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As 'china Effect' Reverses, Inflation Threatens

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http://www.telegraph.co.uk/money/main.jhtm.../cninfla107.xml

When the Prime Minister appears on television vowing to "get to grips with inflation", you know that a serious problem is taking shape.
The game is now up. Industrial wages on China's eastern seaboard have jumped 50pc over two years, while salaries in Bangalore have risen so much that software companies are outsourcing back to Europe.

Burst balloon: the years of cheap goods from China and India are over and those continents

are sucking in commodities at such a rate that prices are heading sky high

When the Prime Minister appears on television vowing to "get to grips with inflation", you know that a serious problem is taking shape.

Gordon Brown had the good fortune to be Chancellor over a golden decade as the industrial revolutions of China, India and emerging Asia supplied us ever cheaper manufactures.

In this miracle world, we have had 5pc global growth for five years - the best since the Second World War - without overheating.

Known broadly as the "China-effect", it has held down goods inflation. The rich West has been able to indulge in housing booms and credit sprees without an ugly knock-on into CPI inflation.

advertisementThe game is now up. Industrial wages on China's eastern seaboard have jumped 50pc over two years, while salaries in Bangalore have risen so much that software companies are outsourcing back to Europe.

Michael Saunders, an economist at Citigroup, said the era of imported disinflation is over. "We're no longer getting cheap goods from Asia. At the same time, growing demand from these countries is pushing up commodity prices across the board," he said.

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http://www.telegraph.co.uk/money/main.jhtm.../cninfla107.xml

Burst balloon: the years of cheap goods from China and India are over and those continents

are sucking in commodities at such a rate that prices are heading sky high

Good old Ambrose. Always liked his writng. He's been telling it like it is for the last few years in the telegraph. Noticed he's been signing off as International Buisiness Editor recently. Has he been promoted? and if so what does that tell us about the way the papers owners want things to go?.

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Yeah, China has the foreign reserves to outbid you on the resources and commodities they need and they'll do it in your own currency, thus leaving their own relatively strong and unaffected. Additionally these reserves entering the global system will reduce the strength of those currencies effectively increasing the import inflation factor for those countries whose currencies are affected.

Up g'fecked!

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Globalisation = arbitrage of labour costs; arbitrage always reduces price differentials. There was never any prospect that we could sustain our high wages and prosperous lifestyles by exporting jobs and manufacturing to countries where the workers are paid a dollar a day.

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I always thought the anti-globalisation movement was missing a very big point, not seeing the wood for the trees.

In the coming years we will see the rise of a new anti-globalisation movement from completely the opposite direction - the 'right' rather than the 'left'.

How ironic.

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In the coming years we will see the rise of a new anti-globalisation movement from completely the opposite direction - the 'right' rather than the 'left'.

Actually, the greatest opposition to 'globalisation' is now coming from the 'right'; just look at the reaction to Bush's bill that would have given amnesty to illegal immigrants, for example. America led the rush to globalisation and pretty soon it will be leading the rush away.

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IMHO, the rising labour costs in China won't have such a dramatic effect on imported inflation that people think it will. If the average Chinese worker earns $5 a day say, it would take many many years of 50% pay hikes before their labour costs would start to become an important factor in the location of industry. What is more likely is the coming wall of worry from the commodities markets, especially the energy markets. Watch that oil price, people will start to wonder what's going on when it hits and stays above $150 a barrel

Best,

L

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If the average Chinese worker earns $5 a day say, it would take many many years of 50% pay hikes before their labour costs would start to become an important factor in the location of industry.

If their pay goes from $0.50 a day to $5 a day, they have ten times as much money to buy stuff. That means global inflation as they compete for resources... while Western companies continue to export jobs as they're still much cheaper than Western workers.

Also, Chinese manufacturing companies compete with each other on tiny margins, so every penny they increase their workers' pay is going to be passed on to their customers.

