Why don’t you just read the data? The core inflation rate in China is about 1.5% in Jan, 2008, correct me if I remember the wrong numbers. Food and energy are the two behind the headline numbers. Pork and egg are the two behind the food numbers.

According to Chinese statistics the January/January CPI was up 7.1%, non-food CPI was up 1.5%, food was up 18% (pork up 58%). Since food has a roughly 1/3 weight in the Chinese CPI, these numbers should be about right, (2*1.5+18)/3=7%. So, if the high Chinese inflation did not come from food, then how do you explain these numbers?

The fact is that there was a big fall in pork production in China last year, due mainly to the blue ear disease. The 2004/05/06/07/08 (08 is an estimate) pork meat production data in million tons are: 47/50.1/51.9/47/48 (just for comparison, the world production was 92.8/96.1/98.5/94.7/93 million tons). The pork consumption in China in these years was 46.6/49.7/51.5/46.7/47.7 million tons (08 is again the estimate of the USDA, the Chinese estimates for both the production and consumption in 2008 is a lot higher). So in 2007 production was roughly 7 million tons below potential demand. This is a huge number. Since there was not enough pork meat, and people had to eat something, the prices of the substitute food items also went up (7 million tons of pork meat is rougly the equivalent of 28 million tons of grain).

Basically, subprime MBS bonds representing fictitious capital are being eliminated in market valuation. It is a travesty of economic justice that the Federal Reserve is printing and inflating the money supply in a vain attempt to bailout the Wall Street Hedge Funds laden with subprime debt holdings. In a repeat of the Long Term Capital Hedge fund fiasco, Fed Chairman Bernanke has been on the phone continually with Robert Rubin and other Hedge Fund managers who are on the record pleading for a federal taxpayer bailout. Acting as Robin Hood in reverse, the Federal Reserve’s inflationary monetary policies are stealing by stealth, the hard earned savings of the US middle class facing record food and energy inflation. The economies of the rest of the world have imported US inflation under the global dollar hegemony regime.

ac, thank you for your data.

Brad, we all know food accounts for a large part in China’s CPI and people look at headline CPI more often. My arguement is that this is precisely a food problem. If you are worried about the social unrest generated from higher pork price, you should not use tight monetary policy to decrease pork demand, which would embark a bigger unrest. The correct way is to increase meat supply.

other countries can depeg, or other countries can keep their pegs and the US can stop debasing their currency and punish the criminals behind the subprime asset bubble- find the individuals who profited from the fraud and make them pay it back (e.g Chuck Prince, Paulson, etc.).

If we want to talk about real justice, and leave aside the concerns of our own personal countries, the latter solution is by far more equitable- the (world) masses are are bearing the brunt of this travesty of (American) greed. The bubble has burst.

As long as USD is world reserve currency, Bernanke has an obligation not to debase. The US became the most powerful country in the world precisely because it could randomly manipulate money supply in its own interests, and people still accepted it. It has a responsibility- otherwise, if you want to talk about being equitable, give back all the wealth that was created by this privilege.

Guest, speaking about Hank Paulson arranging for a federal taxpayer bailout at Goldman Sachs,

” Second, this is a shared responsibility of industry, government and homeowners. We in government are working to expand options through the FHA, and we’ve worked with the industry to reach as many homeowners as possible to let them know that help is available. There is more that government and industry can do, and our efforts will continue to evolve. ” – Hank Paulson

Translation: We are attempting to bail out the Wall Street banks, as much as possible, by shifting the risk to the FHA where US taxpayers will be expected to pick up most of the costs. Paulson and the banksters are showing no morals by asking for bailouts from taxpayers. Obviously, morality is a one way street for Paulson. Is it any wonder that everyone across Asia is trying to dump every US Dollar that they own for precious metals, and currencies with “sound” monetary policies.

THE GREAT EMERGING STAGFLATION OF 2008
U.S. dollar in the toilet and the great capitalists talk socialism. The blind leading the blind.
Bring on the AMERO maybe it it’ll be worth more than the paper it’s printed on.

