In the US, inflation means political suicide. So it is embraced like the Black Death. You know, the plague that killed 30% of Europe?
But what is the Chinese experience with inflation? Do they feel they have measures in place to restrain it? You can guarantee that their people feel smarter than ours, because everyone thinks they are smarter than everyone else. And when they succeed, it is due to brilliance. And when they fail, bad luck. The Chinese, being human, are the same. To them, it will be different because they feel smarter than us. Not the same because they are just like us. The Chinese have not had political reversals from bouts of inflation. That doesn't mean they won't. It just means they haven't yet.
Until then, don't project our terror into their eyes. We are really looking at ourselves, then. Not a way to win at poker.
The Chinese will not revalue their currency.
He is letting dollar slide, for one thing. That has the effect of raising the prices of imported US consumer goods and lowering the relative cost of domesticly produced consumer goods. Still, is there a palpable difference? Econo-Girl posits, and she wouldn't be the first one, that the deliniation between the two blurred a long time ago. Japanese cars are made in America, after all.
At any rate, to the extent it applies, the huge consuming machine that is the US public gets its US-made goods cheaper and it foreign-made goods at a higher price. Not a bad choice for a President.
Secondly, the low value of the dollar puts pressure on China to revalue its currency. China won't, of course. But it is a bit like tightening the thumbscrews on them, knowing they could leave at any time, but won't. Since China has a lot of dollar holdings, it then becomes their immediate priority to float loans to the US to inflate the dollar's value compared to the renminbi. So we can keep our prolifigate spending and the Chinese can keep their currency peg. Both goals seem to be of dubious value. But not a stupid move by Bush.
AP - Thu May 26, 8:07 PM ET
WASHINGTON - China is likely to move within months to adopt a more flexible currency system as U.S. officials have been prodding it to do, Treasury Secretary John Snow said Thursday...
Econo-Girl doesn't believe it for a second. Why would China be seen to bow to US demands?
The excitement in economics comes from changes that can alter the future. Witness the French struggle with its EU identity. There's a lot at risk here that is being ignored by US business media. If the Europeans dismantle their political and economic unity, there will be one less place for money to rest outside of the US. So that would strengthen the US position as a debtor nation and consumer of the world, simply because wealth will have no other safe place to go. For right now. Keep your eye on India and Indonesia, though.
The whole idea of uniting Europe started after World War II. I guess after that grisly mess, Europeans were invested in not tearing themselves apart again in the near future. So they thought that a treaty between Germany and France on coal and iron would make a strong economic reason not to go to war. Then it expanded to other areas. Then the concept of a United Europe got some traction and leaders began to promote the advantages of overall cooperation between European member states, to include dropping trade barriers.
And indeed, a United Europe would be a formidable economic force. Would be. If it was to happen, that is. You think people there would see past their own national loyalties to the big picture. But even as I type that, it sounds stupid. Everyone identifies themselves in many ways, and nationality is one of them. If Europeans are not identifying themselves as Europeans, then of course they would be reluctant to let their grip on national identity loosen. But what a boon it would be for Europe to be working together to boost trade and negotiate at the international tables. For them. Not for the US.
The upshot of these developments is that the US consumer does not have to change their prolifigate ways, since it looks like foreign monies will still be pouring in to support our debting. That will give US policymakers more time to find ways to encourage saving and put a lid on borrowing so that the hot air in the US economy is let out slowly.
First, and most overlooked, is the history of China in its dealings with the west. Wars and the social fallout from an opium-based economy are still remembered there with great bitterness, even though it was over a century ago. So the feeling is that the west has always run over China and caused great pain for its own economic advantages, like ensuring the supply of opium to Britain in the late 19th century. These feelings underlie the belief that China must do all it can for economic advantage, as they felt they were victimized long ago. So the sense of fair play that our politicians are implicitly relying on doesn't resonate with the Chinese.
Second, too many dollars are being held by the Chinese as wealth. If they allow their currency to rise against the dollar the value of what they already have will fall.
Third, the Chinese themselves are importing a lot, and the amount that US consumers buy from them keeps China from having a trade deficit of their own.
Fourth, cutting off the supply of cash from China will create a stoppage of Americans buying on credit. Essentially it is the Chinese and Japanese buying of US Treasuries that gives us the money to buy. Right now, US consumer demand is what is floating the global economy. Any deflation of demand would cause ruptures, especially in Asia.
