significant inflation. China joining the World Trade Organization was the disruption that disconnected the two. With vastly more available labour, new infrastructure and wages far below those of developed economies, global capital poured into China to take advantage of the gap.
Now the average yearly wage in China is around 30 per cent of the average for members of the Organisation for Economic Cooperation and Development, and China is also facing a shrinking labour force. Opportunities for arbitrage in China are nowhere near what they once were as any production that could have relocated to China has done so.
The China story has become firms trying to take a bigger slice of the current pie rather than upgrading their existing production in China. This fundamental shift is reconnecting inflation to money supply.
Lack of worries over inflation has turned central banks into Santa Claus, printing money for all sorts of reasons. Bailing out the speculators who wrecked the global economy in 2008 and paying people to stay home during the Covid-19 pandemic are among the main factors driving up global debt from less than 200 per cent of GDP in 2007 to 256 per cent in 2020.
Withdrawing this massive monetary overhang is impossible as higher interest rates would risk bankrupting many major governments around the world. Inflating away large portions of existing debt – hopefully in an orderly manner – is the only way out.
When the price of something is spiralling even before inflation sets in, it still has plenty of room to fall even given the effects of inflation. For example, a 5 per cent rate of inflation cannot wipe out the massive overvaluation of US stocks or Hong Kong real estate. I suspect both of these markets will see large corrections in 2022.
Asia’s emerging markets are best placed to cope with stagflation fears
It appears that the pendulum is finally swinging in the other direction. Wages are rising everywhere but not keeping up with inflation. The odds are that wages will rise in tandem with, or even above, inflation in 2022.
This could be the beginning of a trend that lasts for decades. Strong wage growth could be a bright spot in the global economy as it supports global consumption.
While some will complain about the consequences of the era of easy money coming to an end – pointing at vanishing wealth and slowing growth – the world will be a healthier place for it. Falling birth rates, for example, are partly driven by shrinking real incomes and rising home prices.
Reversing the trend is vital for the future of the world. This bubble economy has enticed the world’s best and brightest into unproductive activities such as internet start-ups and financial misadventures. Now wages for engineers in the manufacturing sector are on the rise while internet whizz kids and financial gurus are seeing thinning returns. If these trends continue, the world will be a better place.
Andy Xie is an independent economist