Federal Reserve’s Interest-Rate Cuts are Limiting Asian Counterparts’ Options to Curb Inflation

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Bloomberg reports that, “Under Bernanke’s chairmanship, the Federal Reserve’s steepest interest-rate cuts since 1990 are limiting his Asian counterparts’ options to curb inflation.” Instead of raising their own borrowing costs or letting their currencies appreciate faster, governments are resorting to regulating meat and egg prices in China, stockpiling cooking oil in Malaysia and subsidizing utility bills in Indonesia and the Philippines.

“Such measures may backfire. Artificial price curbs and subsidies only feed more demand for oil and other commodities, and ultimately will make it harder to contain inflationary pressures worldwide, officials from the Group of Seven nations warned at their Feb. 9 meeting in Tokyo.

“Asia’s governments have experience with the destabilizing effects of runaway prices. China’s inflation contributed to the unrest that triggered the 1989 Tiananmen Square demonstrations. Indonesia’s attempt to increase fuel costs in 1998 was the spark for protests that led to the ouster of President Suharto after almost 32 years in power.”

Colleague Dan Denning, at the helm of the DR-Australia, believes Bernanke’s cuts “might be undermining social and political stability in Asia… ”

“Not that it was his intention to do so, but maybe Bernanke can succeed where than man standing in front of the tank in 1989 could not, putting massive political pressure on the communist regime. Such are the unintended consequences of playing around with the value of money. A surprising result, yes. But not impossible.

“Asian governments aren’t letting the rising cost of food be passed on to consumers in the form of high prices. Instead, they are setting price controls and subsidising consumption or providing rebates.

“You have total pricing dysfunction.

“On the one hand, years of cheap credit has led to over production of scarce resources based on demand that’s not sustainable when credit contracts.

“On the other hand, you have governments blocking higher prices from being passed through to consumers, where they would eventually curb demand.

“What do you get in the end? Well I reckon you’d get patterns of resource consumption that hit a brick wall sooner or later. And then you will have some really [angry] people who can’t find any cooking oil or any food to cook in that cooking oil.

“It’s one thing to replace cars with bicycles, or to cut energy consumption by shutting factories, or turning your air conditioner down a few degrees. But what do you substitute for the calories you get from, say, wheat?

“Let them eat dirt! I don’t know. But I’m storing up on canned goods.”

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. Why don’t the Asian countries wisen up and stop printing money? Their currencies will go up and their imports will become cheaper.

    Reply
  2. This might be good for the dude on the ground, but the people that have influence over monetary policy would tend to be those that benefit more from exports being cheapers… my general theory anyway.

    Live Free or...
    February 21, 2008
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  3. John

    I guess the problem with the Asian currencies is like any other nation at the moment or in the near future. They have to simultaneously address inflation (commodity imports mostly) or an economic slowdown (asian nations are very export dependant). Stronger currency will reduce inflation but reduce exports and vice versa. That would be the usual reasons given by the financial press and the like for the observed policy formulation in the asian parts.

    In my opinion though I think that there are superior global agendas which are dictating the international financial system (currencies, commodities, interest rates, etc) which the common people are not being made aware of.

    Reply
  4. Think about countries like China though. They are producing way more than they are consuming, because their currency is so cheap. They literally can’t afford the fruits of their own labor. If they simply allowed their currency to appreciate, there would be more domestic demand to make up for the loss in international demand.

    Right now, all these countries are producing and shipping the stuff over to the US, while the US is shipping back dollars. They would be much better off economically if they just simply cut the US out of the loop, shipped the goods to themselves, and consumed it themselves with their own stronger currencies.

    Then again, you could be right about the “global agendas”, although I’m not big on conspiracy theories.

    Reply

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