Mish's Global Economic Trend Analysis

Massive Inflation in China, US Inflation Nonexistent
California Cut 37,000 Government Jobs in September; Much More to Come
German Economy Minister Accuses US of Currency Manipulation

Massive Inflation in China, US Inflation Nonexistent

Posted: 24 Oct 2010 06:51 PM PDT

Those looking for massive inflation cannot find it in the US where credit contraction is still underway. However, one can find massive inflation in China, where increases in money supply and credit run rampant, and property and food prices soar.

Please consider China Hides Rampant Inflation in Money Binge: Patrick Chovanec

High-end property prices in dozens of Chinese cities have doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at $3,000 an ounce, up 50 percent in the past couple of months, while packets of certain types of dahongpao tea are going for $30,000 a kilogram. Art and wine auctions in China are pulling in record prices, while the Shanghai stock market surged 8.5 percent last week to the highest level in almost six months.

If it seems like there's a lot of money sloshing around the Chinese economy, that's because there is. Over the past two years, M1 expanded by 56 percent, M2 by 53 percent. Currently, even with much-touted "cooling measures," both are still growing at an annual rate of about 20 percent.

...most people in China seem content to believe their country has found a fantastic new formula for prosperity.

In reality, there is rampant inflation in China. It's just showing up in asset prices. The new money that was created entered the economy as loans, mainly to fund investment in fixed assets. When it finally reached consumers, they bought tangibles, like property, instead of spending on consumer goods.

Chinese Inflation Shows Up in Food and Property Prices

The New York Times reports Food and Property Prices Drive China's Concern Over Inflation

China's roaring economy slowed in the third quarter, rising at an annual rate of 9.6 percent after the government took steps to prevent overheating, according to data released Thursday. But inflation last month hit its highest rate in nearly two years.

The government said the consumer price index, the broadest measure of inflation, rose 3.6 percent from the previous September. It was the highest rate in China since 2008, largely because of food prices, which rose 8 percent last month.

Interest rates on savings deposits in China had recently fallen to about 2.25 percent a year before the decision Tuesday. (The government-mandated rate is now 2.5 percent.) But inflation has risen steadily this year, which means bank depositors are essentially facing a negative interest rate return.

And yet, things may be even worse than the consumer price index suggests. A growing number of analysts say inflationary pressure is stronger than the price index indicates, because it is heavily weighted toward food — particularly pork prices. Rising energy, property and transportation costs are not as significant a factor in the index. And even the price increases of many food items — aside from pork — are also not adequately weighed or calculated, analysts say.

Basket of Nonsense

These stories highlight the problems of measuring "inflation" with a basket of consumer prices. The Greenspan and Bernanke Feds both made huge mistakes by ignoring property prices.

It is actually impossible to pick a representative basket of goods and services. Moreover, and more importantly, even if one could pick such a basket, bubbles caused by inflation can form in equities, commodities, land prices, housing, or other assets.

Please remember this is a global economy. Prices, especially commodity prices, are set at the margin, and based on global demands, not just on demands in the US.

Many have misguidedly pointed to rising commodity prices as proof of inflation. All things considered, that "proof" pertains not to the US, but rather to China where credit, monetary, and price inflation are all clearly running rampant.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

California Cut 37,000 Government Jobs in September; Much More to Come

Posted: 24 Oct 2010 11:25 AM PDT

The LA Times reports Government job cuts ravage California

Weighed down by a struggling economy, government agencies in California shed 37,300 workers last month — more jobs than were lost in the private sector — as cities and counties made their biggest payroll cutbacks since at least 1990.

What's more, analysts see more job cuts ahead as California faces an estimated $10-billion shortfall in the state budget that the next governor must address. Cities and counties, meanwhile, are still struggling with tepid sales and property tax revenue.

Cities across the state have taken stringent measures to balance their budgets, said Eva Spiegel, a spokeswoman with the League of California Cities.

