From about 1980 to 2000, global economy (especially US) enjoyed unprecendented steady growth without the inflationary pain that often comes with it. There were three primary trends:
1. Technology advancement has lowered real costs associated with production of goods and services.
2. International trades and globalization faciliated capitalism to find the lowest cost structure through a combination of variables in global wage arbitrage, tax, and transportation costs.
3. Just-in-time inventory systems through information technologies have reduced the inventory needs to the lowest level required.
4. Inflationary effects from monetary and fiscal policy are negligible when it is averaged on a global economy that has increasing number of low wage work forces without much end-user demands for basic commodities in third world countries.
Everything was all good, but all good things have an end. Going forward, I believe the following factors and trends will increasingly shape the global economic landscapes:
1. Technology advancement is hard-pressed to lower most of the real costs for goods and services in a significant way (let’s say 10+% improvement on an inflation-adjusted, annualized basis, and weighted by its monetary contribution). In another words, the fruits left are the low-hanging fruits.
2. International trades and globalization only work in a low transportation cost environment. High energy prices may reverse the gear on globalization into de-globalization. High inflation will also cause higher trade barriers for crucial commodities.
3. Just-in-time inventory is causing and and will continue to cause extremely high price volatility for prices of commodities and goods. From a mathematical point of view, a feedback system with less buferring capabilities is usually less stable than the one with more buffers. The buffers act as a low-pass smoothing system to smooth out the magnitude of changes from the input to the output. Using laymen’s terms, a low inventory system speeds up the the price changes from the input to the output. Furthermore, it excerbates the volatility in capitalism which hinges on the real-time dynamic balances between supplies and demands.
4. Rising living standards in third world countries put the capitalism to test. Yes, the textbook is correct in stating that increase in money circulation will result in higher inflation. The statement applies in a closed economic system. US domestic inflation is continued to be held down via global trades for now temporarily. However, increase in US money supplies have been “sterilized” by foreign governments via printing of their own currency and buying up of US debts. The end result is that the labor workforce of Asian and Middle-Eastern countries are not enjoying the fruits of their hard work through an appreciated currency to bring a higher living standard. Rather, the labor are suffering the majority of the inflationary effects from the US, while the businessman pockets loads of money primarily not through a more efficient company, but through a wage arbitrage mechanism due to the currency exchange rates held down by foreign governments.
5. An aging demographics is going to exert its inflationary effects on mature economies. Less active labor and more demands for services from elders is the formula to drive wage inflation, if all other factors hold the same.
Whether my observation and interpretation on global economy is correct or not, it is always important to understand the past on how we came to where we are, in order to project the future and find where we may be going. What was achieved from 1980 to 2000 may not be achievable anymore. It’s easy to say that human innovation always triumphs. But unbounded optimism is best to check against with realities once in awhile.