Last blast on dollar inflation/deflation via a good summary from Dr. Molano on the China/LA dynamic. The low interest rates of the US Fed inflated China's bubble. Deflation will affect the entire region, particularly Brazil. Note how state control over China's banks allows the communist klepto bureaucracy to loot bank deposits and thrive at the expense of broad population when bottom falls out.
Let the economic education continue.
BCP's Molano Latin American Daily
May 04, 2004
Crises have been the defining moments for the emerging markets. The Mexican Devaluation, December 1994. The Russian Default, August 1998. The Brazilian Devaluation, January 1999. The Argentine Default, December 2001. And, the Chinese crisis, 2004? A storm is brewing on the other side of the Pacific. The problem is that we do not know how and when it will manifest itself, but problems in China abound. To begin with, the Chinese economy is out of control. Rampant corruption allowed political bosses to raid Chinese banks and invest in new production. Fixed asset investment in China jumped 43% y/y in the first quarter of 2004, despite government attempts to stem credit expansion. Unfortunately, market forces are not driving the investment process. Local politicians are ordering Chinese banks to provide them with loans, most of them which will never be repaid. Therefore, the Chinese banking system is collapsing under the weight of non-performing loans. At the same time, the torrential pace of economic expansion and the rise in commodity prices is creating inflationary pressures. China's inflation target is 3%. The Chinese government recently reported that the 12-month Consumer Price Index (CPI) rose 3% in March, thus meeting the official target. However, other price indicators suggest that China's inflation rate is rising at a much faster pace. Sharp increases in energy and foodstuff were not reflected in the official CPI. The People's Bank of China, the central bank, has a much broader measure of inflation, and it estimated the 12-month inflation rate in March to be 7.4%. Likewise, the price deflator for the first quarter of 2004 was 6%. Therefore, China's inflation rate could be running at twice the pace of the official CPI data. Unfortunately,a rise in China's inflation rate and the slow-motion collapse of the Chinese banking sector could be a deadly cocktail. Given the global market reaction to recent announcements in China, a major crisis on the other side of the Pacific could be devastating. To make matters worse, the Japanese government announced that it stopped its purchases of dollars in April. After having
bought $137 billion in U.S. dollars during the first quarter of 2004, the Bank of Japan halted its program. This may explain the recent steepening of the U.S. Treasury curve.
Nevertheless, problems in China and a higher cost of capital is very bad news for Latin America.
crisis in China, if any, won't follow IMF script
Submitted May 4, 2004 - 10:28 pm by Benjamin Melançon—then wonders if China could be next in 2004.
Now, I know next to nothing about the economic situation in China, but the four crises listed above each resulted from following the guidelines of the International Monetary Fund right off the cliff. A key part of IMF prescriptions is removing all controls on capital flight. I don't think China is following IMF rules, so any financial crisis there would not play by the same rules: the Chinese government would probably have a lot more control over how it plays out.
I think Latin America has more to fear from the U.S. economy falling, even into a mild recession, than anything likely to come out of China.
The most interesting question right now is how economic hardship caused in Latin America by the global market, whatever the source, will play out politically in the various countries.
To grossly oversimplify, would more anger and more moving to the left predominate, or would helplessness and apathy and the consequent 'default' shift to the right?