Well this was predictable


This was very predictable.  The US creates monetary inflation by printing up trillions of dollars.  China responds by buying these dollars to prevent its currency from strengthening against the dollar.  In doing so, it prints renminbi to buy dollars, and puts renminbi to work in the Chinese economy.  This act by definition supports the dollar, and hence, American consumers.  America has exported its inflation to China, so to speak, and in the short-term.


It prompts Chinese businessmen to boost production.  Prices in the economy need to adjust to the now larger renminbi money stock.  Prices of most goods and services rise, i.e. they experience price inflation.  Chinese politicians take note of this when the CPI rises.  At this point, Chinese politicians must do something to prevent hyper-inflation, and they tighten monetary policy by letting the renminbi strengthen against the dollar.  In so doing, it must create less monetary inflation.  Americans now have to first convert dollars into a more expensive renminbi, and then pay a higher renminbi price for Chinese produce.  American consumers get hit with a double whammy, and price inflation hits the US, and the initial monetary inflation is imported back into the country, so to speak.  The long-term from the initial intervention is reached.


That’s the China-US monetary-price inflation channel.  The article below should be read in this context.  If South Africa wants to avoid this cycle, and protect its 50 million consumers, it should continue to let the Rand strengthen.

BUSINESS / JUNE 21, 2011

Change in China Hits U.S. Purse


For more than a decade starting in the early 1990s, U.S. inflation declined as low-wage workers in China and other developing nations joined the global economy and produced a tide of cheap goods that washed onto U.S. shores.

The trend made American consumers feel better off and, by restraining the upward crawl of consumer prices, helped enable the Federal Reserve to fuel the U.S. economy with low interest rates.

That epoch appears to be over. Prices of imported goods are climbing, becoming a source of inflationary pressure. A wide variety of common products made abroad, from shoes to auto parts to jewelry, are landing on U.S. docks with higher price tags.

U.S. import prices, excluding oil, rose 8% over the past two years, a historic shift from their downward drift for two decades. The increase is bigger still when including oil, which is up on global demand and Mideast turmoil.

Though the pressures eased a bit in recent weeks as commodity prices retreated, they show signs of becoming a nagging presence as Chinese workers and others in emerging markets win higher wages and also become eager domestic consumers.

The shift is part of a broader change that is reshaping the U.S. economy and its place in the world, with attendant pain as well as benefits. For years, U.S. consumers feasted on cheap imported goods—cheap partly because the Chinese currency was kept undervalued. This bred large U.S. trade deficits.


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