4/13/08 - Inflation Watch

Globalisation and the dollar glut are pushing inflation of commodity prices to dangerous levels. Captialist organization is running up against inherent contradiction that land, labor and money are not commodities.
Following Arrighi, we can expect a turn from the free-market dynamics of finance captial, balanced on a weakening dollar, to calls for greater regulation of home markets and leveraged finance. Profit margins will be hit by along several dimensions in the present conjuncture.
1.) the added costs of raw materials based on extending global demand and financial speculation against the dollar, 2.) higher labor costs following increased regulation of home markets hit by the rising cost of food and inputs, 3.) increased regulation intending to prevent the environmental deterioration of the home market and global landscape, 4.) calls for regulatory protection against leveraged financial speculation which has resulted in the present credit crisis and the rising wave of global inflation.
Despite international calls for strengthening the dollar, the us can be expected to maintain the dollar at its inflationary interest rate of 2% in order to try to move the economy from recession. Global inflation strains can be expected to offset these efforts by the us to jump start the economy. After experiencing a nice rise in exports at the start of the year, the current account balance has again started to rise as foreign econs cut back on their purchases.
A Way Out?
the dollar must firm or replacements proposed. this is definitely long term. a world wide recession would have some effect on relieving commodity pressure, but perhaps not as much as desired.a return to feudalisma resurgence of nationalist regulation, subsidizing necessary commodities. the prices of land, labor are not going to be easily offset even by recession.perhaps this is too bearish a prediction. in any case, growth rates will slow globally and profit margins be strained. if liquidity can be restored, the stronger will start to outmuscle the weaker companies.global penetration will be retarded at the expense of a greater turn towards nationalism and localism. not so very appetizing a prospect.
A Still Strengthening East Asia?
Asia Bubble Watch:April 8 – Bloomberg (James Peng): “Taiwan’s export growth unexpectedly accelerated in March, rising at the fastest pace in two years as customers in China, Southeast Asia and India bought more of the island's electronics. Overseas shipments rose 22.8% from a year earlier after gaining 18.5% in February…”
April 9 – Bloomberg (Yu-huay Sun): “Taiwan’s energy use rose for the eighth straight month in February on increased demand from manufacturers… Energy consumption climbed 10.1% to the equivalent of 8.83 million kiloliters of oil, or about 1.92 million barrels a day…”
April 10 – Bloomberg (Shamim Adam): “Singapore’s economy rebounded in the first quarter… Gross domestic product grew an annualized 16.9% in the three months ended March…”
Income Inequality
April 8 – Financial Times (John Plender): “Income inequality in the US is at its highest since that most doom-laden of years: 1929. Throughout the main English-speaking economies, earnings disparities have reached extremes not seen since the age of The Great Gatsby. Much like this decade, the 1920s were a period of strong corporate profits growth and increasing household debt. Awash with easy money, Wall Street became hooked on what the economist J.K. Galbraith in that subsequent seminal work on the period - The Great Crash- called ‘the magic of leverage’: the ability to increase returns through borrowing. Investment trusts provided the vehicle for this financial merry-go-round, in which one investment trust would ‘sponsor’ another investment trust, which would in turn sponsor a further investment trust. This paper-shuffling multiplication of risk bears a remarkable resemblance to the slicing and dicing of risk in highly leveraged structured credit markets today. In the 1930s, it ended with bank failures and the Great Depression. Now, after decades of ‘financialisation’ in the US and other Anglophone economies, whereby financial services have increased their share of gross domestic product, banks are being bailed out - using public money - in an effort to ensure the same does not happen again. From a political perspective the notable feature of the inegalitarian, free-market era that began in the 1980s is how little backlash there has been against the stagnation of ordinary people’s earnings… Yet there are signs that the mix of policies and economic circumstances that gave a protracted laisser-passer to the rich and to business is coming to an end. This is potentially dangerous territory.”

April 9 – Bloomberg (Courtney Schlisserman): “The difference in incomes between the richest and poorest U.S. families has widened since 1998 as unemployment failed to decline to prior lows and tax cuts benefited the wealthy, a private study showed. Average incomes for the bottom fifth, adjusted for inflation, dropped 2.5% in the eight years that ended in 2006, compared with a 9.1% gain for the top group, according to…the Economic Policy Institute…”
A sideways market for the next 2-3 years?
May 26 - Inflation fears may be overly high. Commodity prices can't be expected to go much higher and still permit adequate profits. of course, what does adequate mean? most likely, commodity prices will continue to rise but not at the same pace. at the same time, commodity prices will be hitting profit margins in a large part of the economy where costs can not easily be passed on. it may be just the time to take 5% fixed income plays as 5% rises in the general economy may be difficult in the next 2-3 years.
May 31 - however, inflation will take time to work itself into production from its base in commodities. perhaps taking as long as 18 months to have its full effects.