Finance
Inflation control measures in China evoke memories of excessive state control
The inflation rate of vegetable prices in China, the main food for hundreds of Millions of Chinese has reached 62% in November this year.
The government reacted to the situation with new laws threatening food shop owners with drastic punishment if they increase prices or build up stocks of food to maximize later profits. Also the spread of rumors in regard to inflation is now punishable. The measures obviously address large groups of the general public that do not have an insight into the deeper reasons of inflation trends and tend to hold shop owners directly responsible for price increases.
- The measures evoke bad memories of strict communist rule in China when neighbors were encouraged to denounce critics in their neighborhood to the police. With at least 200 Million Chinese living beneath the poverty line of 1 Dollar a day and at least another 200 – 300 Million Chinese having not much more than that, the inflation in China, now officially 4, 4 %, poses a serious risk for social peace in the country. Major conflicts and clashes in the history of China erupted always very suddenly and were mostly related to food shortages.
Vegetable prices are very critical for social peace in China
The government therefore now started to subsidize food prices. But in case of further rising inflation these subsidies could become quickly insufficient given the huge population of at least 1,3 Billion people with around 600 Million having lower income.
The political impact of rising inflation in China might also affect foreign economic policies of the country as any commitment to international trade and monetary rules including WTO requirements might be difficult to communicate for the government to the people as long as those rules do not obviously serve the urgent needs of the most needy groups in the population.
Rapidly increasing volatility of EURO exchange rates may accelerate erosion of markets’ trust
Recent comments of Deutsche Bank analyst Gilles Moec this week underline the deficit situation of Spain as most relevant for the further crisis effects in Europe.
Volatility of smaller European currencies in relation to the EURO demonstrates benefits of flexible exchange rates
In 1973, the German economist E. F. Schumacher startled Western societies with a revolutionary economic analysis that proclaimed “small is beautiful.” His book of that title concluded with these words: “The guidance we need . . . cannot be found in science or technology, the value of which utterly depends on the ends they serve; but it can still be found in the traditional wisdom of mankind.”
If you consider the rapid success of small start up companies and revolutionary content providers in the web since three decades this sentence does obviously still make sense. Implicitly it also raises the question about the hardly definable relation between quantity and quality in general as quality cant be dependent from quality as otherwise the logic differentiation of both terms lost its reason. There is a logic and linguistic barrier to put quantity and quality into one.
In this regard the performance of smaller European currencies over the last years gives a good reason to reflect the consequences of this linguistic and philosophical conclusion. Did the Czech Krone, the Polish Sloty or the Icelandic Krone serve the needs of their economies better than the EURO for some of its member states?
The Cyech Krone is still flexible in its relation to the EURO
The Polish Zloty indicates measures of volatility management
The Icelandic Krone exchange rate is part of the crisis management on the island
This quest can be cross checked almost objectively if you consider growth rates and recovery dynamics after the financial crisis in selected countries with own currencies in Europe. There is no clear evidence up to now that their independent currencies helped to recover, but there is hardly a doubt that for example Hungary or Iceland would have posed a comparable challenge to the EURO as Greece or Ireland did, if they would have been member states.
The Czech Republics growth figures show clear signs of recovery
Poland as the only country in Europe could avoid recession up to now after the crisis
Potentially the fear of a bigger variety of gradually flexible „currency identities“ in Europe is exaggerated if you consider the economic, social and political risks the EURO has obviously posed on its members and the political framework in Europe.
Price indices of agricultural commodities, food and energy show inflation trend especially for USD-based economies
With agricultural raw material prices up by 12% since May 2010, sugar prices up from 14 to 26 US cents per pound and natural gas up by almost 30% within one year, it becomes obvious, that most inflation-sensitive prices are sharply on the rise.
Food price levels indicate inflation trends since June 2010
Recent news about an temporary sugar price decrease didnt change the overall trend
Inflation in Russia is already at high levels
Besides that, expenses for health care and housing are rising drastically in almost all developed countries. Benefitting from the appreciation of the EURO, most European consumers are currently not as much concerned by the inflation trends as consumers in China, the US and USD-based economies.
Given the usual technical delay of price adjustments by distributors and retailers it can’t be excluded that with further increasing price levels a price shock might occur already during the first months of 2011 as stock levels of wheat and other commodities are also on historically low levels.