Fifth, political fallout within China. Those old men that run the place don't want to lost control, under any circumstances.
Sixth, we can be reasonably assured that the US Congress is either posturing and doesn't mean what they say, or are ignorant of what they are really doing and are going to be educated into dropping their China legislation. Econo-Girl says that because of the US fallout of higher prices for most consumer goods. Inflation. And the implied counter-threat of China no longer lending us money to fund our lifestyles.
From the Chinese perspective:
- Is the US going to declare war over this? No.
- Is the US Congress going to take it on the chin with the voters with higher prices for daily living? No. Not from the displays of courage from that body recently.
To reprise the British gloom, how long is it going to last?
The dire predictions for the US economy from the British papers are interesting, if you are into disaster scenarios. But they do seem extreme. Why would the global economy shift to slam the dollar when so many economies rely on the dollar for value? And when they have much of their wealth in dollars?
A lot of economic and political stability depends on the strength of the US economy, and especially the spending habits of the American public. That spending heyday lifted the world from what could have been a serious depression.
Another angle is where else will people put their money, if not the US? What other currency or country provides the solid and stable investment environment that people can put their money in?
The real estate market is so obviously overvalued that even t.v. commentators are noting it. How will it steady itself? In DC, the last real estate boom was followed by stagnant prices for 12 years. That's not so bad. A halting of the market would put a damper on US consumer spending,
but not cause a recession-like contraction. However, the foreign suppliers of our goods would feel the pinch. Further, if our national savings rate gets back to where is used to be, there would be a further decline in US consumer spending.
But the party has to end sometime. US consumers are NOT saving. They are debting badly. And that debting is being financed by other countries' willingness to buy US bonds. What can change this in a way that won't cause dangerous repercussions for everyone?
As a note: Econo-Girl has been getting complaints about neglecting the Chinese currency valuation issue. I don't see any changes coming in that arena soon. China is getting the benefit of US consumers buying its goods. Why would they do anything to alter that? So they won't. They will hem and haw, and sometimes feint to give us false hope, but they will do nothing
because no one is making them do anything. And no one will for some time.
When I moved into this Columbia Heights area, people were still openly buying drugs at the corner park. The city did something, I suppose, to stop it. But they really started when middle class people started buying houses here.
My husband would routinely find places to dump unwanted furniture and spoiled rugs with no hassle. Then in comes the middle class. You can't get away with anything anymore. There is an uptight woman living across the alley from me. She really needs a hobby because all she does is watch that alley. You can't get away with anything. She peers over her second floor porch down at little Econo-Girl absorbing the beauty of her garden and caws over the state of the alley. I just know she's the one that threw some of our garbage bags back over our fence into our yard. You're not in Bethesda anymore, babe. Watch it.
So in a more localized economic sense, is there more money in middle class people who watch alleys than in suburban people who buy drugs? There must be! You cut down on garbage law enforcement, for one thing. That neighbor lady may hate me, but she is not likely to shoot me with anything other than dirty looks.
The neighborhood is pushing the drug dealers a bit. It seems like a dangerous proposition, and I admire their courage. The first thing I noticed were members of a well-known religious group standing on the corner across from the drug dealers. They have been there for several years now, at least. They carry pamphlets, but don't push them on anyone. They are two old men in suits and ties and hats, just like in old movies. And they just stand there. Nothing else. They are fighting with their respectable presence alone. Usually they are gone by lunch.
I remember reading about a church that had a problem with drug dealers outside its doors. They BLASTED opera out of the church windows at full volume. The drug dealers couldn't take it and moved locations. The purity of opera is only for the pure of soul.
So the latest onslaught against those dealers is the family attack. The cement park that they call home is now taken over on Saturdays with family activities. And damned if they don't come. There is general park cleanup before 9 a.m. Then there is a free Tai Chi class. Then kids come for games and supervised play. I butt into the activities at that point with my two dogs. I thought the kids would like to pet the dogs.
So I go into the park and ONE OF THE DRUG DEALERS says to me, "Excuse me, excuse me, you are going to have to leave the park. I am asking you to leave the park now. No dogs allowed here."