Written by NO to Euro on 2008-03-04 11:01:06

DC and Nick and No to Euro:

aren’t you just speaking to yourself, acting as if another…

after all look at the timing of your postings from first guest to last, you are waiting, hoping to pounce, wasting your and everyone else’s time. I wish I had your time, blogging all day…unemployed or employed for a purpose which might fall on deaf ears, ears made deaf by your restatement of perspective, lack of foresight, and self-serving diatribes. BW1, perhaps, BWII choice, surely great and sovereign states which you protect voraciously are big boys and understand the consequences of their actions, as do others, no one seems to complain when they are making money and things seem to go their way, yet as the Tao teaches, good and bad in everything.

It’s actually not either/or. My personal view is that the current round of inflation is due to a food/fuel shock which is translated into prices via expansionary monetary policies.

One thing that makes this situation not a no-brainer for Chinese policy makers is that the current pattern of inflation (high food, low everything else) helps farmers, so there is less of a desire to slam on the brakes than there was in 2004. The danger is that the price rises will go into other goods if monetary policy is not changed.

We are about to see BWII crumble and looks like it is going to crumble in the same way that BWI crumbled.

DC: You are taking two positions that seem to be logically inconsistent. If inflation is due to pork and not monetary policy, then Bernanke is not responsible. If inflation is due to Bernanke, then the drop in pork production is irrelevant.

DC: Obviously, morality is a one way street for Paulson.

It’s actually a one way street for pretty much everyone. Yes, the US and rich bankers are being self-serving, but does anyone think that Chinese bankers would be more well behaved than American bankers?

DC: Is it any wonder that everyone across Asia is trying to dump every US Dollar that they own for precious metals, and currencies with “sound” monetary policies.

Which causes a major problem for the PBC. When someone in China sells a dollar they are selling it to the People’s Bank of China who buys it at a rate that everything things is too high. At that point the PBC is sort of stuck. If it lets the dollar crash, then it wipes out its reserves. If it doesn’t let the dollar crash, then it just builds up more reserves that could crash later.

I really don’t quite understand why you are so giddy about the dollar crisis. If the dollar becomes worthless it’s going to take China down with it. If the dollar goes down 15-20%, China can absorb it. If the dollar does down 50%, China has an major economic crisis on its hands.

Guest: We would not be in this mess if there was no Fed and there was no such thing as fractional reserve lending.

If you eliminate government-sponsored fractional reserve lending, you’ll end up with private fractional reserve lending, and you’ll end up with a system that is worse than the system we have (see the US banking system in the 19th century).

I really dislike “political snake oil.” Yes the current system may be bad (and it’s really not *that* bad), but that doesn’t mean that any alternatives you propose are going to be any better.

Two questions I always ask when people come up with political or economic policy proposals:

1) what’s in this for you? If someone says that they are doing something altrustically purely for my interest, they are either lying or stupid.

2) what’s wrong with your proposal? If someone comes up with an idea and they can’t tell me the ten things that are wrong with it, they means that they haven’t thought things deeply.

“does anyone think that Chinese bankers would be more well behaved than American bankers”

Once in a while, at least some Chinese bankers end with a bullet in the head for corruption. Was anyone prosecuted at Robert Rubin’s Citicorp for involvement in the Enron embezzlement and criminal fraud? Were Bill and Hillary Clinton ever prosecuted for their personal involvement in the Whitewater land scandal deals that bankrupted a Savings & Loan bank? Just wait till Hillary gets back into the Whitehouse to shred legal and financial documents.

China is supposedly holding domestic oil prices $20-30 below the world market price.

Doesn’t that just mean that when it comes to imported oil China is valuing the yuan at what it would be if it was freely-floating?

DC: Everything in the world economy is directly influenced by the oil price. The rise in oil and gold has been directly correlated to the devaluation of the US Dollar from the irresponsible monetary policies of the Bernanke Fed Reserve.

So you do think that Chinese inflation has nothing to do with pork shortages, or do you? If you think that Bernanke is following an irresponsiblity monetary policy, then you must think that the Chinese government is also being irresponsble for importing that policy, which is the point that Brad has been making for years.

The only consistent thing in your arguments seems to be that everything the US does is wrong, and everything China does is right, but that view just leads to a lot of very unclear views.

