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Slow global gains could mean inflation

Marketplace Staff Sep 19, 2007
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Slow global gains could mean inflation

Marketplace Staff Sep 19, 2007
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TEXT OF COMMENTARY

Scott Jagow: Let’s get another perspective on this. In his new book, Alan Greenspan says the gains from globalization are waning. Commentator David Frum says that’s why the inflationary storm clouds will start gathering.


David Frum: In the 1990s, big countries like China and India rejoined the world market. Their people flooded into cities and into export industries. That influx restrained wages worldwide, and in turn, slowed inflation.

But there is not an endless supply of anything. Not even Chinese peasants. Sooner or later, the influx must slow, wages will rise and inflationary pressures will gather. Especially since those ex-peasants will want to buy things, too.

They will want more meat, which means grain to feed the meat, which means higher grain prices. They will want cars, which means higher oil prices. They will want more gadgets, which means higher prices for nickel, steel and other commodities.

Eventually, they will want to spend more and save less, which means less demand for U.S. Treasury bonds. That, in turn, will mean higher interest rates to attract investors.

The forecast looks bad for inflation, and not just because of China. Fundamentally, it’s because of us.

Every developed country has made health care and pension commitments to baby boomers that can’t possibly be honored in full. What have governments historically done when burdened with commitments they cannot meet? They inflate their way out of them.

That’s what happened in United States in the 1960s, when the United States decided to build a Great Society and fight a war in Vietnam, all at the same time, without raising taxes. Let’s borrow the money. And how will we pay it back? Easy — just print it.

It worked for a while. A very short while. Between 1967 and 1982, the dollar lost almost three-quarters of its purchasing power.

There’s going to be a great temptation to escape our debts to the baby boomers the same way. And this time, those Chinese peasants won’t be around to help us out.

Jagow: David Frum is a resident scholar at The American Enterprise Institute.

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