Hey everyone Peter Zeihan here and hello from Colorado where we are edging into December and it is still 60 degrees, because you know, mountains.
Now a lot of people in a lot of places been blah blah blah about how inflation is getting out of control, and I thought it would be good to put things into a little perspective both from a good and a bad point of view.
So first, we kind of need to get a grip. People are talking about how inflation is the highest it’s been in 30, 40 years and that is true.
What people are not talking about is why inflation has been so abnormally low for so long. In most of these years, inflation never touched three percent. We’ve only gone above five percent a couple of times, and so having six percent inflation seems like a disaster. But if you remember back to the early 80s and before this was the norm, so it’s not so much what changed now, but what changed 30 40 years ago.
Well there’s three things that are going on.
First, food production. Since the 1980s, total agricultural output in the United States has increased by over half, and in the 1980s, the United States was already the world’s largest producer and exporter of food stuffs. So what for most countries is the single most important aspect of inflation, food prices, has never really been an issue here.
Second, the shale revolution. It started in 2004. We applied a new series of technologies to energy reproduction. And now the United States has the lowest energy prices in the world. Not just in absolute terms but per unit of economic output.
That’s all because of technological advances and production that is local, kind of like with food production. So the second biggest aspect of inflation that has caused problems for countries since the dawn of time is also not a major concern here.
So what’s the third one? Well in a word, globalization.
Two words: globalization and China.
The global order did a lot of things, but in making this safe… making the world’s oceans safe for everyone, it allowed an economic player to interface with any raw materials in any end market, and the Chinese could do so at scale.
So they had a demographic moment. They had a financial system that encouraged overproduction. They had global and regional and national economies of scale, and they had access to every consumer market in the world, most notably the biggest one, in the United States.
That meant that the cost of manufactured goods steadily went down for 40 years and things like electronics and computing in terms of their productivity are less than one-fifth the price of what they were 30 and 40 years ago.
Well the first two trends, energy and food, those aren’t changing. So for the United States, what is traditionally the biggest problem everywhere else in the world is just not a problem… except for maybe in the short term with some hiccups.
But the consumer goods action issue, the manufactured goods issue, that’s all going away.
The Chinese financial system is breaking apart. Chinese demographic movement which gave them oodles of low-cost labor for decades is now over, and they have the fastest appreciating labor costs in the world.
And the Americans are backing away from globalization, meaning that the Chinese have to take care of their own material inputs, their own energy inputs, and find their own markets. And there just isn’t that possibility anywhere in the world at the scale that they need, which means that global supply chains for every manufactured product needs to change.
Now here in the United States we can already produce all of these products at a lower price point.
Our labor is more productive, our food and energy inputs are lower; transport to end consumers is negligible, but you have to build the industrial plant first and you don’t do that in a year.
Which means that the biggest dis-inflationary aspect of the global system that we have seen for the last 30 years, the reason why inflation has been so low for so long, the participation of China is coming to an end.
And the adjustment to our new normal will take a few years, and we’ll see inflation inflation inflation as we build out that plant and as every supply chain that we’ve become dependent upon, requires complete rethreading.
That is the future of inflation and that is the story for the next five years.