The global economy may be a mess, but the world's central bankers like to congratulate themselves for one thing. Inflation has been tamed.
Sorry, bankers, but the low level of price inflation has little if anything to do with skilled central banking. In the short run, the absence of price pressure reflects the prolonged recession. And for the past decade or so, the low inflation is the result of China's low wages.
That's right. Consumer prices are flat in substantial part because China sends us so much stuff, dirt cheap. This puts downward pressure on prices. The real price is paid both by Chinese workers who are paid a pittance and by American workers who either restrain their own wages or watch jobs move to China.
But all that may be changing, and the change will be a mixed blessing.
China, long politely criticized by the US government for managing the value of its currency, is now allowing the renminbi gradually to rise in value.
Analysts say China wants a stronger currency to fight inflation.
China is both contributing to the inflation and suffering from it, by being such a large new buyer of raw materials that it drives up prices. A stronger Chinese currency means that the price impact is buffered -- for the Chinese.
China has also been criticized for its low wages. But the Beijing regime has also begun allowing wages to rise, as part of its strategy of domestic development.
Bottom line, stuff from China won't be quite as cheap. That, along with the impact of higher worldwide commodities prices, means higher inflation on the horizon for the US. Unlike the Chinese, we are not letting our currency appreciate in value. We are watching it fall.
What does all this mean? Economics, infamously, is the science of on-the-one-hand-this, on-the-other-hand-that. On the one hand, it's about time that China let its currency behave more like others and began paying its workers more than a pittance. A more expensive Chinese currency and better Chinese wages will be marginally good for American exports, and also good for US wages.
On the other hand, the free ride on inflation may be ending. If so, we could face pressure to raise interest rates at a time when the economy is still suffering from very slow growth and very high unemployment. That means a worse recession.
Professor Charles Kindleberger famously argued in his 1973 book, The World in Depression, that the world economy needs a hegemonic monetary power, to provide a reliable currency, and to be both a lender and a market of last resort. Britain played that role in the 19th century, and the US after World War II. According to Kindleberger, the interwar period was such an economic disaster because no country played that role.
China is fast becoming the monetary hegemon of the 21st century. It has done a benign job of buying our bonds at low interest rates. But it has done a terrible job of opening its markets or managing its currency in the world's interest. On the contrary, its behavior has been entirely mercantilist, in its own self interest.
But if China starts behaving more like a normal nation, we could end up paying more to sell our bonds, and having to deal with higher inflation as well. And, increasingly, China will be in the drivers seat.
No hegemonic power is entirely benign. But the US in the postwar period wasn't bad.
It's hard to imagine China bearing its new-found economic power entirely with altruism.
Yet it would be comforting, but misleading, to scapegoat the Chinese. Yes, they do poach American jobs by subsidizing industry and paying crappy wages. But for the most part, the current crisis was made in U.S.A.
If we had had an industrial policy, we'd have a stronger manufacturing sector. If we hadn't let banks go nuts, we wouldn't have a prolonged economic stagnation. And if we hadn't gutted our tax code to reward the rich, we wouldn't have a huge deficit that required the Chinese to buy so many bonds.
Like it or not, China is now the 800 pound gorilla of the world's economy. The thing about such beasts is that tend to do what they please.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.