BOTH the USA and China are suffering from high inflation. You can find the exact data on the internet, as well as the many commentaries of what that means for the global economy going into 2022.
What this essay aims to do is to provide some understanding of what high inflation means for the global political situation for this New Year.
To start, I want to give a layman’s explanation for the inflationary cycle. Consider a sleepy little town. It has a lot of bright, industrious people but it doesn’t have any capital/liquidity. So a group of investors decided to go in and lend capital at a low interest rate. Suddenly, the townspeople have the means to start businesses, upgrade their quality of life and increase their productivity.
Time passes, and more capital moves into the town. The price of said capital is also rising, adjusting to the local cost of living. However, there is now a limit to how much growth the capital can serve, and so the return on investment isn’t as high as it was in the past.
Eventually, there is just no more growth to be had in the town, and the capital flows out to other places, leaving behind an exhausted economy.
That’s my rambling way of explaining the inflationary cycle, and I hope my readers understand what I’m getting at. Inflation is not a problem as long as it’s paired with equally high growth. Problems only happen when that growth stops (or rises unsustainably), in which case you end up with a stagflationary environment. From there, the inflation rate goes down to match the slow growth environment, and the situation goes bad.
A good example of this environment is Japan. Since the 80’s/90’s Japan has been in a low growth environment, when it had exhausted its growth potential from previous decades. It’s still a wealthy country relatively speaking, but its best economic days are behind it.
Now, getting back to the original point of this essay: Both the USA and China are in a high inflation environment. Stagflation is coming soon, and you can be sure that when that happens it’s going to hurt more than just the US and China. Capital will start looking for new safe havens, and where capital goes power and influence goes with it. It won’t happen quickly but when it does I, for one, expect serious political repercussions.
Happy 2022./PN
