Remember, our "everything will be ok thesis" is once we pull through this 'minor credit issue' the world's economies will pull us through that 'minor consumer slowdown' we are going to experience. But with the growing Chinese middle class spending more on food - this cuts into their spending habits
Also, remember we import so much from this country of "CHEAP" labor. What happens when they demand higher wages so they can do minor things like... EAT. Chinese companies are already skimping in quality control since they are trying to outdo each other on pricing - and you see the results in dog food, kids toys, and I am sure I already forgot a few others in the near weekly recall news. So increased safety regulations, increased wages for their workers - and suddenly Chinese goods become more expensive.... and who pays? The US consumer - in the form of potential inflation.
As we discussed last week [Another Myth Falling Flat - Exports Will Save the Economy]
More worrisome is another theme I promoted in the fall, the export of inflation out of China. For a long time, the flood of products from China has been keeping a lid on prices. For the first time I have seen, we are now seeing costs rise (0.1%) out of China. 0.1% sounds like nothing but in years past it was a negative number and a large negative number at times. So as costs rise in China, its slowly going to begin to be passed on to the countries they export to. So yet another factor working against the US consumer.
Growing evidence is mounting it's becoming a serious issue [China's Food Price Curbs Signal Increased Inflation Worry - WSJ].
The more I listen to myself, the more I wonder why the heck I am not always at maximum cash position and short position in the fund. Duh. It really does not help to be intellectually correct but not benefit financially. But in a bigger scale - this is why the world we are entering is becoming more interesting by the year - everything is connected. A pin drop on the other side of the globe can have a global effect. And why we have to keep our eye out for things all over the globe. But I think China is setting up for a very similar fall to the US - in fact it might be striking in parallels - bad financial controls (if you think our banks are bad...), an out of control real estate market driven by massive liquidity, and striking inflation hitting the middle and lower classes. We shall see how it turns out, but it's starting to all sound very familiar. Wasn't Carter the last one who put in price controls (a bit before my time, but I heard that did not turn out too well).
Remember, (and I am not an expert in China, I just play one on the internet) but the vast majority of people are rural poor - not the "middle class" excited Wall Street types will hyperventilate about. And most of their income is spent on food. And when you get close to 1B people unhappy; it doesn't turn out too well. (social unrest) Even if 200M are enjoying the high life with their new Buicks and Apple iPods in the major cities.
Interesting times folks. Inflation is going to be such an interesting catalyst for so many actions in the coming decade. Already China is controlling the price of energy, and now food. This actually will stoke demand artificially, actually making the problem worse in the long run - until it implodes. (But not until after the Olympics in August mind you)
- China's government moved to exert more control over increases in some food prices, signaling heightened concern over the high inflation that is threatening to erode the meager incomes of the nation's rural majority.
- Under temporary measures announced yesterday, large producers of some food products -- including dairy, pork, mutton and eggs -- now must seek government approval before increasing prices. Wholesalers and retailers don't have to seek permission to raise prices, but must notify the government when the gains cross certain thresholds.
- China's government has voiced increasing worry in recent months about inflation, more severe bouts of which have in the past triggered instability in the country. Inflation this time has been mainly the result of rising food prices, especially those of cooking oils and meat -- which have pushed China's inflation rate to an 11-year high of 6.9% in November. China has longstanding price controls for gasoline and other energy products, and last week it reiterated it would hold those prices steady.
- The government has been trying to encourage more production of food staples to reduce prices, but the results haven't been quick enough to ease widening social unease. The public named inflation as the top concern in a survey released this month by an official think tank.
- The latest move, which takes effect immediately, "is an understandable reaction to political concerns about overall consumer-price index inflation," UBS economist Jonathan Anderson wrote in a report. Mr. Anderson said he expects headline inflation rates to decline in coming months as prices of meat and eggs level off.
- Economists tend to see price controls as, at best, a short-term solution and, at worst, a counterproductive way of combating inflation. "If strictly implemented, price controls could lead to shortages, forcing shoppers into highly visible queues. They could also prolong the problem by further discouraging producers from increasing output," said Mark Williams of Capital Economics in London.