You can imagine my reaction at this outburst of good citizenry.
"My goodness," I replied, "I wouldn't want to BREAK THE LAW here at 11th and Monroe Streets." One of his buddies hit him on the arm and told him to be quiet. I continued, "I wouldn't want to do anything ILLEGAL here in a public park." No further conversation, but I did leave.
These guys are not the gangsters of popular myth. They are older men, or at least they look like old men. And they look like they sleep outside half the time. About four of them were pouting during the kiddie play time around a chess board that is never played on. Not that they couldn't. I understand chess is a popular pastime at Lorton.
After play time in the park, there is a knitting circle. There were some women there last Saturday.
So the locals are ready to make life uncomfortable for the illicit trade, going so far as to cut into their business on their biggest day of the week. But would all this be happening if there was more money for the local enonomy in providing a place for people to buy drugs? That is the question. I'm sure we'd all like to think so.
As noted previously, the jagged price of gas is causing far-reaching forcasts for the future, good and bad. Are these the same people changing their minds all the time on whether to be optimistic about our economic future or not? I mean are the same people, every day, radically changing their course based on the last minute's price of gas? Probably.
Something to watch is the trade deficit, which took an interesting, even fascinating, turn downward. There were two schools of thought. 1 - Hooray! The trade deficit is down! What unexpected joy! 2 - The trade deficit is still much higher than it was this time last year.
Without a doubt, these numbers are going to be something to keep an eye on. As with all information, it is the trend that matters most. Is this a one-time thing? Or is it the beginning of balancing the trade imbalance? No one can answer that today. They can take up oxygen trying to guess, but no one has an answer.
As with any numbers, it is the forces behind the numbers that count the most. Is American consumerism in decline? Are American products in more demand? Two different questions with widely differing implications. If the American consumer is just plain buying less, than that could spell recession. If American products are more in demand, that will affect production and labor, which could spell inflationary pressures.
Econo-girl has been slacking. She will return with more data and predictions once these numbers are further analysed. Ciao!
But such reaction on Wall Street! It's not like China has agreed to give us all its tea. There is some movement in the price of gas and everybody acts like it is forever. Newsflash: commodity prices go up and down. It happens all the time. In fact, it happens every day. You really can't go reading into a single day's price.
Personally, I think Wall Street brokers and bankers really need to go to the track. They are adrenaline junkies. Just be honest about it, and stop dragging the NYSE along for the ride.
You know, I'd like to see a reality t.v. show where the financial talking heads of the '90s are cornered and asked to justify their incorrect predictions. It could get really ugly. Maybe people who lost money on their advice should be there, too. Hmmm.
Of course, I have the burden of always being right. I should take the time to introduce myself to Alan Greenspan.
Econo-Girl has stopped sending her daily hate mails to CNN Money. None of them were answered. Is Econo-Girl getting soft?
However, there are places similar to DC's real estate market. Places like London, Rome, Dublin, Cape Town are all international hubs. I pointed this fact out to the otherwise enthused realtor. His eyes grew blank and he just repeated himself. I guess that works in picking up girls at the 9:30 Club, but it is not enough to get me to part with money.
We are headed for a 'correction' in the DC real estate market. OK, I lie. We are already IN a correction in the DC real estate market. I can see it about the edges. In Columbia Heights, my stomping grounds, houses have been 'just reduced' for about six months now. The transitional neighborhoods like mine are the first places where a housing slowdown will be seen. And I have been seeing it.
Looking as I have been to the London market in property, I echo what the linked article says: higher interest rates affect housing demand. Unlike the UK, our Fed is less concerned with supporting a housing bubble. When property prices became too speculative, the Exchequer raised UK interest rates out of concern. That move had the desired cooling effect on the housing market in the UK.
Now people in the US are saying that rising interest rates will not have a negative effect on US housing prices. WRONG! It will, and to the extent that bozos across America are paying interest-only mortagages, or mortgages whose rates fluctuate, people will be less able to pay their mortgages.
Personally, I am waiting for the KERPLUNK of everyone realizing that their little investment rental property will not pay for itself with rental money. They will hold on for a while, just as they did in London, according to the article linked above, but soon it will be too much. That is when I will swoop in like a vulture and giggle as I dance below their asking price.
Is that too much to ask for?