Here’s why it matters. Do you think the Chinese government should raise reserves and abandon the peg or not?

don’t blame bernanke. fiat currency involves built in moral hazard – and in a doomed helicopter situation shouting at the pilot isn’t going to help anybody.

and if the people are hungry, it may have something to do with exponential industrial, economic, and population growth, on a finite earth.

on the other hand, if you fiat enough fiat currency, in a globalised world economy, it seeps out everywhere and you cannot stop it, for all the pigs in china.

you generate confetti blowback.

the real ill is not in the policy, but in the proportions. the people most to blame for imbalance are those with the option to shift their money. people whose income just about covers their purchase of necessities cannot do much to destabilise markets. what is scarily different from 1929 is the proportion of consumer spending which is discretionary, and the ratio of investment ‘play money’ to household monthly budget money.

so far, except in places like iraq and gaza, the real and tangible international economy remains intact. even in cleveland, ohio, the mansions are still standing. it’s not a property bust – its a mortgage bust.

if anyone out there is making leveraged bets on pork, wheat, or tulips – these will continue to grunt, get ground, or bloom.

- but financial fashions change and the last bubble to deflate will be the bubble bubble.

the united states economy, thus the dollar economy and the global economy, is not responding to the controls. the best metaphor is not a crash, but a stall.

i don’t buy your theory, brad, about fed responsibility. the idea that the business class lounge can fly on regardless, while tourist class falls out of the sky. to survive, the fed will have to preserve the global context in which the economy of the united states operates. don’t shoot the rickshaw driver.

hope you can follow the mixed metaphors.
.

another helicopterconfettisceptic :

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccview103.xml&page=2
.
.

Twofish writes, “The only consistent thing in your arguments seems to be that everything the US does is wrong, and everything China does is right, but that view just leads to a lot of very unclear views. ”

Actually 73% of Americans want the US forces out of Iraq, but both Hillary Clinton and George Bush are in agreement that US forces should occupy Iraq permanently. What good is having an US democracy when the will of the people is completely ignored? Of course, the elites always know better.

Twofish, you are flat wrong. Actually China’s policy of non-interference in the internal affairs of other sovereign nations is the correct and rational policy. It’s the same reason why you never get personally involved with the family affairs of your next door neighbor. The world is headed for a new multi-polar world order; US foreign and Economic policy is intellectually bankrupt.

“Who controls money controls the world.”

Henry Kissinger – Council on Foreign Relations

Brad

Totally agree on the pro-cyclical policies imported by emerging economies and the gulf states, problem is how do these economies implement contra-cyclocal policies when the western model till now is so very pro-cyclical, any ideas anyone?

as for the dollar peg; how about focussing on the one currency that did de-peg, how’s kuwait doing? (apologies if this is completely inaccurate, had a long night) Would be careful about the HK peg, lots of speculators waiting to cash in on the de-pegging, might just spark off unpleasant events on the Hang Seng, given the uncertain mood in markets these days, Pesek might just get something he didn’t wish for. Then again, he is a journalist, as they say, any news seems to be good news.

There was an interesting article in Bloomberg stating that the emerging markets cycle followed a 11/14 year cycle; in other words the bright spark was predicting 2011 as the year of the bust. Sounds pretty much like the Joseph story complete with the technicolor coat ensemble. Problem is, most people would tend to pre-time this, say 2010, wouldn’t they?

groucho — if the gulf wants to invest more in asia, it will just add to their reserve growth. if asia lets their currencies rise and starts to run deficits it might be a different story. generally speaking, more flows to asian economies that already have an incipient inflation problem won’t help much.

judy — kuwait’s inflation is roughly in line with the rest of the gulf. i though would note that Kuwait’s move so far has been small, and overwhelmed by other moves: the euro and rmb and yen have all appreciated by more. and since kuwait imports a lot of from all three, one wouldn’t expect much of a benefit. kuwait needs to appreciate v the world, not just the us.

and then there a complex set of issues associated with a small move, expectations for a further move and the incentive for capital inflows that are hard to sterilize. but that is really another topic.

2fish — the capital creation is indigenous, tho in the gulf’s case, it has been helped along by an exogenous shock that increased the oil price. and in china’s case the puzzle is how savings increased more than investment when both have soared.

my question tho was whether there are potential domestic crises that don’t have their roots in the old fashioned withdrawal of external financing and associated pressures for procyclical macro policies. clearly a lot has changed, so i wondered if the potential triggers for trouble have also changed.

Stephen Roach Op-Ed
http://www.nytimes.com/2008/03/05/opinion/05roach.html?_r=1&ref=opinion&oref=slogin

American authorities, especially Federal Reserve officials, harbor the mistaken belief that swift action can forestall a Japan-like collapse. The greater imperative is to avoid toxic asset bubbles in the first place. Steeped in denial and engulfed by election-year myopia, Washington remains oblivious of the dangers ahead.

