Source: Dashu Town Governor WeChat ID: dashuzhenzhang
01
Many people’s impression of Brazil may remain in the news. In addition to the warm and beautiful Latin American people, what people are most impressed with may be the spectacular slums in the major cities of Brazil.
A view of the slums in Rio de Janeiro
At the same time, this country, whose per capita GDP was surpassed by China in 2018, is famous for its high crime rate and drug abuse.
How high is the crime rate in Brazil?
According to the data of the most developed Sao Paulo police station in southeast Brazil, theft, robbery and personal injury will again become the most common types of criminal cases in 2022, accounting for nearly 80%.
In 2021, the state will have a total of 1.01 million criminal records, 87004 more than the same period in 2020, with a year-on-year growth of 8.5%.
The proliferation of drugs in Brazil is also a big problem for the local government. Since the production and trafficking of drugs increased from 2183 kg to 57 tons from 2013 to 2019, the total amount of drugs seized in Brazil has increased.
Today, the COVID-19 patients in Brazil are among the top in the world, with more than 680000 deaths, second only to the United States.
The root of all this, of course, is not the natural laziness and disorder of Brazilians, but the disorder of social order caused by economic poverty.
In Brazil, where the unemployment rate is high, too many people are unable to find suitable jobs to feed and clothe themselves. People have to become slum dwellers, even criminals.
The Brazilian government and society are vulnerable to COVID-19, and the cemetery is completely saturated
Economic downturn – high unemployment rate – rising crime rate – deteriorating economic environment – capital outflow – the economy is more sluggish, and the vicious circle that is hard to get rid of has become the current portrayal of Brazil.
Why did Brazil, which had almost become a developed country in the late 1980s, become like this?
The answer is the great stagflation that started in the 1980s and has continued to this day.
Today, even if the central bank raises the interest rate to more than 10%, there is hardly any fund willing to enter Brazil. The Brazilian economy has been stuck in a stagnant state for a long time, like a pool of stagnant water, and it can no longer make waves.
In 2020, Brazil’s GDP fell by 4.1%. Although the GDP per capita will rise back in 2021, it will be only half of that of China.
The problem of stagflation has always been a difficult problem for economists to turn pale at. In history, it has been rampant in many countries.
The terrible thing is that its negative economic cycle is hard to break, and the consequences are extremely serious, often followed by large-scale unemployment, economic depression, political turmoil, and the country’s collapse.
Now, with the unprecedented wave of money printing in the United States, the feeble interest rate increase, and the destruction of the world economic pattern caused by the Russian Ukrainian conflict, the cold wave of stagflation is approaching all of us again.
02
Stagflation – literally, it refers to economic stagnation+inflation, and either of them is a hard nut to crack. If the two come together, the destructive power will be amazing enough to destroy the future of a country.
This is why economists and politicians are reluctant to talk about stagflation, because in history, once a country falls into stagflation, it often means that the future of the country is not good.
Economic stagnation generally means that GDP is in a long-term downturn, with the growth rate generally below 2%, or even hovering around zero for a long time.
High inflation generally means that the CPI, which measures inflation, is at a high level for a long time, generally above 5% or even higher.
Why does stagflation occur?
The main reason is that after the weakening of economic growth, the currency in circulation in the society still remains at a high level and has not decreased significantly. The reason why the currency in circulation has not decreased significantly is to maintain the healthy operation of the overall social debt.
What do you mean? In short, the modern economic model is mainly debt driven economy.
For example, I opened a factory and borrowed 200 million yuan from the bank. However, if the overall economic downturn happens, 200 million yuan may not be enough.
At this time, the bank not only allowed me to delay the repayment of the loan, but also gave me a loan to continue the operation of the enterprise in order to avoid the bankruptcy of my factory.
In this way, even if the economy is weak, it is difficult to reduce, or even increase, the funds to maintain the normal operation of society. At the same time, the number of goods in circulation did not change much, and inflation came.
