China Has an Inflation Problem

By: Paul Kasriel | Wed, Nov 14, 2007
Print Email

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



Paul Kasriel

Author: Paul Kasriel

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

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. 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 © 2005-2012 The Northern Trust Company

All Images, XHTML Renderings, and Source Code Copyright ©