There are eerie similarities between the United States now and Japan then. The Bank of Japan ran an excessively accommodative monetary policy for most of the 1980s. In the United States, the Federal Reserve did the same thing beginning in the late 1990s. In both cases, loose money fueled liquidity booms that led to major bubbles.

Moreover, Japan’s central bank initially denied the perils caused by the bubbles. Similarly, it’s hard to forget the Fed’s blasé approach to the asset bubbles of the past decade, especially as the subprime mortgage crisis exploded last August.

bsetser: in china’s case the puzzle is how savings increased more than investment when both have soared.

Sharp increases in productivity caused by massive urbanization and industrial restructuring.

2fish – something similar happened in india, but savings didn’t grow faster than investment

Faber, as usual, puts it best…

“…basically, if you print money like the Fed or other central banks do, the value of money – of paper money – goes down and then it’s reflected in an increase in the value of assets such as gold that cannot be multiplied at the same rate. I mean someone could say, “oh, the gold price has gone up a lot since 2001.” I can turn around and say: “No, the gold price is the same. It’s the dollar the dollar that has collapsed against the price of gold.” And why did the dollar collapse against the price of gold. You call up Mr. Greenspan and Mr. Bernanke and you ask them about it. Of course, they will never give an answer. Each time Ron Paul asks them a sensible question they just evade the question and they move on to something else because, as I explained, they are a bunch of liars. And actually, if there was a court for honest money, both Mr. Greenspan and Mr. Bernanke should be hanged…” http://www.financialsense.com/transcriptions/2008/0112.html

Japan Central Bank may intervene to support tumbling dollar
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccjapan104.xml

Pressure is building in Japan for official intervention to cap the surging yen before it triggers a sharp industrial slowdown and tips the country back into slump.

Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind “carry trade” positions, estimated at $1.4 trillion in its varied forms.

David Woo, currency chief at Barclays Capital, said: “I don’t think we are yet at the point where the Bank of Japan is once again going to intervene by buying US Treasuries, but there is no question that people are worried. If the dollar gets to 100 yen, it could happen.”

The major Asian powers are increasingly irked by what they see as America’s beggar-thy-neighbour policy of dollar devaluation, which effectively steals growth from other countries. The question is when and exactly how they will react.

Often forgotten, Japan is still the biggest creditor nation by far, with net overseas assets of $3,000 billion. The last time Japan acted was during the deflation scare from 2003-2004, when it purchased $250bn of US Treasuries over a fifteen month period.

Violent US Dollar currency shifts are extremely damaging to the “real” industrial economy. In the fourth quarter for example, Toyota Motor Corp reported approximately $194 million in currency related losses. Should Toyota concentrate on building high-quality manufacturing of vehicles or should their executives waste their time speculating in the currency markets? http://biz.yahoo.com/fxcm/080305/1204753356457.html?.v=1

taxpayer — right now i don’t see much floating, and i see a fair amount of deliberalization (notably price controls)
Written by bsetser on 2008-03-05 09:55:46

I wonder hold long they can hold out?
The export competitiveness that the peg gives them is creating a pressure point.
They can let the air out gradually (float or pseudo float like China) or risk a more damaging and unpredictable blowout.
The rush to get out of the dollar is not making it easier for them.
The commodities rises flowing through to foods like tempeh and pork are creating domestic tension.
They are wedging themselves with price controls, pinning their hopes on a commodities downturn sooner than they can realistically expect.
The commodities have their fund money floor -for now.

I am very sympathetic to your argument. I also got the impression in nov. that the “pork” argument was as much about managing expectations as a real statement of conviction. There weren’t as many Jon Anderson’s (inflation will be 2% by the fall) as I expected. The Gulf is saving a similar set of issues. So far the argument that it is “just” rent and thus inflation will come down when new supply hits the market hasn’t been borne out. Inflation was already supposed to be back down in qatar and the uae and well it hasn’t fallen. Combine the liquidity from less fiscal sterilization (i.e more spending/ investment of the oil windfall) and from speculative inflows and you kind of have china on steroids, but without energy cost pressure …

basically, real int. rates are still likely to be very variable across the cycle in the emerging world, with a high risk of a period of over ivnestment and then of under-investment …

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