[Texgreen] The politics/economics of oil-led inflation

[Roger Baker]

Excellent analysis below, IMO.

If the inflation numbers in the US per month are now 4.1% X 12 months  
as recently reported, it means we have 4.9% real inflation. But if  
you buy US treasury bonds, or lend at prime, you only get a 5.25%  
return. In other words, lenders like China are only getting 1/3%  
interest on their money loaned by parking their money for now in US  
treasury bonds.

So to keep landers lending, the interest rate has to go up. That  
tends to depress the economy, making it harder than ever for American  
consumers to keep from falling into deep debt, all while bearing the  
additional burden of paying off a large accumulated domestic US debt.

The only reason China has been willing to lend so much is because US  
consumers were willing to buy so much of what they made. For China, a  
third of a percent interest is not a very good return on a global  
reserve currency haunted by such troubles and backed up with little  
but the promise of a government that seems intent on running the  
world by military force rather than economic strength.

-- Roger


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<http://news.independent.co.uk/business/news/article1222295.ece>

Bank's Bean says cheap goods 'banquet' may be over
By Julia Kollewe
Published: 28 August 2006

The Bank of England's chief economist Charlie Bean has warned that
record oil prices could kill off the era of cheap goods, making it
harder for policymakers to keep a lid on inflation.

Cheap imports from the Far East and eastern Europe have kept the prices
of goods down. In spurring greater competition, globalisation has
provided a "favourable tailwind to central banks' attempts to hold
inflation down," Mr Bean said at the annual gathering of central bankers
in Jackson Hole, Wyoming, sponsored by the Kansas City Federal Reserve
Bank. Yet he cautioned: "Winds can be changeable and the process may go
into reverse at some point. To an extent this may already be happening
.... There is no never-ending banquet under the sun."

He pointed to the near-tripling of oil prices over the last couple of
years, and the rise in commodity prices more generally, as global demand
has rocketed, especially from China's rapidly-growing economy. He called
the rise in oil prices the "flip-side" of globalisation. This meant
policy makers should not look just to inflation measures that strip out
energy costs because they are regarded as less volatile. The focus on
measures of core inflation was "highly suspect", as they strip out
soaring energy prices while retaining falling goods prices.

Mr Bean admitted that the impact of higher oil prices had been
relatively benign because wages and prices have not reacted in the way
they did during the oil crisis of the 1970s. That is partly down to
policy makers' efforts to prevent an inflationary spiral, but also
because of greater competition which means businesses often feel unable
to pass on energy price increases to their customers and instead seek to
cut other costs.

Another factor is that "workers have less scope to negotiate higher
earnings when faced with potential offshoring and actual or threatened
use of migrant labour", he said.

Mr Bean argued that while globalisation can bring about swings in the
prices of many goods, central bankers still have control of overall
inflation. "Globalisation represents a shock to relative, not absolute,
prices. What happens to the general price level depends on what monetary
policy makers then decide to do." Yet he admitted that increased capital
market integration can reduce central banks' leverage over domestic
interest rates. "So the impact of policy decisions might become rather
less predictable. Certainly maintaining the very high degree of
inflation stability that we have seen over the last decade may prove
difficult."

In a separate paper, the Harvard University economist Kenneth Rogoff
argued that volatility in stock prices and exchange rates had been
"perhaps the greatest challenge to monetary policy during the
globalisation period."

Ben Bernanke, the Federal Reserve chairman, issued a strong warning
against the spread of protectionism at the Jackson Hole gathering on  
Friday.