China Frenzy

Just a quick note: you will have noticed that the Chinese raised their interest rates today. They are trying to fend off inflation and a potentially nasty real estate bubble. How I wish we had done the same thing back in 2004/2005. This action will slow their domestic economy, and thus drain some of the global economy’s demand as well. My feeling is that the are trying to get their shot in before Bernanke goes ahead with his next round of easing which I expect right after the upcoming Fed meetings on November 2nd. The Chinese move will mute the Fed’s action somewhat, and make it a little more difficult to inflate the world economy. It is a classic example of two economies working in different directions and possibly offsetting each other. The Chinese would not have been forced into this move had they allowed their currency to float up from its currently rigged state. They want to keep their currency as weak as possible in order to boost exports. That can only reduce our ability to get our economy going and hurts our already abysmal job creation prospects. Meanwhile we want to weaken the dollar vis their currency to inhibit their trade and boost our own. As long as the two economies remain uncoordinated we should expect more of this head butting contest. Hopefully we take a much harder line and ignore all the Chinese protestations about the inflationary consequences of further stimulus: they want contract their demand to avoid overheating, and for the US to help out by going into contraction mode as well. Since we are already depressed that is not a viable option for us. The conflict is growing.

Watch for this to get more heated.