Edited by MarkG

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IMHO, the rising labour costs in China won't have such a dramatic effect on imported inflation that people think it will. If the average Chinese worker earns $5 a day say, it would take many many years of 50% pay hikes before their labour costs would start to become an important factor in the location of industry. What is more likely is the coming wall of worry from the commodities markets, especially the energy markets. Watch that oil price, people will start to wonder what's going on when it hits and stays above $150 a barrel

Best,

L

its obvious that the West and China will clash over oil and gas soon enough. Iran being the most likely initial flashpoint. China have signed massive gas deals with Iran. Gas that the west (UK ) needs badly and wont give up without a fight. Iran can forget about pretending it owns that gas. The west and China will be fighting (not literally i hasten to add) over it soon enough.

how do you see that panning out ?

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Back in the old days of this forum, when there were still a few bulls around, they used to talk about a 'new paradigm'- a new era of permanently low inflation and interest rates. It really would be different this time.

The bears told them it was cobblers and lo, it was.

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its obvious that the West and China will clash over oil and gas soon enough. Iran being the most likely initial flashpoint. China have signed massive gas deals with Iran. Gas that the west (UK ) needs badly and wont give up without a fight. Iran can forget about pretending it owns that gas. The west and China will be fighting (not literally i hasten to add) over it soon enough.

how do you see that panning out ?

In life I always find that what actually happens falls directly inbetween the optimistic and the pessimistic forecasts. Optimistically, we have no oil crisis for the rest of the century and prices may rise but stabilise at a low level (below $100). The West will work out lasting trade agreements with the Middle Eastern States and the flow of oil will be assured. New technology coupled with new discoveries will ensure the ever expanding supply of reserves. The debt-based economic system will continue to flourish as the future flow of energy provides for the slow and consistent growth of economic output.

The pessimistic case has it that the major oil fields will have given up most of their easy oil within the next 30 years. Faced with the possibility of an energy (and hence a monetary) collapse, the Western powers will make their move before this stage is reached by encircling the last remaining oil rich States to protect them and their economic viability. I believe that China will try to stop this happening. They will be successful. I agree with you that that they will try to avoid direct military confrontation because they are not strong enough on the battlefield. They will use assymetric methods including financial and electronic attack. The outcome will be the fall of the American Empire and the subsequent economic enslavement of the West to the East by the end of the century.

So what is in the middle? Your guess is as good as mine. I would guess that there will be a semi-smooth transition of hegemony from America to China which will take the form of China's rising economic power and a shift in the World's mindset in doing business and politics the Chinese Way. You have a long way to look back in history before you encounter a strong and powerful China which once accounted for a third of the global economy. However I believe that the weight of the world will one day soon be transferred back to China, one way or another

Best,

L

Edit : typo

Edited by Luminist

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In life I always find that what actually happens falls directly inbetween the optimistic and the pessimistic forecasts. Optimistically, we have no oil crisis for the rest of the century and prices may rise but stabilise at a low level (below $100). The West will work out lasting trade agreements with the Middle Eastern States and the flow of oil will be assured. New technology coupled with new discoveries will ensure the ever expanding supply of reserves. The debt-based economic system will continue to flourish as the future flow of energy provides for the slow and consistent growth of economic output.

The pessimistic case has it that the major oil fields will have given up most of their easy oil within the next 30 years. Faced with the possibility of an energy (and hence a monetary) collapse, the Western powers will make their move before this stage is reached by encircling the last remaining oil rich States to protect them and their economic viability. I believe that China will try to stop this happening. They will be successful. I agree with you that that they will try to avoid direct military confrontation because they are not strong enough on the battlefield. They will use assymetric methods including financial and electronic attack. The outcome will the fall of the American Empire and the subsequent economic enslavement of the West to the East by the end of the century.

So what is in the middle? Your guess is as good as mine. I would guess that there will be a semi-smooth transition of hegemony from America to China which will take the form of China's rising economic power and a shift in the World's mindset in doing business and politics the Chinese Way. You have a long way to look back in history before you encounter a strong and powerful China which once accounted for a third of the global economy. However I believe that the weight of the world will one day soon be transferred back to China, one way or another

Best,

L

The US would have their defence shield in place by then.

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The West will work out lasting trade agreements with the Middle Eastern States and the flow of oil will be assured.