And this kind of inflation is not the inflation of economic growth – that kind of relative inflation is beneficial. In contrast, when inflation occurs when the economy is stagnant or even declining, the amount of money in everyone’s wallet does not change, but the purchasing power continues to decline.
As shown in the figure below, it is a typical stagflation pattern. Economic growth, that is, GDP growth, has been around 0 for a long time, while the inflation indicator CPI has been around 10% for a long time. This is the data of Argentina, a South American country similar to Brazil.
We can see from the figure that from 1998 to 2003, from 2008 to 2010, and from 2012 to 2015, Argentina’s economic growth rate has dropped to near zero for many consecutive years. At the same time, the inflation rate is high, reaching 10%, and even close to 20% in 2015.
Why did Argentina fall into stagflation? Like Brazil, Argentina was tricked by European and American countries in the 1980s and implemented wrong economic policies, which led to the failure of economic transformation and economic stagnation.
At the same time, the Argentine authorities had to make up for the growing debt foam by continuously issuing currency.
It can be said that the long-term economic stagflation pattern of South American countries has caused serious damage to their domestic economic ecology.
It’s like a patient has a cut on his stomach, but after sewing, the wound is constantly pulled open, cracked and infected, and the final result can be imagined.
Another example of stagflation is Japan.
In the 1970s, Japan also fell into a serious pattern of stagflation. The inflation rate once reached more than 20%, while the GDP growth rate fell to around 0%.
Low economic growth often leads to a decline in employment opportunities, difficulties in finding jobs, and an increase in the unemployment rate; The growth of unemployment rate will reduce the consumption capacity, the products of enterprises will not be sold, and the profits will decline, which will lead to the increase of enterprise bankruptcy, and the increase of bankruptcy will lead to the continuous growth of unemployment rate
A vicious circle is thus formed.
If the economy does not grow and inflation is superimposed, the situation will soon become worse.
Due to inflation, the price will generally rise, and the rent, food, transportation, heating and other costs will rise significantly. People will have to spend more money on food, housing and necessities, which will significantly curb consumption.
With the rise of unemployment rate+inflation+the subsequent devaluation of the currency, people have to tighten their belts.
In order to avoid currency devaluation, the rich and market funds will further purchase basic materials or invest in the real estate market, further causing price increases. The economy has entered a vicious circle that is difficult to get rid of.
03
Among the developed countries in the world, the longest and most famous stagflation is that of the United States in the 1970s.
At that time, loose monetary policy combined with soaring oil prices gave birth to hyperinflation in the United States. The rise in international oil prices has led to the inability of a large number of factories to operate and the unemployment of a large number of Americans. On the other hand, the comprehensive price index CPI once rose to a high of 15%.
Typical cases of inflation inflation, economic downturn and stagflation.
In order to get rid of stagflation, in the 1980s, Paul Volcker, the chairman of the Federal Reserve at that time, used an iron fist policy to raise the domestic interest rate of the United States to around 20%, while tightening monetary policy and cooperating with Europe to suppress oil prices.
Paul Adolph Volcker, Jr (1927 – 2019)
To do so, on the one hand, is to urge the “Laolai” who can’t pay the money to go bankrupt quickly and stop the bank from releasing water for them. On the other hand, it is to promote the currency in the market to return quickly. The suppression of the oil price is to prevent the American industry relying on oil from being made worse by the cost.
This, of course, will lead to widespread sorrow. After the bad debts were abandoned and the foam assets were punctured, bankrupts were everywhere and social contradictions were further sharpened.
But after this disaster, the United States finally lowered inflation in the mid-1980s, and the economy began to resume growth.
04
Today, the United States faces the same problem, and history is still repeating itself.
Just a few days ago, the United States announced that the CPI in October 2022 would fall by 0.5% compared with the previous month. All news cheered that the inflation in the United States had slowed down.
But has the situation really improved?
Even if it falls back, the US CPI is still high at 7.7%. Inflation has not yet been resolved, but the Federal Reserve has repeatedly released news that it may stop raising interest rates in January 2023.