Chinese consumers that are already facing now inflation levels beyond 4% might be most vulnerable as the modest appreciation of the Chinese Yuan of only 2% as announced by the government, will be by far to low to balance rapidly rising prices of imported food and energy. The Eurozone as well might face price shocks if the ongoing debt crisis should lead to a significant depreciation of its currency. In the US a more slightly but also continuous rise of prices is expected in opposite to USD based economies in Africa and South America where a further price rally of imported goods might boost inflation up to socially critical levels.
The main economic agreements at the G20 Seoul summit as reported (summary)
Framework for Strong, Sustainable and Balanced Growth
1. “Our unprecedented and highly coordinated fiscal and monetary stimulus worked to bring back the global economy from the edge of a depression. This has highlighted that the world would benefit from more effective international cooperation. In Pittsburgh, we launched the Framework for Strong, Sustainable and Balanced Growth and committed to work together to assess the collective implications of our national policies on global growth and development, identify potential risks to the global economy, and take additional actions to achieve our shared objectives.
2. “Since then, we have made important progress through our country-led, consultative Mutual Assessment Process (MAP) of the Framework:
* “Supportive economic policies have been put in place to promote ongoing recovery and job creation;
* “Explicit commitments have been made to put public finances on a sustainable track; Strong measures have been adopted and are being implemented to safeguard the stability of our financial system;
* “Important structural reforms have been launched and/or planned to boost global demand and potential growth; and
* “Significant steps have been taken to strengthen the capacity of international financial institutions (IFIs) in support of development.
3. “Since we last met, the global recovery continues to advance, but downside risks remain. We are resolved to do more. Our strengthened collaborative and collective policy actions can further safeguard the recovery and lay a solid foundation for our shared objectives of strong, sustainable and balanced growth.
The Seoul Action Plan
4.”Today we are launching the Seoul Action Plan. We shaped the Plan with unity of purpose to:
* “ensure an unwavering commitment to cooperation;
* “outline an action-oriented plan with each member’s concrete policy commitments; and
* “deliver on all three objectives of strong, sustainable and balanced growth.
5. “Specifically, we commit to actions in five policy areas with details of specific commitments by G20 members set out in the Supporting Document.
6. “Monetary and Exchange Rate Policies: We reaffirm the importance of central banks’ commitment to price stability, thereby contributing to the recovery and sustainable growth. We will move toward more market-determined exchange rate systems and enhance exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. Together these actions will help mitigate the risk of excessive volatility in capital flows facing some emerging market economies. Nonetheless, in circumstances where countries are facing undue burden of adjustment, policy responses in emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro-prudential measures. We will reinvigorate our efforts to promote a stable and well functioning international monetary system and call on the IMF to deepen its work in these areas.
7. “Trade and Development Policies: We reaffirm our commitment to free trade and investment recognizing its central importance for the global recovery. We will refrain from introducing, and oppose protectionist trade actions in all forms and recognize the importance of a prompt conclusion of the Doha negotiations. We reaffirm our commitment to avoid financial protectionism and are mindful of the risks of proliferation of measures that would damage investment and harm prospects for the global recovery. With developing countries’ rising share in world output and trade, the goals of global growth, rebalancing and development are increasingly interlinked. We will focus efforts to resolve the most significant bottlenecks to inclusive, sustainable and resilient growth in developing countries, low-income countries (LICs) in particular: infrastructure, human resources development, trade, private investment and job creation, food security, growth with resilience, financial inclusion, domestic resource mobilization and knowledge sharing. In addition, we will take concrete actions to increase our financial and technical support, including fulfilling the Official Development Assistance (ODA) commitments by advanced countries.
8. “Fiscal Policies: Advanced economies will formulate and implement clear, credible, ambitious and growth-friendly medium-term fiscal consolidation plans in line with the Toronto commitment, differentiated according to national circumstances. We are mindful of the risk of synchronized adjustment on the global recovery and of the risk that failure to implement consolidation, where immediately necessary, would undermine confidence and growth.
9. “Financial Reforms: We are committed to take action at the national and international level to raise standards, and ensure that our national authorities implement global standards developed to date, consistently, in a way that ensures a level playing field, a race to the top and avoids fragmentation of markets, protectionism and regulatory arbitrage. In particular, we will implement fully the new bank capital and liquidity standards and address too-big-to-fail problems. We agreed to further work on financial regulatory reforms.