Skip to comments.China's Inflation Problem Looms Large (Peter Schiff)
Posted on 01/21/2011 5:18:34 PM PST by sickoflibs
The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China's long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China's economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.
Twenty years ago, China's leaders decided to ditch the disaster of economic communism in favor of privatized, export-focused, industry. The plan largely worked. Over that time, China has arguably moved more people out of poverty in the shortest amount of time in the history of the planet. But somewhere along the way, China's leaders became addicted to a game plan that outlived its usefulness.
In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing's task becomes nearly impossible. Last week, it was announced that China's foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China's annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).
In order to buy these dollars, the Chinese central bank must print its own currency. In essence, China is adopting the Fed's expansionary monetary policy. In the U.S. the inflationary impact of such a strategy is mitigated by our ability to export paper dollars in exchange for inexpensive Chinese imports. Although prices are rising here, they are not rising nearly as much as they would if we had to spend all this newly printed money on domestically produced goods. The big problem for China is that, unlike the U.S., the newly printed yuan are not exported, but remain in China bidding up consumer prices. As a result, inflation is becoming China's dominant political issue.
It was recently announced that in November China's consumer price index rose 5.1% from the same time a year earlier, with food prices rising more than 10%. As unrest builds, the Chinese government has unleashed a series of policies to address the symptoms of the disease while ignoring its root cause.
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut your taxes, spend a few trillion and that will jump-start the economy, this list is not for you.
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The Austrian Schools Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: First, do no harm!
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is Gods money.
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
It is really criminal.
They also have their Zero Interest Policy, which steals from savers and pensioners, whom are getting less then Fed induced inflation( They’re losing wealth). Plus they get taxed too.
Like meeting thug Federal Reserve and thug IRS in a ally at night.
The timing of the change is set to arrive with the products on the US shores in the summer of 2011.
Theyre going to go home with 35 percent less product than for the same dollars as last year, particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. The consumer will definitely see the price rise.
At work I argue with a liberal who is a 100% Obama Koolaid drinker who now argues that devaluing our currency (to make us more competitive) is great because it keeps China and Germany from stealing our jobs. I went down the logical path of telling him that it lowers our salaries and asked why Obama and Democrats campaigned and still say how middle class salaries are too low because of Republican policies, and how Democrats claim forcing the employers to pay us more (UNIONS, mandates, regulations) is the secret to stimulating the economy, yet at the same time make the opposite argument about devaluing the dollar.
A weak currency is certainly no walk in the park across the board, but it is true that exports would thrive and imports would suffer, leading to increased domestic employment in those sectors that would benefit.
I saw this firsthand in 2008, when many companies sourcing offshore came running back looking for domestic sourcing. At that time this was due to very high fuel prices making container shipping costly enough to throw the equation back in favor of domestic. But, a comparatively weak currency would have the same or similar effect.
Trouble is, we’re importing so much that such a move would drive up the dollar cost of so many consumer goods that it would look an awful lot like inflation, in an environment when very few have the capacity to absorb it. Net effect of the resulting downturn in consumer spending would likely wipe out any gains from export manufacturers.
Yes. Fighting deflation with inflation (devalue dollar) causes a squeeze on the employers who have higher rising costs than rising demand to be able to raise their prices. Example : In MD most food chains here compensate by replacing union checkers with automated ones because food prices are rising faster than demand.
There is not much hope for unskilled labor in the future here from the standpoint of looking back to the past decades,
Thanks for the ping - and the advice... Hopefully you’ll get one copy of this - and only one!