The World is Broken, Part 2 – Playing the Blame Game

'Not all lack of inflation is created equal'

There’s always a motive…

That’s one way of thinking about anything a central banker says... no matter how logical it may seem.

Take the recent speech by European Central Bank President Christine Lagarde on the impact of de-globalization, which was the focus of my earlier post, The World is Broken, Part 1.

In that essay, I quoted a friend who is no fan of Lagarde, but who agreed with some of her points... especially how globalization kept down inflation.

But after thinking it through my friend wondered whether by being so candid and logical, Lagarde might have had have an ulterior motive...

I suspect the issue of de-globalization, for lack of a better term, will potentially be used as an excuse by central bankers to increase their inflation targets. Maybe her speech was a crafty precursor to trying this.  

I am beginning to learn central bankers seem to like any excuse for more inflation. I guess like taking more heroin, it always seems to be the easiest way out, until it isn’t, or you are dead, which might be one and the same thing.

He went on to say...

The central bankers, for some reason unknown to me, tried to fight it by trying to create more inflation, for no real reason. Not all lack of inflation is created equal. A lack of inflation created by globalization did not need monetary stimulus. It was a productive lack of inflation, which was not rate sensitive since rate lowering went into asset prices... not the productive economy.

Now that globalization is going the other way, causing inflationary pressure, he muses...

Instead of fighting it, the central bank now must get out of the way and let it happen? Central bankers seemingly only act in the direction of allowing for more inflation, for the most part – except for extreme circumstances like we have had over the last year, I guess.

He added that he thinks maybe only about 5% of what was offshored comes back…

That’s simply because “it’s complicated and hard to bring it back, and we never have the wherewithal to take any short term pain for long term gain.”

Then, getting a bit more worked up, he added…

To fully make my point, the price lowering impact of the 100 units of production that was offshored had to be fought tooth and nail by the monetary authorities with loose money to bring inflation back up. But now you’re telling me the five units of production that will be de-globalized is a major crisis that needs to be addressed with a higher inflation target???? That does not seem very consistent to me. Nor does it seem to be sound logic. 

Will my friend be right? I have no idea, but there are clearly too many moving parts for comfort. As I told him…

Like you, I don’t believe there will be full de-globalization. Can’t happen, impossible. We’re too inter-connected, geopolitical dysfunction, notwithstanding. 

China clearly wants to prove it’s better than we are and ultimately control everything. Culturally, they believe they are superior, and if they aren’t, they certainly are craftier.

But in the end they’ll be screwing themselves… just like we screwed ourselves with all the offshoring.

Early on, in the name of lowering costs and avoiding the continued pressure on wages by manufacturing unions, offshoring made sense. The unions, in a way, priced themselves out of the market. Technology accelerated their demise… 

Low-cost labor abroad (notably China) was the solution, until it started to become pricier and pricier…

Now, as the supply chain debacle caused by Covid proved so well – and angst over Taiwan is suggesting – the U.S. has no choice but to onshore, and it’s happening, but there will be limits… plus a bunch of factories will wind up in Mexico. (Good for a few U.S. railroads.)

In terms of what Lagarde was saying: She’s no dummy, and her comments were so pointed and seemingly candid you do have to ask: What was her real motive.

The truth is central banks around the world are tripping over themselves to buy gold, and they’re not doing it for their health.

Maybe that goes back to something else my friend said..

We live in a victim culture now – maybe central bankers are claiming victimhood by secular forces? Who helped enable those secular forces to begin with?  Hmmm….

Hmmm, indeed, inflation be damned.

(I also write two investment newsletters for Empire Financial Research, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)