Can the United States’ high inflationary and low interest rate policies help China to grow even more? As we know how the United States is trying to keep the inflation rate high and interest rate low to promote consumption spending and bring in more revenues for government agencies. United States is doing this while also cutting back some spendings in general, because the United States needs to deal with both huge foreign and internal debts and the interest of the foreign debts. As United States prints more money to keep inflation rate high, this affects China’s inflation rate big time.
Why? China’s Yuan is still pegging to the Dollar, and so China’s inflation rate is probably shooting up really high when the inflation rate in the United States skyrockets. As China’s middle class is growing in astounding number, China’s middle class is sure to have a lot of cash to spend. Although Chinese tradition is to save more and spend less — Chinese had been poor for a long while since the downfall of China’s ancient kingdom and during Mao’s time — with more money Chinese people are sure to be able to afford better modern accommodations. As in the United States, high inflation may encourage Chinese to spend more since they may fear that prices are keep climbing for the accommodations (e.g., household items, cars, furnitures, electronic items, smartphones, etc…) that they need.
In the time that the Chinese are having a lot of money, they are sure going to spend for whatever that they must have and need. With the high inflation rate in China to boost the domestic Chinese consumers to spend even more, Chinese internal market may heat up even more and growth in consumption may as well skyrocket. This in turn will boost firms and companies from abroad to bet even bigger on the Chinese market as Chinese market is set to grow a lot higher in term of consumption lead.
Unlike the United States in term of forgoing home manufacturing capacity, China may boost consumption even without letting go home manufacturing capacity. Why? Out of 1.4 billion of people or so, if I’m not wrong on this China’s middle class is roughly around 300-400 million of people or so, and so around 1 billion more Chinese are still working their way toward becoming the new middle class citizens. With so many more Chinese that aren’t yet achieved the middle class status, they’re sure working hard in the home manufacturing based entities/market in hope of making a better living. This is why China may not yet be able to forgo the home manufacturing capacity for cheap labor is still possible in China’s poorer areas.
Meanwhile, China may try to boost their service sector to grow even more to compete with foreign service industries. On the top of all of that, China doesn’t need to print so much money as the United States to boost inflation rate, because the United States’ inflation rate alone is already pushing China’s inflation rate up. I think China’s market will grow even more as the United States prints more money to boost the inflation rate at home. The question is if the United States decides to tapering, what will happen to the markets and economic growths in China and the United States?
Lately, I got a bit of a fever in wanting to know more about the United States’ economy, thus I’m still reading a very long book on economics of sort. The book is “The Death of Money: The Coming Collapse of International Monetary System” by James Rickards. This book got advance details on various economic assessments, and so it is a bit dull for me to finish it. Nonetheless, I’m trying to anyway. So far, it seems this book got my attention on couple things, but let me mention one in this blog post.
As reading this book, I noticed that James Rickards mentioned the Fed intended to keep the interest rate very low and print a lot dollars in the hope of creating higher inflation. I think the Fed has had the idea of planting the fear — of seeing prices of products keep going up — into people’s mind. Why? If people are seeing prices are going up for everything, they fear the prices will continue to climb for some period to come. These people’s solution might be all about spending the money they’ve earned now on the products they’re really needing now, because they fear the prices for the products they need will continue to climb to ever higher prices. I surmise the Fed has thought this has been and continues to be a good option for the government to generate sale tax revenues. After all, people will have to pay sale tax for the products that they will buy, right?
As the United States economy isn’t recovering fast enough to the level of high confidence in various industries, and so the United States government is in a very tight spot of wondering how to generate a strong recovery for the United States economy. In this slow recovering period with low growth on job generation, the United States government is also in need of money to pay for the national projects. With tighter budgets for everything, the United States government is supporting the Fed to generate high inflation and low interest rate.
In my opinion the Fed’s design of low interest rate and high inflation can work for a short period of time. Right after the United States’ 2007-08 financial crisis, many people who were not directly hit by the financial crisis were having money still. These people could spend their money in low interest rate and high inflation period to sustain their comfortable lifestyle. Unfortunately, these people were the last supply for the Fed. After seven years of low growth and slow recovery and low growth on job generation, the people who spent their money in low interest rate and high inflation period might just have ran out of money. Going forward, it’s pretty hard to see how low interest rate and high inflation period can help the United States sustains the slow recovery. As of now, we are still talking about an economy that is trying to recover in a slow recovery period! And so the outlook for Fed’s design in hoping to generate growth for the economy and collecting some revenues might not look very bright!
Of course, I’m not expert on economics matters, thus I might be very wrong on what I had detailed. Nonetheless, it’s my opinion that the Fed might have to do something else besides printing money and keep the interest rate low. I guess we would have to wait and see how things will unfold for years to come.
In the video right after the break, Mr. H. “Woody” Brock speaks a lot about how United States can get back on track to a more productive future. I think he makes a lot of sense in the video. In the video he argues that nowadays United States cannot upset the bond market, because United States relies on the bond market to generate money. With a benign bond market, the cost of borrowing money will not be high (low interest rate) and the borrowing won’t be hard to do so. Nonetheless, when the bond market begins to doubt that the United States can ever pay back the debts, that is when the cost of borrowing money will be really high and devastated to the future of the country. Mr. H. “Woody” Brock argues that since the United States has to borrow more money to keep things in order, she has no choice but to be smarter about how she would go about and use the borrowed money. If using the borrowed money unproductively, the economy will continue to get worse and the borrow cost will go higher until everything gets unsustainable. He argues that if the country uses the money that she borrows from the foreign entities or entities within wisely, one example would be spending on fixing and building infrastructures that the country needs most, job creation might not be such a tough challenge. When jobs get created, he infers that there might be hope for the country in dealing with her massive deficits.
Afterthought: The things that Mr. H. “Woody” Brock suggest in the video might not be the things that definitely get United States out of the world of hurt, but the things he talks of are of common sense. I think Mr. H. “Woody” Brock might be right about what United States needs to do to reverse some of her economic bad lucks. Then again, what do I know?