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May 10, 2004
You are on the invidual archive page of The Laws of Economics and Communism. Click Simon World weblog for the main page.
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The Laws of Economics and Communism
As part of Beijing's efforts to pop the emerging bubble in its economy they have announced planned price controls. Obviously Beijing doesn't subscribe to Alan Greenspan's "bubbles are only obvious after the fact" philosophy, which is just as well. It was only recently that China's biggest worry was deflation but the powers that be recognise an emerging inflation threat when they see it. Again, Mr. Greenspan could learn from the CCP on this score. However as noted previously, it's not easy being a central banker in an economy like China. So they revert to what they know best, command-style central price controls. The problem is it won't work. "The prices of 90 percent of commodities are decided by the market, rather than the government,'' said Li, of Haitong Securities Co. in Shanghai. Still, local governments "don't cooperate well with the nation's macroeconomic control and are inclined to raise prices for short-term profit.''It applies mostly to utilities such as gas, electricity and transport. Shame the rest of the world doesn't want to help Beijing. When oil hits US$40 a barrel that's a direct cost that goes into things such as electricity and transport. When centrally mandated price controls ignore such basics as rising input costs, the end result will be more losses for state owned enterprises. And in China that means the state owned banks will bail out these utilities with more loans. Which makes their bad loan problems worse. And at the very peak of the China boom bad loans are estimated to take up to 40% of bank assets. At the top of the cycle. Furthermore the centre (Beijing) does not wield much control over the provinces, despite appearances to the contrary. As a province do you refrain from raising pricesor do you try and sneak them up and hope Beijing doesn't notice? This is the free-rider problem writ large: the pay-off for cheating by an individual exceeds the punishment, while the collective benefits only accrue if everyone obeys together. It's still no fun being a central banker in China. Yes, we are witnessing the laws of economics and communism meet. Any takers on who's going to win? I know who I'm backing. posted by Simon on 05.10.04 at 03:42 PM in the
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TrackBack URL for this entry: http://blog.mu.nu/cgi/trackback.cgi/27772 Send a manual trackback ping to this post. Control Excerpt: Following on yesterday's post on China's efforts in economic control comes a report from The Standard of Beijing trying to assert its authority over the provinces.For the first time, a central government newspaper has lashed out at local officials and ... Weblog: Simon World Tracked: May 11, 2004 10:02 AM Carnival of the Capitalists Excerpt: The Carnival of the Capitalists for the week of 5/17/04-5/23/04 Greetings and salutations to you. I'm Josh Cohen, author, traffic reporter, radio producer, and blogger. I'll be hosting this week's Carnival of the Capitalists, which you're reading right... Weblog: d-42.com: Josh Cohen online Tracked: May 17, 2004 07:51 AM
Comments:
Obviously you aren't an American old enough to remember arch-Republican Richard Nixon's wage-price controls in the early 1970s and Gerald Ford's subsequent WIN propaganda buttons. WIN = Whip Inflation Now! posted by: Tom -Daai Tou Laam on 05.11.04 at 04:42 PM [permalink]As an Australian we also had wage and price controls in the late 70s. It resulted in a bad recession that took until the early 80s to start climbing out of. Inflation only started to get whipped when Volcker did his Saturday night special and shoved interest rates as high as possible. Problem is 25 years later and Greenspan is fighting the last battle (goods and services inflation) instead of the next one (asset inflation) while China is discovering the "command" has gone from its command economy! posted by: Simon on 05.11.04 at 04:54 PM [permalink]THe really scary part is that almost all the Central Bankers are now behind the curve. Richard Nixon's wage and price controls only made the situation worse. When Volcker had to finally move he thought raising rates aboove 10% would check accelerating inflation. However, by then inflation had accelarated to around 10% as well. Meaning real rates were still 0 and inflation was still accelerating. Volcker had to get brutal and go postal on rates at that point - all the way to 18%!! Greenspan has rates at BELOW inflation. If we are behind the curve, then 3% fed targets are NOT going to be enough to stop accelerating inflation. Will Greenspan have to raise rates to 4, 5, 6%? Can the economy stand these rate rises with its debt load? Will the Fed's attempts to fight inflation actually bring on the deflationary crash? Don't change that dial! posted by: kennycan on 05.14.04 at 01:09 PM [permalink]I think Greenspan is trying to deleverage the debt and speculation out there. He is now the anti-1994 Greenspan. What a whack the markets took back then! Those were the days; Kidder Peabody dead and Orange county bankrupt. All because Greenspan sent rates up without the market (bond market mostly) expecting that to happen. The markets reacted badly. Today I think he is trying to guide people to unwind debt and leverage in an orderly way. So, this time around everybody knows rates are going up because Alan keeps saying rates are going up. No one should be surprised and everyone moves in an orderly way to the exits. The carry trade will end. There are $71 trillion in derivatives that are loose in the world. This is a huge debt bubble he is trying to manage. It also means carefully turning those giant (damaged!) ships Fannie and Freddie without popping the remaining rivets and sinking them. This is one of those times that make interesting history (like the Depression) but, you don't really want to live through. posted by: Fred Boness on 05.18.04 at 07:59 AM [permalink] |
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