this post was submitted on 30 Nov 2025
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Wage-price spiral occurs only under full employment. When the productive capacity is fully occupied, GDP can only grow through inflation.
That is irrelevant to China’s problem because China doesn’t have full employment.
To understand the solution to this problem, we need to go back in time to the 1970s first before we can explain this.
After the collapse of the Bretton Woods, the IMF and OECD began to push the NAIRU (non-inflationary rate of unemployment) theory, which in simple terms, means that full employment no longer mean fully employed workforce, but a minimum level of unemployment where you do not cause more inflation. In other words, if you have too few unemployed people (too many people getting paid), you’re going to get into an inflationary spiral and it’s bad for the economy.
As a result, many countries were afraid of using an expansionary fiscal policy (government deficit spend more money) to ensure full employment. To spend more money in a “balanced budget”, you need to increase the assets you hold first. As a result, many developing countries - under the pressure from IMF, World Bank and GATT (later WTO) - converted their economy in export-oriented economy to run a trade surplus, export-led growth model. By selling cheap goods and services to wealthy Western economies, the earned foreign currencies then become part of their assets, which allowed the governments to spend more money domestically to raise the living standards of their own people.
This is all neoliberal crap, of course. The solution to preventing wage growth under full employment from causing an inflationary spiral is also where the genius of MMT comes in. The introduction of a price anchor through jobs guarantee pretty much solves the problem. When the government sets the wages through guaranteed employment, and since goods are priced relative to wages, it eliminates the potential wage-price spiral with too many people getting employed. The wage level is set as determined by the productive capacity and availability of goods and services in real terms.
Amazingly, Stalin figured this out nearly 70 years ago with the first Five-Year Plan, which involved the 1930-32 Credit Reform. Using a Dual Circuit monetary system, Stalin correctly understood that money is simply debt, and split the ruble into two largely insulated but partially overlapping circuit - the non-cash ruble circuit are investment money used for driving large investment projects, while the cash rubles circuit are the wages that flow into the working people for consumption. Since the non-cash rubles were mostly insulated from the consumption economy, the Soviet government was able to spend huge amount of money into investment projects without having to worry about inflation. Instead, the wages (cash ruble circuit) were determined based on productive capacity and availability of goods and services. This was how the Soviet economy was able to expand exponentially with very little inflation. Of course, a large portion of this mechanism was reversed under Khrushchev, and the Soviet economy began to stagnate in the coming decades.
Going back to China, as you can see, all China has to do is to give up the neoliberal framework and begin to enact jobs guarantee program. This will immediately allow the consumption level to rise, and hence solving its deflation problem. Not only that, the Chinese government can also set social safety net, such as free healthcare, such that people would be less averse to spending. Finally, wealth redistribution is also key to ensuring that the rural population (nearly 40% of China’s population whose monthly income is still around 1000 yuan (~$150) will also have the purchasing power to raise their living standards.
The increased consumption level will automatically cause wages to increase, and inflation to increase at a healthy level.
No neoliberal country actually has full employment because none of them have a jobs guarantee, so this seems to contradict your earlier assertion that the wage-price spiral is fundamental. Clearly it isn't, you're saying it's contingent on full employment. Shouldn't that mean there's no problems with raising wages?
It was a problem in post-war European social democratic countries under the Keynesian model, including the UK.
Strong labor unions had the leverage to push for real wage increase, and if the firms do not want to cut their profit, they have to mark up the prices in return, leading to a wage-price spiral.
The bourgeois establishment was afraid of the strong unions eating into their profits, and their refusal to reduce their mark up profit led to uncontrolled inflation. By the mid-1970s, inflation in the UK soared to ~20%, and combined with the falling sterling exchange rate, the neoliberals were brought in to crush the labor unions and bring the inflation to an end.
It becomes a problem once economies gave up the neoliberal framework and start guaranteeing everyone job. In this case, a job guarantee program from the government will become the price anchor that anchors labor to wage, hence effectively setting the minimum wage to the economy. If firms do not want to raise wages, the workers will simply go find jobs from the government. If firms mark up the prices excessively, demand will fall and they will have to cut production and layoff workers. However, because of a jobs guarantee mechanism in place, the system ensures that there will not be a loss in consumption demand (since the laid off workers continue to be employed in another job and getting paid), preventing both a recession and for the firms to unreasonably drive up inflation. The situation fixes itself.
Okay, but that begs the question: why can't China fix their deflation problem by also pushing for wage increases?
It seems like a non-problem that is being created by their own inflexibility and adherence to, as you say, neoliberalism.
Because China wants to have its cake and eat it too. It wants the competitiveness of its export industries (since money creation is tied to accumulation of foreign currencies/assets, and requires suppression of wages and domestic demand) and boost domestic consumption at the same time (which requires wages to increase, and giving up its net exporter status).
