CHINAMacroReporter

Why Inflation Should Not Be A Problem

‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities. We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’
by

|

CHINADebate

April 29, 2020
Why Inflation Should Not Be A Problem

Part 1: Getting Back to Work & Consuming Again / Fed Actions

Part 2: Why Inflation Should Not Be A Problem

Part 1

Getting Back to Work & Consuming Again

‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities. We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Malcolm Riddell: ‘Tom, what's top of mind right now?’

Tom Barkin: ‘This is going to be a deep downturn. I'm focused on how fast can we recover, and there are two pieces to it.’

  • ‘The simpler piece is how hard is it going to be for us to call people back to work? I'll call that “operational recovery.” We're closing in on the point where it's time to go back to work with the appropriate precautions.’
  • ‘The second piece – the one I'm really most focused on - is how long will it take for consumers to come back and shop? What is it going to take to get us back into the stores, into the restaurants, into traveling again, into concerts, into ballgames? I’ll call that the “confidence recovery,” and it’s going to be a lot harder.’

Tom: ‘I'm trying to get some insight from China.’

  • ‘I've looked at some ShopperTrak data that would suggest Chinese retail traffic is somewhere around 50 or 60% of what it was before.’
  • ‘China is interesting, in part, because they're eight to 10 weeks ahead of where the U.S. is.’
  • ‘That's a pretty slow trajectory, and I could imagine the same kind of slow trajectory here.’

Fed Actions

Malcolm Riddell:‘Now let's switch over to the Fed actions, and how you see what's been done so far, and what you have left in your arsenal to deal with this recovery?’

Tom Barkin:‘Well, it was only a month ago that there were a lot of articles written saying we didn't have any ammunition left. That wasn’t right.’

  • ‘I think it's striking to see how many things we've been able to move forward, led by Chairman Jay Powell and the Board of Governors.’

‘Just for context, in response to the 2008 financial crisis, we took actions such as lowering rates, forward guidance, and quantitative easing.’

  • ‘They were specifically designed for the environment that we were in then.’

‘In the situation we’re in now the banks are healthy, which wasn’t the case back then.’

  • ‘The yield curve is flat, not steep.’
  • ‘And the markets have again been quite volatile.’

‘So in addition to taking rates down - the traditional tool - we've been heavily engaged in trying to settle down the markets, which underpin lending to individuals and businesses.’

Malcolm:‘How are you calming down volatility in the markets?’

Tom:‘Well, the bid-ask spreads in the Treasury markets were quite wide, so we started buying Treasuries.’

  • ‘Same in the mortgage-backed markets, and we've introduced facilities around commercial paper, around asset-backed securities, around money market funds - to provide a backstop to those very important markets.’

‘Then Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allocated $434 billion to us and Treasury.’

  • ‘We’re using that money to create additional backstop facilities.
  • ‘Every dollar of it has to be approved by Treasury under the Dodd-Frank Act.’
  • ‘These are new facilities for the Fed, and ones we couldn't do if we didn't have Treasury agreement and funding.’

‘We've announced a municipal lending facility that should go live in a few weeks.’

  • ‘We've announced a Main Street lending facility for four-year loans with first-year payments deferred for middle-market businesses that need that kind of liquidity.’
  • ‘We've announced, and already expanded, some investment-grade bond facilities, both for new issues and for secondary offers, and so all those are now out there.’
  • ‘We also established a facility that is intended to help free up bank capital to make more small business loans through the Paycheck Protection Program (PPP).’
  • ‘All of those are new authorities we didn't have two weeks ago, and so we're plenty busy now.’

‘I do think we ought to be appropriately humble.’

  • ‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities.’
  • ‘We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Part 2

Why Inflation Should Not Be A Problem

'American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’

Malcolm Riddell:‘Economic theory tells us that all debt the U.S. is adding could be inflationary.’

  • ‘How concerned are you about inflation?’

Tom Barkin:‘I'm not of the view that anything we're doing right now is going to drive runaway inflation.’

  • ‘Part of that is because American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’
  • ‘The rise in power of purchasing departments, and the rise in power of consumer price transparency create quite a formidable wall against runaway inflation.’