Now if only they could implement some type of debt-based-feel-good-factor Ponzi scheme based around house price inflation in the Middle East they could get away with just about anything. <_<

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The US would have their defence shield in place by then.

Presumably this would only work against a direct missile strike? How would this protect against a sustained currency attack? As I have said, the Chinese are not that stupid I don't think to meet the US on a playing field where they have the lower hand. One of the key ideas of assymetric warfare is you let the opponent use up a lot of money in developing a strategy or system. Then once the parameters are known, there is usually an effective counter that can be developed at a fraction of the cost. In the meantime, the money that you save by not developing such a super weapon or defence you can use in building infrastructure for the domestic economy

Best,

L

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Presumably this would only work against a direct missile strike? How would this protect against a sustained currency attack? As I have said, the Chinese are not that stupid I don't think to meet the US on a playing field where they have the lower hand. One of the key ideas of assymetric warfare is you let the opponent use up a lot of money in developing a strategy or system. Then once the parameters are known, there is usually an effective counter that can be developed at a fraction of the cost. In the meantime, the money that you save by not developing such a super weapon or defence you can use in building infrastructure for the domestic economy

Best,

L

http://www.reuters.com/article/bondsNews/i...228045520070612

Does the US own the banking infrastructure and institutions ? (trading platforms, servers, exchanges, IMF, World Bank, etc)

Edited by Ash4781

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http://www.reuters.com/article/bondsNews/i...228045520070612

Does the US own the banking infrastructure and institutions ? (trading platforms, servers, exchanges, IMF, World Bank, etc)

Many thanks for the link Ash. Even though I dislike Greenspan for selling out the American people and being quite hypocritical in action against his noble ideas in his younger days, I do like this quote from him in that link:

"Some of these price/earnings ratios are discounting nirvana."

Classic

Best,

L

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forget any ideas of another world war

no two nations with nuclear weapons will ever face off, in that situation there will be no winner. the war will bring an end to one nation and at best the crippling of the other.

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Surely the % of imports from Asia is still expanding, offsetting price increases????? (as Asian imports are still substantially cheaper than manufactured products from domestic / other Western firms).

Edited by gruffydd

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its obvious that the West and China will clash over oil and gas soon enough. Iran being the most likely initial flashpoint. China have signed massive gas deals with Iran. Gas that the west (UK ) needs badly and wont give up without a fight. Iran can forget about pretending it owns that gas. The west and China will be fighting (not literally i hasten to add) over it soon enough.

how do you see that panning out ?

There is a good reason why China developed technology to destroy satellites. They have proven they master it, and that's it for the

US - China is now untouchable. The biggest WMD the Chines have in their hands is BTW over 1 trillion little pieces of green paper.

They'll just have to set it free, and the US would be history.

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Yeah, China has the foreign reserves to outbid you on the resources and commodities they need and they'll do it in your own currency, thus leaving their own relatively strong and unaffected. Additionally these reserves entering the global system will reduce the strength of those currencies effectively increasing the import inflation factor for those countries whose currencies are affected.

Up g'fecked!

That would be a double whammy for the western Corporations that have outsourced work to Asia. First, the wage arbitrage has started to turn against them as rising pay costs in the Far East is starting to eat into the profits. Second, a sudden change in the foreign exchange markets would mean that the goods and services being produced there become much more expensive for western consumers . Of course, they could simply redirect all their output to the domestic markets in the Far East but making the same profits from consumers there is not going to be so easy. At the moment the Chinese and Japanese governments are artificially suppressing their currencies so the foreign exchange rate has not really kicked in hard yet but this policy itself is stoking inflation in Asia. Sooner or later those rising cost in China are going to be exported to us.

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The US would have their defence shield in place by then.

Even if it would work and couldn't easily be defeated with decoys, even if they could afford to build it... how would they build it without chips from Asia? America trying to fight a war against China would be like the British trying to fight the Battle of Britain when the engines, machineguns and instruments for their Spitfires and Hurricanes were built in Germany and France.

It's also worth noting that the US military is insanely oil-intensive; I read an article a while back claiming that their annual oil consumption is larger than that of several European countries. With declining oil supplies, they may have to resort to rowing boats and pointy sticks.

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