In fact, the IMF themselves even gave this phenomenon a name - middle income trap. The idea that a exporter country’s economy is stuck at transitioning into a high income country because the moment they give their workers high income, their export competitiveness will fall, lose their economic advantage and brings them back down to middle income.
The only way out is to not play the IMF/neoliberal game.
Okay, so Chinese deflation comes from the contradictions created by keeping exports cheap. If wages rise then domestic consumption will compete for exports, raising the cost of exports unacceptably and hurting China's overall income. That still sounds like a non-problem created by their own unwillingness to actually make that choice, they're adhering to a model that isn't necessary anymore. It's not like all of their built-up infrastructure will just go away if they can't export slop to Western consumers.
Also, isn't the middle income trap just a neoliberal revision of World-systems Theory? So-called middle income countries are stuck at transitioning to high income countries because they aren't imperialist, they are unable to use predatory financial instruments and assassinate neighboring political leaders and otherwise underdevelop their periphery. Is the transition to high-income even possible without being welcomed into the imperial core or being one of the core's favored semi-peripheral compradores?
The question is where is the money going to come from?
To raise wages, either the firms (private sector/capitalists) run into deficit, the foreign sector does, or the central/local governments do so.
Let’s go through them one by one:
Since the capitalists are unlikely to want to make a loss, and they aren’t exactly in the shape to do so right now because profit margin has been squeezed to razor thin due to intensive competition (involution), the wage growth isn’t going to come from there. You can see the government has started intervening with the anti-involution campaign to raise the firm’s profits so they have the money to even pay their workers. Worse, the deflation (lack of domestic consumption) is making their corporate debt even more expensive to service. The only way to offset the loss is by exporting even harder (which is why you see Chinese exporting firms are dumping cheap goods into other countries under Trump’s tariffs).
The local governments are also in a debt bubble right now. Years of over-reliance on land revenue has caused a reckless over-investment in real estate. The property prices are now plunging (land revenue going down), and with slowing consumption/export (value added tax revenue going down), and with an outsized hidden and visible debt that need to be serviced, the local governments have little capacity to spend do so.
Which brings us to the central government, the only governmental body that has the power of money creation. However, since China wants to adhere to the IMF rule of balancing the budget to keep its deficit spending low, it has to either accumulate foreign currencies (through export, or through attracting foreign investments), or borrow through bond issuance (banks collateralizing their assets to the government).
As you can see, the only realistic way to raise wages is for the central government to run deficit, but they will not be able to meet the 3-4% of GDP spending as recommended by IMF, and they will be scolded by the IMF.
Yes, because the developing countries have listened to the IMF to convert their economies into export-oriented ones.
After the collapse of the Bretton Woods, the US empire found the “cheat code” by running permanent trade deficit (super-imperialism) to absorb the surplus goods from the rest of the world. This causes many governments, wanting to earn the US dollars, to become over-invested in export manufacturing capacities. As a result, the oversupply of productive capacity allowed wealthy Western countries with strong currencies to enjoy cheap goods from the Global South.
Since they have over-invested in this trade surplus strategy, the export economy became the primary driver of domestic growth. Whenever they try to raise income, their export goods become uncompetitive. This keeps the developing countries in an artificial “trap” as long as they want to rely on the export industries.
But here’s the problem: how do you transition out of the export economy? For every investment, there is always an opportunity cost. If you spend 10 years to get good at something, and suddenly the skill you’re good at is no longer needed, you find yourself difficult to compete with others because you have not invested in the other skills. This may not be a problem if you’re alone and don’t need much to survive, but what if you have to pay for the medical treatment of your aging parents? Suddenly, the decision is a much harder one to choose.
Every country has to decide how to strategically invest in their economy, and the cost of transition, even if it is overall beneficial to their own economy, will always be a policy choice with some hard decisions to make. If you give up something you’re good at, you might get overtaken by your competitors and suddenly you find yourself losing that market, and you’re screwed if that transition fails.
This is why only countries like China with very strong economy can make the transition easier than most, and they will and should have an outsized responsibility for the rest of the Global South countries.
That still sounds like a non-issue, can the IMF even do anything to China?
The issue I see isn't the IMF, it's the MIC. Without the West relying on China for slop the economic disincentives for war drastically decrease, bullshit like """defending Taiwan""" makes a lot more sense when China stops being the West's toy factory.
That was my question! Is the transition to becoming a high-income country even possible without being welcomed into the imperial core or being one of the core’s favored semi-peripheral compradores? It seems like the middle income "trap" is actually predetermined by the limits of non-imperialist growth, that it might not be possible to reach high-income without superprofits under the current world system. Which would actually imply, to me, that the only way out is to change the world system itself.
