Blame the Chinese for Inflation?

Highly amusing headline: The Latest Chinese Export May Be Inflation. Actually this is a smart article, by Bloomberg's Simon Kennedy and John Fraher, in spite of the flippant headline. It paints a picture of inflation as the product of years of out-of-balance globalization. Now the global economy is slowly and inevitably re-balancing:

Central bankers have harnessed the effects of low-cost production from China and other countries like India to hold down interest rates and stimulate domestic growth. The Organization for Economic Cooperation and Development in Paris estimates that globalization knocked as much as 0.2 percentage point off inflation in rich nations from 2000 to 2005, even as the world economy sped up and buoyed raw-material costs.

Now, when "inflation is above target, the cost of reducing it has been increased," said Robert Lind, chief economist at ABN AMRO Holding in London. Interest rates in Britain and the 13-country euro zone are already the highest in six years, with officials hinting that more changes may be on the way.

China is actually struggling to keep it's own economy under control, and is raising interest rates:

China reported the quickest pace of growth in a dozen years, pushing inflation to 4.4 percent in June. On Saturday, China raised its benchmark interest rate to an eight-year high of 6.84 percent.

Kennedy and Fraher give examples of central banks struggling with inflation not only from China, but also from Britain, New Zealand, and Canada.
Britain:

The Bank of England's policy makers highlighted import prices as a "growing" inflation risk and one of the reasons for this month's increase in the benchmark rate to 5.75 percent.

It is not just the cost of imported goods that troubles Mervyn King, governor of the Bank of England. On May 16 he said that British house prices were "heavily influenced by what is happening overseas, independent of U.K. monetary policy," as wealthy foreigners purchase property.

New Zealand:

Bollard, of the New Zealand central bank, is expected to raise the official cash rate to a record 8.25 percent this week, in part because overseas orders for butter and milk are pushing up dairy prices.

Canada:

The Bank of Canada this month increased its main rate for the first time in more than a year to 4.5 percent partly because of surging investment in the western province of Alberta to develop the world's largest pool of oil reserves outside the Middle East.

Hyperinflation in Zimbabwe. USA next..

This business of the Fed simply printing up cash to buy the stock market is nuts. We are going the way of Zimbabwe. And nobody seems to notice, or care. As long as the stock market goes up, everything else can go to hell.

By the way, the Zimbabwe Stock Exchange is soaring much faster than the mighty Dow:

Here is a chart that shows the hyper inflation of the Zimbabwe Stock Exchange (click for a higher res image). It seems to show the ZSE's Industrial Index going from almost zero to 55 million in one year! A helpful Harare stock analyst, Shumba Seti of the African Banking Corporation, emailed me this chart and the weekly closing prices for this index for the past year. The ZSE was not actually at zero in July 19, 2006, it was at seventy thousand (70,084). One year later this index closed at thirty three million (33,582,892). This gives a year on year percentage rise of 47,818%!!! This is down considerably from its peak at July 3rd at 53,354,792 (a 76,000% rise in less than one year). The reason for the recent downturn is that Zimbabwe's authoritarian president Mugabe imposed price controls in the last week in June, a few days before the ZSE hit its peak. Price contols has had the effect of making almost all commerce other than barter impossible in the country: Zimbabwe Price Controls Wreak Havoc on Economy.

To return to America, it sounds like good news that the Dow Industrials has closed over 14,000 for the first time. Suppose it happened to close above 18,000 by year end? What's not to like? And maybe 25,000 or 30,000 the next year? Wow! But at what point would the celebrations in the NYC ballrooms turn to panic? At what point do we start to suspect there is nothing there, that these "dollars" are becoming increasingly worthless and irrelevent even as they multiply geometrically?

Some people might point out that a soaring stock market could be an inflation hedge. Perhaps. Unfortunately it is also the most un-equal distributer of wealth. This is how it works: the Fed has its Plunge Protection Team (see wiki page). They buy futures in the Dow, the S&P, and other indexes. Brokers and their automated trading programs see a fat spread between the future contract and the underlying stocks, so they buy the stock and sell the future. They get as sure a profit as is possible in this uncertain world. The stocks go up. The Fed sells the contract at a loss. This way the Fed injects money into the economy. Much of it goes directly into broker's pockets. The corporations love the flow of capital.

Does any of it trickle down to those not participating in the market? In a real, and growing economy a little bit would in fact trickle down (not that this method of economic stimulous is in any way justified). Corporations would invest in new plants, new stores, they would hire more workers. That is not happening in the USA. Corporations are buying back their own stock, buying other corporations. The market is simply feeding on itself. This is not growth. It is a dead end. The end result, in an extreme example, is for all to see: Zimbabwe. National economic collapse. There, but for a little common sense, we'll be.

USD Painting Itself Into a Corner

The dollar is finding itself in a 'falling wedge' pattern. This is normally a bullish configuration, meaning it indicates that the dollar will likely break out to the upside. If it was a stock it might be a buy. Yet it can also break downwards. Read any article about the dollar, the fundamentals look horrendous. Like this one: Global Exodus From The US Dollar In Motion.

Since the Bernanke Fed discontinued the decades-old reporting of the broad M3 money supply in March of 2006, the growth rate of M3 has accelerated from an 8% rate to a sizzling 13.7% clip, its fastest in more than three decades. The Bernanke Fed is preventing borrowing rates from rising at a time of explosive loan demand for US corporate mergers and takeovers, by rapidly increasing the US money supply.

Just why should we care so much about the dollar? Because it is holding the world's economy together, and by the thinnest of threads at this point. Here is a piece in the British Telegraph: Credit Crunch Will 'Shred Investment Portfolios To Ribbons'

Markets have been wobbly since the surge in yields on 10-year US Treasuries, the world's benchmark price of money. Yields have jumped 55 basis points since early May on inflation scares, the steepest rise since 1994. It infects everything; hence that ugly "double top" on Wall Street and Morgan Stanley's "triple sell signal" on equities.

Wobbles are turning to fear. Just $3bn of the $20bn junk bonds planned for issue last week were actually sold. Lenders are refusing "covenant-lite" deals for leveraged buy-outs, especially those with "toggles" that allow debtors to pay bills with fresh bonds. Carlyle, Arcelor, MISC, and US Food Services are all shelving plans to raise money. This is how a credit crunch starts.

"This is the big one: all investment portfolios will be shredded to ribbons," said Albert Edwards, from Dresdner Kleinwort.

The BIS had warned days earlier that markets were febrile: "more risk-taking, more leverage, more funding, higher prices, more collateral, and in turn, more risk-taking. The danger with such endogenous market processes is that they can, indeed must, eventually go into reverse if the fundamentals have been over-priced. Such cycles have been seen many times in the past," it said.

The last few months look like the final blow-off peak of an enormous credit balloon. Global M&A deals reached $2,278bn in the first half, up 50pc on a year. Corporate debt jumped $1,450bn, up 32pc. Private equity buy-outs reached $568.7bn, up 23pc. Collateralised debt obligations (CDOs) rose $251bn in the first quarter, double last year's record rate.