Notes From Underground

The markets were waiting to see the Chinese inflation numbers and a possible interest rate increase from the CENTRAL BANK. The Chinese price increases were higher than expected and some analysts believed that the rise in food prices was the culprit for the inflation increase. Hu Jintao, China’s president, assured the Politburo that inflation would be dealt with and they would “battle inflation without jeopardizing growth.” Friday, before the release of the inflation data, China raised its reserve requirement by another 50 basis points. Reserve requirements have not yet had much success in slowing Chinese growth in the past. If food prices are REALLY the major variable causing prices to rise, wouldn’t an appreciating YUAN with increased food imports do a great deal to stem food price inflation?

I’m skeptical of China’s inflation worries as an economy that has so much excess capacity and a huge pool of available labor isn’t in danger of uncontrollable inflationary pressures. If the real problem in China is excess real estate speculation, then the Politburo is going to have to utilize the tools of a semi-command economy and put restrictions and punishments on “profiteering.” The year ahead will reveal how the authorities intend to deal with selective price increases, the blunt hammer of raising rates or the hammer and sickle of a centrally planned economy. If the YUAN appreciation becomes the preferred tool, global agricultural prices will probably make new highs as imported grains will provide the needed insurance against food-based inflation.

Chinese food policy will be interesting in lieu of the recent negotiations on the BUSH TAX CUTS. In order to save the BUSH tax plan, the compromise was for continued support for the 45 cents-per-gallon credit for corn-based ethanol in order to produce clean energy products. The farm lobby let the Blue-Green Alliance fight for this credit under the guise of environmental concerns. Couple this credit with the recent decision by the EPA to lift the mix ratio to 15 percent from the present 10 percent. According to budget crunchers, the extension costs will add $4.87 billion to the budget.

Otto Von Bismarck said the legislative process was like sausage making: very distasteful to watch but in the end the product had a pleasant taste. I for one believe the budget would be sweeter with Brazilian sugar-based ethanol. Energy competing for grain in a world with changing food consumption patterns will create havoc for urban consumers. Only a ship of fools would screw with the food chain!

Word out of Europe is that Sarkozy and Merkel have agreed that the EURO currency is non-negotiable and the policy makers and individual nations will do whatever is necessary to ensure the future of the EURO. The question begs to be asked: Non-negotiable for whom? If the EURO survives I am left to wonder if it survives with all the present members or if some of the peripherals are asked to leave until they get their finances in order? When it comes to European politicians, it is important to parse words in the similar vein that was needed with Bill Clinton or Alan Greenspan. Yes, the EURO may be non-negotiable but is its membership deemed the same. Remember  “I DID NOT HAVE SEXUAL RELATIONS WITH THAT WOMAN”? Everything depends on the meaning of words.

Frau Merkel and President Sarkozy let it be known that as the two largest contributors to the EU they were voicing concerns not out of selfishness but simply as those with the most to lose. Sarkozy also let it be known that he was opposed to a common EURO BOND because it would make governments “less responsible” when the goal was to make European states more creditworthy through the use of fiscal restraint. I wonder what Sarkozy will say when it is France’s turn on the rack as the budgetary inquisition its rounds throughout EUROPE.

Tags: Bill Clinton, Bush tax cuts, China Central Bank, EPA, ethanol tax credit, EU, Euro, Eurobond, food prices, Hu Jintao, inflation, Merkel, Sarkozy, Yuan

This entry was posted on December 12, 2010 at 9:39 pm and is filed under China, Commodities, Currency, Europe, France, Germany. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.