So, I guess I agree with you from a different angle. China can't just print money to eliminate deflation because, if it did, its exports would become less competitive and then the imperialist death machine would turn its sights on China to punish them for daring to not churn out the endless slop the West needs to sustain its high standards of living. It's a hostage situation.
They can if they abandon the neoliberal ideology, as I have been saying.
It is a belief system. If everyone in your neighborhood believes that you can only use tap water for no more than 5 liters per day, or else the pipe is going to burst and flood your entire house and damage your property, it’s going to dramatically alter how you live your life, and everyone else in the neighborhood. You will learn how to drink less, wash less, save water whenever necessary, and you will curb certain activities that might make you too thirsty, or need more washing.
And this will create a trading system where people who are good at saving water will sell or lend the surplus water to their neighbors who need more water for the day, in exchange for other treats. It will create an economy of its own even though nobody knows for sure whether the pipes will burst or not.
The point is that until somebody actually tried running the tap water beyond the maximum limit, it will continue to be a belief that dictates everyone’s life. And nobody dares to test it, because they are afraid that the pipes will burst, their homes will flood, and their neighbors will kill them for irreparably damage the life support system of the community.
Sure, and I'm saying it's a non-issue because beliefs aren't real.
That said, there is some material basis to these beliefs. If somebody ran the tap water beyond the maximum limit the empire's water police would come and kill their whole family. If China abandoned neoliberal ideology the US would start WW3.
Trump literally wanted to decouple from China. It has been China that, through using various of its powerful cards like rare earth export restrictions, that brought the US back into the “marriage”.
China should just take up on Trump’s offer and start importing from the US lol. Let the Americans be the world factory’s workers for once.
Sure, but that demonstrates my point. Trump showed that the US can't decouple from China because it's too reliant on Chinese exports, as long as China is the world's factory it has tremendous leverage that protects it from direct US aggression.
Turning the US into an exporter could turn the contradiction on its head and protect them from US aggression, because then the US would be reliant on Chinese consumers, but I don't see how the US becomes the world's factory without central planning. Currently the US is throwing all of its resources into the AI furnace and it doesn't look like productive economic activity will resume for a while.
My point is that Trump is the one who wants to decouple, not China.
Trump is the one saying “the Great American Nation has run up 100 gallons of tap water for y’all so you get to save your water. Now I’m asking you to open up your tap water and give us back some of the water we gave you”.
I agree that Trump won’t be able to materialize his MAGA plan to re-industrialize America. However, the fact that that’s what Trump wants means that he won’t start a war with China for literally giving him what he demanded, will he?
I'm very aware that Trump is the only one that wants to decouple and not China. Trump thinks paying for stuff is the same as being ripped off, so trade deficits are actually somehow stealing from the US economy. His decoupling strategy wasn't even total, he granted so many exceptions that China continues to be a strong trading partner with the US. Deeply unserious.
That's also why there won't be war, because China is still too important of a trading partner despite exports to the US declining. China also is important for the rest of the imperial core and semi-periphery, even as Trump tries to pressure US-allies and vassals to cut off trade (to very limited success) and this further protects China from US aggression.
So with all that in mind, I can kind of see the logic of maintaining the export-based economy. As long as the imperial core is dependent on China's exports they can't attack without causing their own economies to collapse. It's the only material explanation that makes sense to me, "China is just too ideologically committed to neoliberalism to consider raising wages" isn't a satisfying explanation.
There is no need to wonder, I already posted it before here:
Wang Jian (王建) from China Society of Macroeconomic Research, who proposed the Great External Circulation strategy back in 1987 that was officially adopted by the central government, talked about this in an interview in the early 2000s:
In September 2020, months after China proposed the Dual Circulation Strategy (export balanced by domestic consumption), Wang Jian reasserted the importance of dollar hegemony in an interview:
Once you understand this, you will understand that China cannot and will not give up the dollar system, especially its hegemonic status. The status quo greatly benefited the Chinese economy and there is no reason to give up even when the US itself is threatening to end the arrangement, because China still has plenty of cards to play (e.g. rare earth export). The US will find itself unable to decouple from China.
This is also why when the US confiscation of Russia’s $300 billion foreign reserve at the start of the Russia-Ukraine war, and the Fed rate hike that caused dollar liquidity crisis in many Global South countries and spurred strong interest in many to leave the dollar regime, China has been the one that was and still is the most reluctant to abandon the US dollar. If China doesn’t want to, then nobody else can do anything about it. The Biden administration correctly gambled that China would not threaten the dollar hegemony during the rate hike in 2022.
It's hard to reconcile this with the BRICS trying to set up their own currency alternative to dollars. That doesn't look like China "cannnot and will not give up on the dollar system" it looks like they're trying to build an off-ramp before it inevitably collapses.