At the same time, the United States, which is known as the engine of economic growth in developed countries, has reduced its GDP growth rate to 1.8% by the academic community, and is expected to be only 0.5% in 2023.
The data shows that the regular interest rate increase of the Federal Reserve has not seen a good effect, but it does not have Volcker’s determination to burst the foam that year,
There is a great probability that the American economy has entered the stagflation period.
Although the economic data of the United States is still beautiful on the surface, claiming that the employment data has improved, the consumption situation has improved, and the people’s life seems to be still stable, the tide is really surging under the calm sea, and there are many dangers.
Since 2020, the United States has been taking measures to stimulate the economy by printing money on a large scale. The United States hopes to stimulate economic growth by printing money directly to the public and direct government purchases of services.
On the one hand, people have become addicted to “money falling from the sky” – the US government directly sends money to personal accounts – and no longer work hard; On the other hand, the soaring national debt and the huge amount of currency issuance.
Just like people can’t drag their heads to the sky. It is against common sense to directly print money to hope economic growth. It is impossible to succeed. If it is possible, there will be no hyperinflation in the gold coupons issued by the Kuomintang that year – eventually leading to a painful loss.
Although the US dollar, as an international currency, can transfer part of the crisis to overseas countries, the extent of transfer is also limited.
By the beginning of November last year, the effect of a large amount of excessive money issuance in the United States had begun to reach its opposite——
Economic growth has not only fallen sharply, but inflation has also failed to return.
First of all, American house prices continued to rise sharply. In September 2022, the median housing price in the United States continued to rise by 7.6% year on year. At the beginning of this year, the highest year-on-year growth rate of housing prices once reached more than 20%.
In addition, since this year, affected by the conflict between Russia and Ukraine, the oil price in the United States has exceeded $80 almost all the year round, and once exceeded $120 in May and July.
Although the oil price has fallen back with the easing of the Russian Ukrainian conflict, it is still difficult to eliminate its negative impact.
And you should know that Russia and Ukraine are still in a state of war, and the arch fire factions of the United States and NATO are still secretly spying on the situation for the benefit of the portal.
At this time last year, Los Angeles Port, the largest container port in North America, faced an unprecedented cargo backlog, while this year, it faced the largest collapse in container throughput in 13 years. The circulation of commodities is still facing a severe test.
05
Some people may ask whether the United States, as the main culprit in controlling the world currency and exporting inflation everywhere, will transmit risks to China?
Let’s take a look at the relevant data.
The situation of China’s GDP and CPI is opposite to that of the United States. Since 2020, China’s economy is still in a high growth range, while inflation is in a low range.
According to the statistics bureau, in the third quarter of 2022, China’s GDP grew by 3.9% year on year, while the CPI grew by only 2.1% year on year.
From these two indicators, China’s economy is far from being infected by American stagflation
Even connected expansion is not enough.
Of course, this may be contrary to our feelings. After all, we have all experienced various price increases, from rent to vegetables to oil prices. It is worth noting that, after all, some prices are also falling, aren’t they?
To do this, we need to look at historical data.
Compared with the previous stagflation times, we also found that the excessive currency and lard resonance (the price resonance of pork and crude oil) are typical features of Chinese stagflation. This is why the economic community is particularly concerned about pork prices.
At least, pork prices fell to near the lowest level in history at the end of last year, but now they are just rebounding; Food prices also rose and fell, and the prices of grain and oil did not rise significantly. On the whole, prices in China are very stable.
Although the conflict between Russia and Ukraine
The global energy crisis has not really passed,
But at least our economy is quite healthy compared with that of the United States, which has something to do with China’s proper diplomatic handling, rich energy reserves, controlled epidemic situation, and strict exchange barriers.
Last year, the National Bureau of Statistics responded to the overseas media’s speculation about whether China has stagflation.
Now it seems that this is indeed a false alarm. All kinds of failures are finally realized in the invisible.
But can we really breathe a sigh of relief?
06
Let’s go back to America.
As mentioned earlier, in the 1970s, the United States experienced an unprecedented severe stagflation that lasted for nearly 10 years and led to economic depression.
