Saturday, November 03, 2007

China Olympics: Starter's Gun For Inflation

Image from the Summer Olympics of 1904 (St Louis, Missouri)

Robert Gottliebsen in Australia's Business Spectator (Thursday) gives thanks for Ben Bernanke's inflationary rescue of the banking system, but points out that the flight from devaluing US securities is driving demand for assets elsewhere. And there are longer-term consequences to face:

Before the latest US crisis developed my friends in China told me that many Chinese manufacturing businesses would try to raise prices by 10 per cent in 2008 -- probably after the Olympics. That determination will now be intensified because the manufacturers are not only receiving lower returns but are being forced to pay more for oil and commodities. Those seeking shelter from the US dollar will drive up prices.

Bernanke’s actions, even though they are justified, are going to inflame US inflationary pressures. So later in 2008 and in 2009 he will need to reverse the current process and increase interest rates. That will not be good for stock markets or commodities because it will reverse the current forces. But just how serious it will be for the US will depend on whether the current Bernanke medicine worked and the banking breakdown was repaired.

I think there is a chance it will work because rising stock markets are a powerful drug. But no one can be certain, and this is a very dangerous period.

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