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And will continue to do so as long as the U.S. dollar remains under downward
pressure and the Chinese policy is to cushion the greenback's decline. Chart
1 illustrates the result of China's inflation problem - i.e., rising
prices for goods/services, financial assets and real assets. Chart 2 illustrates
the reason for China's inflation problem - i.e., excessive credit creation
by the People's Bank of China (PBoC), the Chinese equivalent of the U.S. Federal
Reserve. The PBoC is increasing the size of its balance sheet at greater than
30% annualized. And the principal driver of that balance sheet growth is foreign
assets - assets acquired through dollar-support activities. The PBoC can raise
reserve requirements until the oxen come home but will not succeed in slowing
Chinese inflation (monetary growth) until a policy decision is made to stop
supporting the dollar.
Chart 1

Chart 2

Small Businesses Join Big Businesses and Households in Their
Pessimism
The Small Business Optimism Index, which is tallied by the National Federation
of Independent Business, dropped 1.1 points in October to a level of 96.2.
As shown in Chart 3, this October level is below levels that prevailed just
before the past two recessions. Charts 4 and 5 show qualitatively similar results
for large corporation CEOs and for the little people - households. It seems
as though just about everyone is as or more pessimistic about the economic
landscape as they were just prior to the past two recessions. Everyone, that
is, except the stock jockeys today. I wonder what Kool-Aid they are drinking.
Chart 3

Chart 4

Chart 5

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Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
The information herein is based on sources which The Northern Trust Company
believes to be reliable, but we cannot warrant its accuracy or completeness.
Such information is subject to change and is not intended to influence your
investment decisions.
Copyright © 2005-2009 The Northern
Trust Company
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