China’s actions to Stimulate their Economy may have only Stimulated Inflation

Posted by PITHOCRATES - February 12th, 2012

Week in Review

China is state capitalism at its best.  The government really massages the economy over there.  With wise bureaucrats making wise decisions to steer the economy to endless prosperity.  Embracing Keynesian economics.  Manipulating interest rates to sustain economic growth.  And a small but manageable permanent level of inflation.   Spending money the only way government knows best.  Like the Japanese did in the Eighties just before they collapsed into a deflationary spiral that lasted a decade or two (see Chinese New Year pushes up prices in January posted 2/8/2012 on the BBC News Business).

China’s rate of inflation unexpectedly accelerated in January for the first time since it peaked in July, as consumers raised spending around Chinese New Year.

Consumer prices rose 4.5% from a year earlier, the National Bureau of Statistics said. That compares with 4.1% in December…

Chinese authorities, who were once implementing measures to control high inflation, had recently begun easing monetary policy to spur growth as inflation eased and weak demand from Europe affected exports…

The biggest contributor to the rise was pork prices, which gained 25% compared with 21.3% in December. That drove overall food inflation to rise 10.5%.

Hello, what’s this?  Inflation getting a little out of hand?  Blimey, that’s not supposed to happen.  Not with wise bureaucrats carefully applying Keynesian economic tweaks to the economy.  But it has, hasn’t it?  As it always does.  Because when you use monetary policy to stimulate the economy this is what you do.  You increase the money supply long enough (by keeping interest rates low) you devalue your currency.  And raise prices.

In the West it’s usually wage inflation that’s the killer.  Those sticky wages that can reset quick enough to avoid a recession at the end of an economic boom.  But there is no wage inflation in China.  Because the government sets wages.  And they set them low.  Which is why they can out-manufacture the West.  And to prevent any opposition to these low wages that maintain their manufacturing advantage they outlaw unions.  To keep the peace in their state capitalism.  And their workers obedient.

But none of this will work if no one is buying the things they make.  Which is their problem.  And it’s a big one.  They were keeping rates low to stimulate their economy to produce more when people were already buying less.  High inflation and excess capacity?  Only one way to fix that.  Like the Japanese did in the Nineties.  A deflationary spiral to bring prices and capacity back in line with actual demand.  And if it can happen to the Japanese it can happen to the Chinese.  For let’s not forget that the Japanese were quite the capitalists for a very long time before they had their troubles.  Much longer than the Chinese have been playing with their experiments in capitalism.  A little here and a little there.  But never so much where markets were truly in control.  No, in China, the state never lost their control.  Which may make their inevitable deflationary spiral worse.

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Price Inflation has led to Wage Inflation in the Eastern Manufacturing Cities in China

Posted by PITHOCRATES - December 25th, 2011

Week in Review

Inflation has arrived in China.  Wages are going up.  Increasing the cost of their manufactured goods.  And the cost of living (see China province raises minimum wage by 23% posted 12/22/2011 on the BBC).

Sichuan province in southwest China has increased the minimum wage sharply to try and attract workers amid a rapidly rising cost of living.

Sichuan raised the minimum monthly wage by 23.4% starting on 1 January, state news agency Xinhua said on Thursday…

Severe labour shortages in Chinese cities have prompted wage rises in many provinces this year and last.

An example of the role prices play in supply and demand.  Life is good in the Eastern manufacturing cities.  So good that there is a lot of economic activity.  And prices are rising to allocate scarce resources that have alternative uses.  Even labor.  But inflation isn’t always good.  Higher prices eventually will lower sales as people can’t afford to buy as much as they once did.  And those cheap exports become not so cheap.  Which means those factories eventually will cut back on production.  As a recession settles in to readjust those prices.

Rising wages have prompted analysts to predict that China, previously known for its low cost of labour, could lose its edge as a manufacturing hub.

Manufacturers could look to countries such as Vietnam, Bangladesh and Cambodia where wages are still low.

However, Chinese authorities have been trying to boost domestic consumption and be less export dependent, and a rise in wages will encourage spending.

Before China it was Mexico.  Remember that great sucking sound as all those American jobs went to Mexico?  Mexico was chopping in high cotton for awhile.  Until they heard that great sucking sound as their jobs went to China.  And now China may hear it next.  As some of their jobs go to Vietnam, Bangladesh and Cambodia.  Who will lament one day the loss of their jobs to some other low-wage country.

This is economics.  And consumerism.  Consumers are always looking to get the most value for their money.  So manufacturers are always trying to undercut the competition to give these consumers what they want.  Good for consumers.  But not good for countries whose poor get a taste of the good life.  And don’t want to be poor anymore.  Thus raising the cost of production.  And eliminating their low-cost advantage.  At least for their export markets.

Eventually all emerging economies will be emerging no more.  And the low-cost advantage will not be attained the easy way.  With cheap labor.  For these once emerging economies will go to the next step in their economic development.  Capital investment in plant and equipment.  To lower their cost of production through economies of sales.  By doing more with less people.  With people leaving the low-skill assembly jobs in massive factories.  And instead design, build, run and maintain the equipment that replaces them at their old jobs.

Socialists and communists (as well as Big Labor) say this is a bad thing.  Replacing people with machines.  Even though they help to relieve chronic labor shortages that labor just can’t meet.  Lowering the cost of living for everyone.  And increasing the standard of living for everyone.  It’s happened everywhere through history.  And it now appears to be happening in China.  Which should ultimately be a good thing for the Chinese.  Especially for the masses who don’t live and work in the Eastern manufacturing cities.

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