An inflationary tsunami sweeps through the global economy, creating economic disorder – in some cases acute political crisis – in every country it touches.
This is gaining momentum as the United States, which is leading other economies in the Global North, attempts to control inflation by rapidly raising interest rates, forcing the economies of the Global North into recession.
Economies in the Global South have thus been hit with a quadruple whammy producing even more severe stagflation, rising inflation and slowing growth than in the Global North.
First, rising US interest rates drive up the dollar’s exchange rate against the currencies of developing countries, raising import prices that are usually priced in dollars, thus worsening inflation for those developing countries.
Second, the appreciation of the dollar against the currencies of developing countries increases the cost in their currencies of repaying international debts, which are denominated in dollars.
Third, to try to prevent a very sharp fall in their exchange rates and to try to prevent capital from flowing out of their economies into the United States, the countries of the South are raising their interest rates, pushing their economies towards recession.
Fourth, the recession in the Northern countries reduces the demand for exports from the Southern countries, which puts additional downward pressure on their economies.
Politically, this situation creates crises for several right-wing regimes in the Global South, but also adds negative pressure on the policies of left-progressive governments and leads to the threat of “color revolutions”.
The United States says that this global inflation, and the downward pressure on living standards it creates, is due to the war in Ukraine – and that, therefore, countries should blame and unite against the Russia. But a brief look at the facts disproves this claim.
The war in Ukraine began on February 24, but US inflation had already risen sharply for nearly two years before. US price increase was 0.1% in May 2020, but in January, before the Ukraine war, prices had risen to 7.5% – US inflation had increased by 7.4% before the war. In August, the price increase in the United States was 8.3%, an increase of only 0.8% since the start of the war.
More than 90% of price increases in the United States took place before the war in Ukraine. Therefore, it is important to think critically when the United States blames Russia for global inflation and the resulting reduction in living standards. The huge wave of US inflation – which spread globally only two to three months late, since the United States is the largest economy in the world – took place before the war in Ukraine. As the editorial board of the Wall Street Journal noted: “This is not Putin’s inflation…This inflation was made in Washington.”
What caused US inflation?
It is easy to explain in technical economic terms why US inflation has soared – it has been analyzed as it happened by US economists such as former Treasury Secretary Larry Summers.
In May 2021, Summers warned, “We are taking very large risks on the inflation side…The idea of the Fed was that they scrap the punchbowl before the party got good…Now the Fed doctrine is that she will only abolish the punchbowl after he sees people staggering drunk… We print money, we create government bonds, [and] we borrow at unprecedented scales.
The US budget deficit reached 26% of gross domestic product (GDP) and the annual increase in US money supply reached 27% – both by far the highest in US peacetime history. With a huge increase in demand and no major increase in supply, soaring inflation in the United States was inevitable.
What has been the role of inflation?
But more important than a technical explanation is to understand the social role of inflation. Inflation showed that demand was much higher than supply, putting upward pressure on the prices of goods and services. Thus, in the absence of an increase in supply, demand must have been reduced. The key social question was: what US spending would be cut?
Many US reforms could be implemented by reducing demand and reallocating spending, thereby reducing inflationary pressures, without reducing the US standard of living – indeed, these reforms would improve economic efficiency and the level of United States life. US military spending is the highest in the world – more than the military spending of the next nine countries combined. This spending of 3.7% of US GDP could be reduced without the US standard of living falling.
Similarly, in 2020, US healthcare spending reached 19.7% of GDP, nearly a fifth of its economy. But the American private healthcare system is very inefficient.
The United States spends a higher proportion on health care as a share of its economy than any other economy in the world, but life expectancy in the United States is only 77 years, compared to an average of 83 in other high-income economies. The cost of the private healthcare system in the United States includes a higher proportion of the country’s economy for its citizens to live about six years less than comparable countries.
But cutting US military spending or streamlining health care would run counter to the vested interests of arms manufacturers and Big Pharma in the US, respectively.
Reducing US military spending would force a reduction in its aggressive military policy abroad.
The rationalization of health care in the United States would lead to a move towards a public health care system as used more successfully by other countries and would reduce the profits of large private health care companies.
The vested interests of the US government in supporting arms manufacturers and Big Pharma mean that no such action will be taken.
But if no action is taken against these vested interests, then the only alternative to reducing spending is to reduce the standard of living of the working class. This is what happens during inflation. As John Maynard Keynes explained, it is much easier to reduce real wages by high inflation than by directly reducing nominal wages – it is a partially concealed reduction and workers cannot bargain with their employers on inflation levels.
Medium and long-term inflation is destabilizing and must be brought under control – normally in capitalism, this goes through recession. But short-term inflation is a powerful tool to reduce real wages, and it is.
Average cash wages in the United States are rising – in August they rose 4.6%. But prices rose faster — by 8.3% over the same period. Real US wages therefore fell, like every month since April 2021. In August 2022, real US weekly wages were 3.4% lower than a year earlier.
But this inflation, which reduces the real incomes of American workers, is spreading to the rest of the world, creating a crisis in the countries of the South. American inflation therefore attacks both American workers and the rest of the world.
[This article was produced by Globetrotter. John Ross is a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China. He is also a member of the international No Cold War campaign organising committee. His writing on the Chinese and US economies and geopolitics has been published widely online, and he is the author of two books published in China, Don’t Misunderstand China’s Economy and The Great Chess Game. His most recent book is China’s Great Road: Lessons for Marxist Theory and Socialist Practices (1804 Books, 2021). He was previously director of economic policy for Ken Livingstone when he was Mayor of London.]