So where’ the inflation coming from? As I’ve been repeating for the last few years, it appears to be largely a China phenomenon. While most economists are busy griping about the “irresponsible” Fed and ECB, they seem to be missing the one central bank in the world that is beyond reckless – the People’s Bank of China. The PBOC has been cranking out money supply growth at double digit rates for a decade now. M2 (the broadest aggregate published in China) has been growing at an average pace of 17% per year over the last 15 years! As they build cities in the middle of nowhere and implement the greatest central planning scheme ever known to man the printing press has been red hot. And this endless printing has no doubt had an impact on commodity prices . After all, there are few people in the world who would question the commodity demand story in China.
Americans have a tendency to focus too much on their own backyard when viewing broad economic trends. When viewing the inflation trends it’s best to recognize that we reside in a global economy and that the problems in the economy aren’t solely due to poor US government actions. The broad global inflation trends point to a clear bifurcation where the developed world is obsessed with austerity and the emerging world is printing beyond imagination. While I don’t agree with much of what the Fed has done over the last few years, we should be more careful about hyperbolic rhetoric that implies that the Fed is driving us into a ditch. If anything, the Fed is the baby in the backseat with the toy steering wheel and mom and dad (Congress and the Treasury) actually believe the baby is the one controlling the car….
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