‘A good example of this: When the tariff issues were hitting China, and then the virus was hitting China, you started seeing supply chain problems.’

  • ‘In both cases, you could have made a case that American companies could have been raising prices aggressively in the context of one or the other.
  • ‘And you just didn't see it in the numbers.’

‘Why not? If you compare today to 20 years ago, prices are a lot more transparent than they used to be.’

  • ‘You try to increase 5% to a consumer, and they're going to come up with another option. That's what the internet has enabled.’

‘And if you're a producer and your costs go up and you want to increase 5%, in a lot of cases you have to go talk to a Home Depot, or a Lowe's, or a Walmart, and you have to go make the case for your price increase.’

  • ‘Now those folks have built their businesses on everyday low prices, and they're not interested in taking any price increases.’

‘These big low-price retailers have purchasing departments whose job is zero cost increases.’

  • ‘And so if the supplier comes in at zero, they go, "Thank you very much.” ’
  • ‘If the supplier comes in at plus 2%,they say, "No, why don't you make it zero?" ’
  • ‘If the supplier comes in at plus 7%, the purchasing manager says, "I'd hate to bid this out, but if you force me to bid it out, I'll bid it out." ’

‘If you're a manufacturer, to raise your prices, you have to believe that all your competitors are going to do exactly the same thing, that your quality is unassailable, that you can't be replaced by somebody out of Malaysia, or Vietnam, or China - and very few manufacturers have that confidence.’

  • ‘If you do have the confidence, and if you push it through, the purchasing manager will start right then on next year's buying.’
  • ‘And that purchasing manager is going to go find somebody who can manufacture against you at a lower price.’

‘One other impact of the crisis I should mention: The big low-price retailers are going to get more share because smaller retailers are going to go under here.’

