Real Inflation

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Its been announced today that the price of eggs are going to rise 50c a carton, milk up 10c per litre, in addition to other foods. The rationale for the increase in prices is said to be the drought, but there are two factors which suggest this is not true:
1. Farmers have said that they will not benefit from the price increase - which suggests its either to cover higher input costs or retailers are in fact getting all the benefit
2. Products which are unlikely affected by drought are facing price increases - eggs and milk being some examples.

The reality is that retailers are pricing products on the basis of people's capacity to pay. Australians have benefited from a huge wealth explosion over the last 15 years as a result of credit expansion. These price increases largely reflect an attempt by business to claw back some of the gains. It thus becomes apparent that any future wage rises were not precipitated by greedy wage earners, but by business trying to claw back earnings at a tim when they are finding it hard to sustain profit growth. The fall off in profit growth is a direct result of a slow down in credit growth, as households worry about falling housing prices and higher inflation.

In these circumstances there are only 2 ways that businesses can build earnings:
1. Higher prices > increasing the prospect of inflation
2. Consolidation of productive capacity > normally results in greater pricing power so higher prices

Clearly in this type of environment if business cannot expand unit capacity then they have to make more profit margin to earn the same profit. From this point forward we are looking at an acceleration of inflation.

In recent years the CPI has been the market measure of inflation. At some point over the next few years people will come to realise that was nothing more than a political tool for facilitating a shift of wealth from households to governments (through tax bracket creep) and business (through higher prices). At some point farmers and unions are going to see the fraudulent nature of this scam.....as workers start to loose their jobs and farmers are forced off their farms by higher input prices, low farm gate prices and drought.
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Reason is the standard for debate.
- Andrew Sheldon www.sheldonthinks.com

Bush to esculate China trade war

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A lot of criticism of China has focused on its trade surplus. This criticism until now has focused on the managed peg of the yuan to the USD. Actually the USA cant use this argument because China is actually financing the US deficit and its done a great deal to reform its financial system in preparation for deregulation. Another justification is that it is reasonable for it to make a slow adjustment so not to penalise any Chinese economic interest group.
But the China debate has taken another turn. There is mounting criticism that the China is discriminating against foreign interests on regulatory policy. The same criticisms were made of Japan from the1970s onwards. Japan was very slow to change, and the US didn’t press the issue because it needed Japanese support in its Cold War stand, as well as an outpost against China. To this day Japan is not an easy place for foreigners to do business. But most of that comes down to the unique tastes (sensitivities) of the Japanese consumer, nationalism and a very unique mode of economic organisation. There is simply not enough room on Japanese store shelves for foreign products, and US-made refrigerators will not fit in a Japanese house.

China continues to report huge trade surpluses which will only continue to grow as the economy expands. But is this really a serious issue? I think not because:
1. China will comply because it is not dealing from strength
2. China is competing with many other countries for foreign direct investment. A trade war would see more of that money go to India, Indonesia, Vietnam, and maybe even Pakistan and Bangladesh.
3. The threat of retaliatory action will come from the EU and USA. Japan will be conspicuously quiet.
4. Its hard to see China getting the same soft treatment as Japan - unless China’s support in dealing with North Korea is required, and I think North Korea is contained, so not an issue.

China’s August exports exceeding imports by $24.97 billion - a surplus exceeded only by June's $26.91 billion. China has opened up much of its economy in recent years since joining the World Trade Organization, considerable restrictions remain on foreign investment in areas including finance, automobile manufacturing, petrochemicals and media, and that some new regulations on mergers and investments also seem intended to aid domestic companies.
But whilst there seems no compelling evidence to suggest this will be a problem, you can expect heightened tensions on the issue. In fact I would go so far as to say that George Bush will elevate the issue to attract votes in the forthcoming election due 5th Feb 2008. I expect that he will attempt to make China the centre of US economic malaise…though he is running out of time to escalate the issue. So this I think will be like another Iraq – a single issue to polarise simple Americans worried about the economy (that’s the housing market folks). Anyway all the huffing and puffing will be good for gold because:
1. It draws attention to the USA trade deficit
2. It escalates a major point of conflict between the USA & China
Frankly I don’t think this strategy will work in his favour – Americans are becoming more cynical…or at least the press is, so that will feed through to the general populous.
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Reason is the standard for debate.
- Andrew Sheldon www.sheldonthinks.com