We Caged the Inflation Dragon — So Why Are We Setting It Loose?

The Thirty-Year Miracle

Cast your mind back to the early 1990s. The Berlin Wall had fallen, the Uruguay Round was being negotiated, and China was beginning its integration into global commerce. Western policymakers made a deliberate wager: that opening borders to trade and capital would allocate the world's resources — labour, raw materials, manufacturing capacity — to wherever they could be deployed most productively. It was, in essence, the logic of the boardroom applied to the global economy.

The results were extraordinary — and profoundly underappreciated. From 1993 to 2019, GDP grew robustly across OECD economies, unemployment trended structurally lower over multiple cycles, and consumer price inflation remained stubbornly, almost mysteriously, subdued. Conventional macroeconomic theory — which held that low unemployment would inexorably fuel wage and price pressures — was confounded year after year. The explanation was not mysterious: a billion-strong Chinese workforce entering the global economy suppressed the cost of manufactured goods on a scale without historical precedent.

US data. Source: US Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve. Figures are approximate period averages.

The data speak plainly. The globalisation era delivered lower inflation than the preceding two decades despite equally strong growth — a combination no prior generation of policymakers had managed to sustain. It was not luck. It was the compounding dividend of capital efficiency at a scale the world had never before attempted.

Why Is Inflation Back?

The pandemic did not merely disrupt supply chains. It accelerated — and in some cases triggered — a wholesale political reversal of the globalisation consensus. Governments across the Western world began to actively pursue the repatriation of manufacturing, imposing tariffs, offering industrial subsidies, and rewriting procurement rules to favour domestic production. The stated rationales were two: security of supply chains and the restoration of industrial employment.

Monard's view is that both justifications, while not without surface plausibility, are largely pretexts.

Supply chain security. The genuine security argument rests on a Taiwan scenario: a conflict that would sever access to advanced semiconductors. This concern has real merit, and the production of a small number of truly strategic technologies warrants targeted domestic investment. But the policy response has been far broader than the risk demands, extending to consumer goods, steel, electric vehicles, and general manufacturing that carries no meaningful strategic weight.

Employment. The US labour market, viewed nationally, does not present an unemployment crisis. The more pressing structural challenge over the coming decade is likely to be the reverse: an ageing population, declining birth rates, and insufficient labour supply. Bringing back mass manufacturing employment is not a solution to a problem that, in aggregate, exists.

The Real Driver: The Politics of the Swing State

The honest explanation for the onshoring movement is political, not economic. Globalisation made the median citizen of Western economies substantially better off — cheaper goods, higher real purchasing power, greater variety. But it did so at the cost of concentrated, severe dislocation in industrial communities. A state like Michigan saw manufacturing employment hollow out not because of mismanagement or lack of skill, but because the same goods could be produced at dramatically lower cost in Asia and Latin America.

The political consequence is that those communities, concentrated in a small number of electorally pivotal states, became a decisive voting bloc. Politicians — across party lines — have responded rationally to the incentive structure they face. The injustice of globalisation's distributional effects is real and must be acknowledged. But the answer to that injustice is not to make the broader economy less efficient — it is to directly support those who bore the cost of making it more efficient.

Deficits, Debt, and the Second Inflation Engine

Capital misallocation through industrial policy is not the only inflationary pressure building in the system. Government spending has reached levels in peacetime that were previously unimaginable. Across the major Western economies, fiscal deficits have become structural rather than cyclical — the product of ageing demographics, expanded entitlement commitments, defence spending reversals, and the cost of the energy transition.

Central banks, having spent the globalisation era largely as spectators to low inflation, now find themselves managing a more complicated inflation dynamic with instruments — interest rates — that are blunt relative to the fiscal impulse they are trying to offset. Monard's baseline expectation is that fiscal deficits will remain elevated across most major economies throughout the forecast period, providing a persistent underlying bid to inflation even as cyclical factors moderate.

The Incomplete Answer: Trade Negotiation, Not Trade War

A note of nuance is warranted. The globalisation settlement of the 1990s and 2000s was not without genuine imbalances. Chinese state subsidisation of manufacturing — via directed lending, land grants, energy pricing, and tax structures not available to private competitors in open markets — has at times tilted the competitive landscape in ways that are legitimately problematic. These distortions are real, and they deserve a serious response.

That response, however, should take the form of rigorous, sustained trade negotiation — pressing for reciprocal market access, transparency in state support, and enforceable disciplines on government-directed capital — rather than the abandonment of the open-trade framework that generated three decades of shared prosperity. The goal should be to repair and extend globalisation, not to dismantle it.