Editorial: How China's inflation wallops us

As an inflation hawk, Richard Fisher, the president of the Federal Reserve Bank of Dallas, is a bit worried about the day the Olympic flame is extinguished.

Mr. Fisher, a member of the Federal Reserve committee that influences U.S. interest rates, says China is about to face an inflation conundrum that the Olympics temporarily is holding in check. Beijing tamped down worker wages and subsidized energy to make sure the world sees China in the best possible light. But pressures from rising demand in China aren't abating. So this once low-cost giant is likely to face serious inflation at home, some of which it will ship overseas.

That's why China matters to Mr. Fisher, who has urged his fellow board members to increase interest rates to battle inflation in the United States. And this is why China also matters to North Texas consumers: Chinese-made goods, such as $20 clothing and less-than-$100 electronics, will cost more.

China's inflation mess is now also the Fed's problem. Wages in China are up 18 percent in the first half of this year and probably will go higher. Wonder why your neighborhood dry cleaner is asking you to reuse wire hangers? Higher manufacturing costs of steel hangers being passed along by Chinese makers to U.S. cleaners.

Well ... yes ... Fisher is an inflation hawk, the one member of the Federal Reserve board who wants to raise rates.

And yes, we have been exporting inflation to China for years, which they have held in check by eating our Treasuries so that they could continue to keep their currency pegged to the dollar and keep up their flood of cheap exports to the Wal*Mart nearest you.

And yes, now that the Olympics are done, there is a good chance that China will be reconsidering its financial entanglements with U.S. Treasuries.

... The thing I can't figure out ... for the last century, the banks of Western Europe, England and the United States (and even Japan) have dominated international finance.

Now it looks like the gulf (oil) nations and China are gathering enough financial muscle to threaten this dominance. Our western banks have dug a rather complex and deep hole for themselves, with complex arrangements, massive debt, massive trade imbalances and fiat currency. So long as all the biggest of those central banks play nice with each other, they might be able to keep this Spruce Goose flying financial monster in the air; but what happens when someone comes along with enough muscle to tip the apple cart, who is entirely removed from the Western culture?

I feel like a long term Italian resident of a neighborhood that has been controlled by the Mafia my entire life, as the neighborhood is being overrun by Mexican drug lords. The worlds wealthiest (Rothschilds, Morgans, Rockefellers, ...) may have been conniving, untrustworthy greedy bastards, but at least they were my greedy bastards.

The next few decades could make for some interesting chapters in the history books.

They have been deluding themselves that asset inflation represents a real permanent economic growth of their countries. Asset inflation based on recycled money(dolar) from oil-producing countries and low cost export economies.

To be fair, Japan has been somewhat outsider to this. They have been hectored and browbeaten by U.S./UK financial players to join their game. Japan tagged along but not with enthusiasm.

And this is why China also matters to North Texas consumers: Chinese-made goods, such as $20 clothing and less-than-$100 electronics, will cost more.

Whoop-de-doo. Then we'll just have to find another country to buy our dollar-store crap from. Worse comes to worse, we'll have to make it here. Either one of those scenarios is not a bad thing at all.

They have been deluding themselves that asset inflation represents a real permanent economic growth of their countries.

By "They" do you mean the Chinese?

They've got a heck of a lot more economic growth than just asset inflation. They've got an industrial base that is getting nearly as large as ours, and will likely exceed ours in not too many years, and a consumer based economy that is now -larger- than ours.

If anything, it is us, not them, who is confusing asset inflation with real economic growth ;).

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