Several factors that led to the stagflation of the economy: economic downturn, excessive monetary issuance and rising oil prices – almost exactly the same as today’s situation in the United States.
The reason why stagflation was formed in those years is limited. We will not discuss it today. We will talk about how the United States came out of stagflation, which may be more meaningful for us to predict the future.
The reason why stagflation is difficult to solve is actually well understood in principle. To solve stagflation, there are two solutions:
One is to start from economic growth and take measures to change the mode of economic development so that the economy can return to the path of high growth.
This road is extremely difficult, which requires the transformation of the economic structure of the whole country, or a leap in productivity due to the substantial improvement of technology.
It is not easy for a person to change himself and form good habits, not to mention the overall transformation of a country? How effective have Biden and Trump been tossing about for so long?
The other is relatively simple and crude. Starting from curbing inflation, we will increase interest rates, suppress oil prices and other ways to lower the prices of the main commodities that cause inflation, which will lead to the overall decline of commodities, thus reducing the overall inflation level of society.
Then, by means of tax reduction or foreign plunder, and with a little help from the first method (such as developing high-tech), economic growth can be restored to a high level.
Volcker’s iron fist just mentioned is not enough. Let’s focus on non economic measures, which are more critical to solving stagflation.
Crude oil has become the most important problem to be solved by the United States. The primary factor to control stagflation is not to let crude oil continue to soar.
In 1975, the United States bullied Gulf countries to sign agreements one after another, stipulating that crude oil can only be settled in dollars. Since then, the United States has controlled the price of crude oil through exchange rate.
In 1976, under the leadership of the United States, the International Energy Agency was established to advocate reducing global dependence on crude oil. Since then, nuclear energy in Europe and the United States has been vigorously developed.
In 1978, Egypt, the leader of the Arab world, shook hands with the United States and Israel. When the large-scale conflict in the Middle East came to an end, the United States not only controlled the Suez Canal, but also doused the powder barrel of soaring crude oil.
The crude oil price was controlled as scheduled and fell sharply in the early 1980s.
If controlling crude oil only solves the problem of stagflation, there must be another way to solve economic growth. It is obviously impossible to rely on our own country for transformation. This glorious task falls to Japan and other countries.
The Plaza Agreement was born. In the early 1980s, the US fiscal deficit and foreign trade deficit increased dramatically.
The United States hopes to increase the export competitiveness of its products through the devaluation of the dollar, so as to improve the imbalance of the United States’ balance of payments, so it signed this agreement.
After the signing of the Plaza Agreement, the Japanese yen appreciated significantly, international funds (mainly US dollar capital) flowed into Japan, and the domestic stock market and real estate prices soared. The foam expanded sharply. Finally, in the middle and late 1980s, the real estate and stock market foam burst due to a large amount of capital outflows, resulting in a long-term stagnation of the Japanese economy.
In this way, the problem of stagflation in the United States has been solved perfectly. Of course, the disintegration of the Soviet Union in the 1990s helped the economic recovery of the United States again. Since then, the American economy has entered 30 years of take-off.
07
From this, we can see that it is not easy to solve the problem of stagflation. It took the United States nearly 20 years to solve it gradually through various economic and non economic means. Can the United States still solve this problem well today?
With its position as the world’s first hegemon, we can only say that it will definitely be solved in the end.
However, there is only one question, that is, who will be the price for the United States to escape from the sea of stagflation this time?
Now we have some answers. For example, the brotherhood wall, war ravaged Russia and Ukraine, such as the UK, where the people are angry and the prime minister has changed, such as Japan, where the exchange rate has nearly collapsed
But is that all?
By the middle of November 2022, the total debt of the United States had reached 31.3 trillion US dollars, about 122% of the US GDP.
In the face of this unprecedented crisis, how can a few little brothers’ bloodletting satisfy their terrible appetite?
The arrival of the bloody carnivore season is inevitable. In the quiet before the storm, we are waiting to see who will be the next one.