Readers who remember Disney movies from childhood, or are familiar with Italian folklore, know that a wooden-headed puppet named Pinocchio was rendered stringless by a blue fairy who required of him that if he were ever to become a real boy, he must grow and mature enough always to tell the truth.
If he told lies, his wooden nose would grow tellingly long. Moveover if he was frequently exposed as a liar, honest maturity as a real boy would not be attained by him until after he suffered many trials.
The left-leaning Washington Post newspaper says that US President Joe Biden has a rating of “bottomless Pinocchios,” a designation awarded to a politician who has repeated at least 20 times a lie so glaring that it has in the past been awarded at least three or four “ordinary” Pinocchios, a classification the newspaper gives to “ordinary” but big lies told by ordinary politicians.
According to the website Trading Economics, the following nations, listed according to the severity of their current inflation problem, from least to most (China’s reported rate here is 2.1%), all have inflation rates lower than that of the US: China, Switzerland, Saudi Arabia, Japan, South Korea, Indonesia, France, Brazil, India, Canada, Spain, Australia, South Africa and Singapore.
Despite these data, President Biden said during an interview conducted with The Associated Press shortly before the midterm elections, “First of all, [a recession is] not inevitable.” (Incidentally, this remark was made after the US had already experienced two successive quarters of negative growth, the standard definition of a recession; here we have nested Pinocchios.)
“Secondly, we’re in a stronger position than any nation in the world to overcome this inflation. It’s bad. Isn’t it kind of interesting? If it’s my fault, why is it the case in every other major industrial country in the world that inflation is higher? You ask yourself that? I’m not being a wise guy.”
Biden’s critics already think his head has the qualities of a knot of pinewood, but a more charitable interpretation is that he does not understand the subtle realities of international trade and finance-related issues involving the international transmission of inflation via the mediation of world money and the role of the US as supplier of world reserve currency.
Unfortunately for Joe Biden’s Pinocchio score (when it comes to explaining world inflation and America’s role and rank in explaining it), American money, especially when it resides outside the US, is acceptable as a means of payment, unit of account and store of value – it is as good as or better money than is the “local” currency in the area where it is found.
According to the US central bank and the International Monetary Fund, the US currently produces about 24% of world GDP, but the US dollar supplies almost 60% of world foreign-exchange (FX) reserves.
In other words, using the ratio 60 over 24 as our metric (60/24 = 2.5), 1.5 times the entire US domestically necessary supply of money is “running around” the rest of the world, doing the usual thing done by money (to the extent it is in excess of the amount needed to support international trade), that is, it helps to create international inflation.
Just how much US international FX reserves are “excess” is very hard to measure. But in my opinion, and in the opinion of other “monetarists,” world inflation in the price of traded goods is always and inevitably caused by an excessive quantity of world money.
Since the US dollar is a big part of international money, US big-spending policy, coming out of the US administration led by President Biden, is not only responsible for US domestic inflation, but it is responsible for a good part of international inflation as well.
What about China?
But if all this is true, how is it that China has such a (comparatively) good record for domestic inflation?
China’s price-level problems go beyond the 2.1% reported inflation in consumer prices. China is an exporter. Its international earnings depend on having a comfortable profit margin between the cost of inputs for the goods traded and the sale price of those goods.
International producer (input) prices are inflating at a 9-10% annual rate. The prices that China may charge to overseas customers are not rising at so fast a rate. Moreover, some of China’s past export markets are being competitively pressured by other Asian exports in places like Vietnam, Taiwan (a cause of some tension) and India.
Also, politically motivated barriers have impeded China’s ability to earn dollar-linked profits from overseas investments as well as from artificially constricted direct sales into the US.
Moreover, China’s volatile property market, funding for which partly comes from international sources, has been a challenge to its policymakers.
Because the US dollar, and the American financial infrastructure, is critical to China’s ability to modify, move and manage its general foreign financial policies, China remains vulnerable to US strategic interests and powers.
If the current toxic atmosphere that dominates the cross-Pacific relationship gets worse, China could experience problems with maintaining progress along Its current long-run growth and development path.
Real recession danger
The vast amount of US money that now circulates outside America represents another danger to China, the rest of the world and the US itself.
If American economic policy continues to create excessive quantities of paper money – to the point where its value internationally is questioned – economic entities holding those funds might come to US asset and goods market and attempt to “cash out.” In a that way international holders of claims against the US “ask for their money back.”
They might prefer to take ownership of US assets out of American hands or invade US markets that are now domestic (property, commodity, raw materials etc) because such equity positions are better than paper. The real dividends earned by the assets taken over would no longer flow to their previous US owners. A truly profound American recession along with destabilizing economic instability would result.
China could not reliably sell goods to Americans who could not afford to buy. Overseas entities that bought their way into ownership of US assets would find their profits to be lower than expected. Recession could spread and reach dangerous levels worldwide.
I really don’t think such a domino row of events is probable. But it is not impossible. International economic and political leaders capable of controlling events in this worst-case possibility better not have wooden heads.
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.