Only a shift in labour’s bargaining power can light up US inflation

Through the pandemic, we have been featuring commentaries on the unprecedented stimulus by central banks and its repercussions viz, rally in gold, cryptocurrencies and prospects of inflation. It gives us great pleasure to share this piece on the subject in the FT by a Marcellus well-wisher. V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister and whose weekly column in The Mint  – Bare Talk would be a regular read for many of us. Anantha writes in support of gold in light of the continued monetary expansion by the Fed, whose policies he argues have failed in stoking inflation but instead caused inequalities. He cites globalisation and technology and the resulting shift in bargaining power away from labour to capital as reasons for sustained low inflation.
“Globalisation — the outsourcing of jobs and offshoring of manufacturing — weakened workers’ bargaining power, compressing wages and, thus, operating costs for companies. Profit margins could expand without end-user prices having to rise too much. Thus, independent central banks targeting inflation did not tame inflation, but the erosion of labour power and the consequent moderation in wages did. Central bankers had nothing to do with it. If they really were responsible for lowering the inflation rate, they should have been able to push it higher. Since the turn of the millennium, first Japan and then others have tried valiantly to generate inflation but in vain.
If a medicine did not work, a good doctor should ask herself whether the medicine was the wrong one, rather than keep increasing the dosage. If not, the medicine loses whatever potency it has and creates substantial side effects. That is precisely what has happened with ultra-loose monetary policy since 2008.
For inflation to raise its head, labour needs to acquire pricing power. Until then, money creation will simply juice assets and make them a bigger source of instability. We shall see if a new administration tilts the balance. If it does, then along with fiat money debasement, the inflation fire will be lit. That could be the last straw for the US dollar.
The return of inflation will also end asset price inflation. Investors should be prepared for the return of the 1970s; perhaps worse, with social turmoil accompanying stagnant growth and high inflation. Emerging markets will have a new problem this decade — that of managing the appreciation of their currencies. They can and should pay down their debts and focus on supporting consumption through domestic production, as currency strength would be a drag on exports. Those that execute that strategy well will find favour with investors.
The good news for America is that no other currency is a better store of value than the dollar because the race to debase currencies is global. But that is bad news for investors. The only anti-dollar in the world is gold.”