Oakland laid off 80 police officers and delayed pothole repairs. Fullerton laid off 14 police officers and three firefighters, cut library hours and closed restrooms at several parks. Oceanside laid off 28 police officers and three firefighters, closed a swimming pool and a recreation center and eliminated the city Bookmobile.

Overall, the state's unemployment rate remained stuck at 12.4%, one of the highest in the nation. The state lost a net 63,600 jobs in September. Local governments shed 32,400 jobs, according to the monthly report from the state Employment Development Department released Friday.

Taxable sales plummeted 18.5% in California from 2006 to 2009 and are expected to remain relatively flat this year, according to the National University System Institute for Policy Research in La Jolla.

The National League of Cities reported this month that cities across the country were making their sharpest cuts in at least a quarter of a century. Nearly 80% of city finance officers in a survey reported laying off staff, and 87% said their cities were worse off financially this year than last year.

Taxable Sales Down 18%

Those last two paragraphs are the key to understanding one of the things I have been saying, that there is no recovery in sales.

Every month, when retail sales numbers come out, I question them. Here is my article from October 15: Retail Sales Rise More Than Forecast; Once Again I Ask "Really?"

Retail sales may be at their best point in the year, but sales are certainly not within 3% of the all time high [as government data shows]. If they were, tax revenue collection would be exceeding all time highs given increases in sales taxes.

Sales Tax Collections Down 5.9% June 2010 vs. June 2008

In spite of numerous sales tax hikes, tax collections are still 5.9% lower than two years ago. Moreover, June of 2008 was not the pre-recession peak. November of 2007 was the pre-recession peak.

Bear in mind those statistics are as reported in Retail Sales Rise .4% from July - How Far to Pre-recession Levels? Where to from Here? reflective of the second quarter.

See link for several charts.

Unless consumers have gone on a tear in the third quarter (highly unlikely with renewed slowdown in housing as well as the recent Gallup survey above), these retail sales reports are simply not believable.

What's clear is the methodology is flawed. By how much is the question. The way to figure out how much is to factor in all sales tax hikes and compare state sales tax collections. I will take another look at that as time permits.

Expect More Cutbacks, Lots More

Just a few days ago I penned, Severe, Life-changing, and Consciousness-Altering State Budget Cuts Coming.

The LA Times article is but a start for what I envision. Moreover, it does not even begin to address the fact that California Pension Promises Exceed 550% of State Tax Revenue by 2012; A Look at Solutions.

Finally, it should be crystal clear that Los Angeles, Oakland, San Diego, and numerous other cities in California and nationwide are bankrupt, mostly over public union pension promises that cannot be met.

Here are a few posts:

The most galling thing in all of this is public unions across the country are demanding more tax hikes so they can receive benefits those in the private sector can only dream about.

Indeed, most of the police, fire, and teacher layoffs underway would not have to happen, if only the unions would accept cutbacks in pay and benefits. Instead, senior union members always vote to toss the junior members to the dogs, then have the gall to blame voters for not hiking taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

German Economy Minister Accuses US of Currency Manipulation

Posted: 24 Oct 2010 01:19 AM PDT

At long last a major player is finally pointing a the currency manipulation finger where it needs to be placed, the US.

Please consider Germany Says Fed Is Headed 'Wrong Way' With Monetary Easing

The Federal Reserve's push toward easier monetary policy is the "wrong way" to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.

Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank's efforts to jumpstart the world's largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle.

"It's the wrong way to try to prevent or solve problems by adding more liquidity," Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel's government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.

"Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate," Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motors Co.'s German Opel unit.

The Big Point

I have been saying for years that the US was every bit the currency manipulator we accuse China of being. My stance is that interest rate policy decisions in and of themselves are manipulative.

Moreover, we have since gone one step further with futile unwarranted rounds of quantitative easing baked into the cake.

Thankfully, the German economic minister is willing to say what anyone with an ounce of common sense has known for a long time: "Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate."

Correction:
Rainer Bruederle is "Bundesminister für Wirtschaft und Technologie", "Federal Minister for Economy and Technology", not Finance Minister. He was filling in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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