Is low inflation in Japan and China a sign of strength or weakness? – Mish Talk

Inflation data via St. Louis Fed, Mish chart, US recessions in light blue

Latest inflation figures

  • United States: 9.06% in June
  • China: 2.10% in May
  • Japan: 2.50% in April
  • Eurozone: 8.64% in June

Thoughts on Inflation Management

Pettis Tweet Chat

  1. For me, it’s intellectual laziness: “China and Japan have managed inflation well, despite their exposure to sharp increases in energy and food prices. Both exercised reasonable control over their money supply and credit.
  2. There is an implicit assumption here that the only issues that matter are US and European issues. Because rising inflation is a problem in the US and Europe, low inflation in Japan and China must be a good thing and a sign of political success.
  3. It also assumes that Japanese and Chinese monetary policies operate in the same way as in the United States and Europe, and that all four economies suffer from the same set of imbalances.
  4. This is simply not true and suggests an almost unbelievable lack of nuance. Japan and China have the opposite problems that the United States and Europe have. They both suffer from very weak domestic demand, driven by extraordinarily low consumption shares in GDP.
  5. Japan has been trying in vain to reverse this trend for 30 years and China for 15 years. The fact that neither has been able to do so in any meaningful way is not a sign of political success but rather political failure.
  6. This is also why they do not suffer from the same inflation problems as the United States and Europe. With consumption so weak and most policies focused on supply rather than demand, it’s no surprise that CPI inflation is low and likely to remain so.
  7. The article argues that Japan and China have kept inflation at bay due to their tight control of monetary and credit expansion, but this only suggests that no one really bothered to look at the monetary data. and credit, particularly in China.
  8. It makes as little sense to congratulate the BoJ and the PBoC for having “solved” their US and European monetary problems as it is to congratulate the Fed and the ECB for having solved their Chinese and Japanese problems. These are not the relevant questions.
  9. Unfortunately, even many Chinese economists have the same US-Eurocentric orientation. They see low inflation in China as a sign of successful monetary and fiscal policy rather than a sign of continued weakness in domestic demand.

What about Germany?

Arguably the best management (using the term both loosely and crudely) goes to Germany.

Until now, Germany did not have the swings up like China and the United States, or down like Japan.

Like China and Japan, and unlike the United States and China, Germany is an export-dependent economy by design.

One size for Germany so far

One of the flaws of the eurozone is that there is no single interest rate that makes sense overall given the huge differences in productivity, work rules, pension plans and economic benefits.

Until recently, Germany benefited from an ECB interest rate policy that I have described as “one size fits all for Germany”.

The problem now is that Europe is at the mercy of its own insane energy policies with Germany at the mercy of Russia and global sanctions against Russia.

Did China handle something well?

China’s growth has been the envy of the world for four decades.

However, the last decade has been a mirage bubble of bad investments in real estate and infrastructure.

And for the past decade, I’ve mocked those who promote the ridiculous idea that the yuan (renminbi) would replace the US dollar as the world’s reserve currency.

For at least a decade, China has not managed anything well, especially its real estate bubble and the Covid. And now it’s recovery time. China’s housing bubble burst and imaginary wealth evaporated.

This is very bad for domestic consumption, making China all the more dependent on export commercialism which it desperately needs to curtail.

Export Mercantilism

The three export giants, China, Japan and Germany are in serious danger of imploding.

Germany has additional problems of high inflation, dependence on Russian energy, foolish European policies, foolish ECB policies and rapidly increasing internal Eurozone conflicts.

How do we measure inflation?

Case-Shiller Home Price National Index and Top 10 2022-03

Before praising a country, we need to take a serious look at how inflation is measured.

Let me suggest that every measurement is fatally wrong.

These 2% central bank targets are a huge source of trouble. In the United States, the Fed has burst three bubbles in a row by not counting asset bubbles, particularly real estate, as part of inflation.

The chart above shows the absurdity of it all. China is just as bad, if not worse, and by the way, Canada and Australia are too.

The Chinese real estate bubble has just burst. If you factored that into Chinese inflation, it would probably be negative right now, not 2.1%.

No praise anywhere!

Given that no central bank on the planet has yet predicted a recession in advance or shown any hints about letting asset bubbles develop, there should be no praise anywhere.

There are a lot of things central banks need to think about. But rest assured, they won’t (at least on the good stuff).

Scroll to continue

The Fed, ECB and Bank of Japan all still have ridiculous inflation targets of 2.0% with no idea how to measure inflation.

As for trying to reverse export dependency, China and Japan have failed for decades, and Germany does not want to change at all.

Root of the crisis

Few people even understand the root of the crisis. The problems began when Nixon closed the gold window on August 15, 1971. For more, see Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis

In 1971, President Nixon nominated the then-Democrat John Connally as Secretary of the Treasury. That’s when things started rolling.

Our motto but your problem

Shortly after taking the Treasury job, Connally told a group of European finance ministers worried about exporting US inflation that the dollar “is our currency, but your problem.”

On August 15, 1971, Nixon ordered Connally to suspend, with certain exceptions, the convertibility of the dollar into gold or other reserve assets, ordering the closure of the gold window so that foreign governments could no longer exchange their dollars for gold. He also issued Executive Order 11615, imposing a 90-day freeze on wages and prices to counter inflation. It was the first time the US government had implemented wage and price controls since World War II.

Reserve currency irony

This decision was not temporary and left governments to bloat at will.

Importantly, the reserve currency has become as much a curse as a benefit.

The irony of reserve currency is that despite protestations of the US advantage, no country wants the alleged advantages that the US supposedly receives.

Global consumers of last resort

The United States is stuck with reserve currency because we have the largest and most open capital markets in the world, the largest bond market in the world, and a much better business climate than the EU, China or Japan.

To ensure that the US remains the curse holder, the EU and Japan still have negative or zero rates, China does not float the yuan but supports corrupt state-owned companies, and Germany punishes the rest of the EU.

Everybody wants to export to the United States, and they do.

Praise Where? For Nixon? Central banks?

The problem cannot be solved as long as governments can inflate the currency at will. A gold standard was the last mechanism that forced governments to stay in line.

Please don’t express your ignorance by saying Bitcoin fixes this, because it won’t. The central banks that matter will never adopt it. Actions in El Salvador and Africa make no sense on a global scale.

And all this talk about a new BRIC axis of Brazil, Russia, India and China is also ridiculous.

One does not obtain world reserve status by declaring one’s intention. Conditions must be met, and China does not come close.

The yuan will not replace the US dollar and will not be supported by commodities

Please note that the yuan will not replace the US dollar and will not be backed by commodities

Also note that China is looking for ways to avoid US sanctions, but a deadly embrace complicates matters.

Unstable configuration

It’s a complicated mess on a global scale, for literally the whole world.

The eurozone is more stressed than ever, China’s housing bubble is bursting, global supply chains are in shambles, and Biden is seeking wildly inflationary clean energy policies.

On top of all that, there is a potential war between the United States and China over Taiwan.

Good luck with that.

I don’t know when it will explode into a major currency crisis, but it will. Gold, not Bitcoin, will be the beneficiary.

This post is from MishTalk.Com.

Thanks for listening!

Please Subscribe to MishTalk email alerts.

Subscribers receive an email alert of each message as it occurs. Read the ones you like and you can unsubscribe at any time.

If you are subscribed and not receiving email alerts, please check your spam folder.