And where is the plan of BRICS setting up their own currency?
They have been trying for the last three years, and learned the hard way that a confederated currency cannot possibly work among the different countries. If anything, it will only lead to an internal fracturing and the result is the dollar becoming even more hegemonic. This was the key lesson from Russia’s Kazan proposal on dedollarization at the BRICS summit in 2024.
The only way out is to use a federated currency backed by a strong economy. Euro and yen were two good, internationalized currencies that have the potential to challenge the dollar, but the US already pre-empted the dominance of the euro by destroying the European economy through the Ukraine war. The Japanese economy isn’t growing fast enough and isn’t up to the task anymore.
This brings us to yuan, which is backed by China’s strong economy, but since China refuses to give up its net exporter status, it cannot become a reserve currency that others can use for saving. China seems content with reaping the benefits of the dollar hegemony, so it’s a no go on that front either.
I’ve been reading through the thread and the discussion is fascinating. However, I’m realizing my MMT knowledge is a bit too underdeveloped to really grasp some parts. Would you mind explaining? Particularly the “Stalin understood money is debt” bit.
For a long time, especially during the gold standard era and the Bretton Woods era, economists had bought into the barter myth perpetuated by Adam Smith that money was invented as a medium of exchange because people used to trade through barter.
I highly recommend reading David Graeber’s Debt: the First 5,000 Years which was based on Michael Hudson’s research, or at the very least, read this excellent Hudson article: Palatial Credit: Origins of Money and Interest, which very much refuted the barter theory:
As Hudson pointed out in the article, money had always existed as a form of debt since the early civilizations, and debt is simply a form of promise.
As human civilization transitioned from primitive hunter-gatherer society into agricultural society, planning for the future was crucial. You need time for the crops to grow, so how do you even “pay” for goods before the harvests?
The widespread use of gold had to do with the Crusades, when medieval kingdoms did not have the means to assert their legal authorities as the currency issuer, and since they hired mercenaries who operate outside the boundaries of their legal authority, gold was instead used as a substitute form of payment.
By the 19th and early 20th century, the monetary system of most countries operated under the gold standard (and later Bretton Woods from 1944-1971).
Even though governments had at times abandoned the gold standard and turned to fiat currency, especially during war and crisis, for example the greenbacks during the American Civil War, all of these were deployed as temporary measures.
Stalin was the first to decouple the “internal” or “domestic” ruble from gold (there is also a “clearing” or “external” ruble that the USSR used for external trade that was still somewhat tied to gold, but it’s irrelevant for the discussion here):
As I wrote in the previous comment, the Soviet “internal/domestic” rubles existed in two forms: non-cash (for investment/business transaction) and cash (the “money” that people use to pay for goods and services). The non-cash ruble isn’t exactly the “money” that people think of today (a commodity/medium of exchange for barter), but rather a form of debt (think credit or score, i.e. numbers) that the government (the legal authority) issues to allow for settlement between state agencies and business entities. This circuit is detached from the “money” that flows into the hands of the working people, and because they were insulated from the consumption loop, its impact on causing inflation is minimal.
On the other hand, the cash ruble was issued based on productive capacity and availability of goods and products, and because the volume was controlled by the state, it could easily ensure that people have access to the available goods without driving up the inflation.
Now, on to MMT, the genius of MMT is the introduction of a price anchor, using government-backed jobs guarantee to prevent wage-price spiral, a mechanism that solved the problem the Keynesians ran into in the 1970s causing the inflation to spiral.
With the government setting the minimum wages through jobs guarantee (because nobody would work for a private firm that pays less than the government guaranteed job), it also controls the prices of goods and services (which are priced relative to wages). Of course, there is also supply side inflation which can be caused by shortage of imported goods, international sanctions, logistics interruptions but we’re focusing on the goods and services that are produced and consumed domestically here.
Moreover, through jobs guarantee, the mechanism also ensured that when workers are laid off by private firms, it automatically offsets the loss of income that could dampen consumption, because the workers can be immediately re-hired through the government jobs guarantee program, ensuring that their income is not lost.
Most important of all, jobs guarantee anchors wages to prices, and give leverage to the workers over the capitalists. If private firms refuse to pay better wages or provide better benefits, the workers will not have to worry about losing their jobs because they can always be hired through the jobs guarantee program, and this gives them plenty of bargaining chips. And because the wage floor is set by the government, it will also not lead to a wage-price spiral.
Pay attention and compare to the Stalin’s dual circuit monetary system here - even though the forms of implementation are different, both rely on the government setting the wages (as opposed to government setting the prices), and this required an understanding the money really is just a form of debt, not a commodity/medium of exchange as perpetuated by Smith’s barter theory.
Hope this helps.
Thank you for the thorough answer. I still have more learning to do but this was a great introduction.