China May Be the Answer to Janet Yellen's 'Mystery' | WHAT REALLY HAPPENED X-Frame-Options: DENY X-Frame-Options: SAMEORIGIN

China May Be the Answer to Janet Yellen's 'Mystery'

Treasury Secretary Janet Yellen's “mystery” may be moving toward resolution.

When she led the Federal Reserve, Yellen puzzled over inflation’s failure to fire despite low unemployment, years of shallow interest rates and several rounds of quantitative easing. Claudio Borio, a top official at the Bank for International Settlements, likened the situation to peering through a looking glass: Central banks that once strove to quash inflation subsequently found themselves trying to lift it. Both he and Mark Carney, then governor of the Bank of England, also spent some time sleuthing. At least part of the answer, they thought, lay in the globalization of labor markets. It no longer mattered much what the factory next door paid workers or charged for their products; the key was what the competitor or supplier on the other side of the world was doing.

When people like Borio and Carney spoke about the entry of more than a billion workers into the labor force since the Cold War, they were essentially talking about China. The country’s economy had become so big, so great an exporter, and so huge a manufacturer that it held prices down from Sydney to Seattle. China became a powerful disinflationary current in the global economy.