More

CHINAMacroReporter

February 8, 2021
Why the Anglosphere sees eye to eye on China
‘Some of America’s European allies are very wary of what they fear will be a new cold war with China. By contrast, the US is getting more support from the UK, Australia and Canada.’
keep reading
February 7, 2021
' "Longer Telegram" | To Counter China’s Rise, the U.S. Should Focus on Xi'
A strategy that focuses more narrowly on Xi, rather than the CCP as a whole, presents a more achievable objective.'
keep reading
February 7, 2021
'The Sources of Soviet Conduct'
'The main element of any United States policy toward the Soviet Union must be that of a long-term, patient but firm and vigilant containment of Russian expansive tendencies.’
keep reading
May 27, 2021
'Demography + Technology is Destiny'
The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
keep reading
May 27, 2021
'China: Births Falling'
‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
keep reading
May 27, 2021
'Demography + Technology is Destiny'
The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
keep reading
May 27, 2021
'China: Getting Old Before Getting Rich'
‘Over the past two generations, China has seen a collapse in fertility, exacerbated by Beijing’s ruthless population-control programs.’ ‘With decades of extremely low fertility in its immediate past, decades more of that to come, and no likelihood of mass immigration, China will see its population peak by 2027.’
keep reading
May 27, 2021
'China Bets on Productivity Over Population to Drive Its Economy'
‘Beijing has a two-pronged approach to maintaining economic growth as its population shrinks.’ ‘First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities.’ ‘Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.’ [see second chart above]
keep reading
May 27, 2021
'China: Getting Old Before Getting Rich'
‘Over the past two generations, China has seen a collapse in fertility, exacerbated by Beijing’s ruthless population-control programs.’ ‘With decades of extremely low fertility in its immediate past, decades more of that to come, and no likelihood of mass immigration, China will see its population peak by 2027.’
keep reading
May 27, 2021
'China: Births Falling'
‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
keep reading
May 27, 2021
'Why Demographics is (Close to) Destiny'
‘Demographics may not be destiny, but for students of geopolitics, they come close.’
keep reading
May 27, 2021
'Sex and the Chinese Economy'
‘A rise in China’s male-female ratio may have contributed to between one-third and one-half of the increase in its trade surplus with other countries.’ ‘The sex imbalance thus likely underpins an important source of tension between China and the US. Yet bilateral engagement has paid scant attention to this linkage.’
keep reading
May 27, 2021
'Lousy demographics will not stop China’s rise'
‘The old maxim ‘demography is destiny’ no longer holds in the same way that it used to.’ ‘A shrinking and ageing population may not have the same gloomy implications in the 21st century.’
keep reading
May 20, 2021
'Apple in China: No Plan B'
“This business model only really fits and works in China. But then you’re married to China.” ‘The Chinese government was starting to pass laws that gave the country greater leverage over Apple, and Mr. Xi would soon start seeking concessions. Apple had no Plan B.’
keep reading
May 20, 2021
'Tim Cook and Apple Bet Everything on China.'
‘For Apple, a clean break with China is impossible.’
keep reading
May 20, 2021
'Apple held hostage by its Chinese puzzle'
"The massive and complete supply chain ecosystem in China is key to the iPhone maker's success, but it has also created a gigantic organism that would struggle to move somewhere else."
keep reading
May 20, 2021
‘Censorship, Surveillance and Profits: A Hard Bargain for Apple in China’
‘Apple built the world’s most valuable business on top of China. Now it has to answer to the Chinese government.’
keep reading
May 20, 2021
Apple in China
‘But just as Mr. Cook figured out how to make China work for Apple, China is making Apple work for the Chinese government.’ ‘Behind the scenes, Apple has constructed a bureaucracy that has become a powerful tool in China’s vast censorship operation.’
keep reading
May 20, 2021
'Apple Reaches $2 Trillion'
“This business model only really fits and works in China. But then you’re married to China.” ‘The Chinese government was starting to pass laws that gave the country greater leverage over Apple, and Mr. Xi would soon start seeking concessions. Apple had no Plan B.’
keep reading
May 15, 2021
‘Scenario Three: Leadership Challenge or Coup
‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’
keep reading
May 15, 2021
Invitation to a Trivium Flash Talk: 'China's Data Environment from a Big-Picture Perspective.’
‘This talk is designed to cut through the tech and legal jargon, and lay out the top-level strategic rationale underpinning China's thinking on data. We'll cover:’
keep reading
May 15, 2021
Invitation to a Trivium Flash Talk: 'China's Data Environment from a Big-Picture Perspective.’
‘This talk is designed to cut through the tech and legal jargon, and lay out the top-level strategic rationale underpinning China's thinking on data. We'll cover:’
keep reading
May 15, 2021
After Xi: A Succession Crisis to Rock the World
A new risk to add to your analyses and strategic planning: A succession crisis in China. By removing term limits on his stay in office and by not naming a successor, Secretary General Xi Jinping ‘has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce,’ writes Richard McGregor of the Lowy Institute and Jude Blanchette of the Center for Strategic & International Studies
keep reading
May 15, 2021
‘Scenario Four: Unexpected Death or Incapacitation'
‘Even if the CCP’s claim that Xi Jinping has no designs to remain in office for life is true, his evisceration of succession norms leaves the country ill-prepared for his sudden death or incapacitation.’
keep reading
May 15, 2021
'Regime change in China is not only possible, it is imperative.'
‘We must make regime change in China the highest goal of our strategy towards that country.’ ‘The US and its allies cannot dictate to China the political system by which it is governed. But they can and must engineer conditions which embolden and enable those in China who also want regime change to achieve it.’
keep reading
May 15, 2021
After Xi: A Succession Crisis to Rock the World
A new risk to add to your analyses and strategic planning: A succession crisis in China. By removing term limits on his stay in office and by not naming a successor, Secretary General Xi Jinping ‘has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce,’ writes Richard McGregor of the Lowy Institute and Jude Blanchette of the Center for Strategic & International Studies
keep reading
May 15, 2021
'Regime change in China is not only possible, it is imperative.'
‘We must make regime change in China the highest goal of our strategy towards that country.’ ‘The US and its allies cannot dictate to China the political system by which it is governed. But they can and must engineer conditions which embolden and enable those in China who also want regime change to achieve it.’
keep reading
May 15, 2021
'After Xi: China's potentially destabilising succession crisis'
‘By removing de jure term limits on the office of the presidency — and thus far refusing to nominate his successor for this and his other leadership positions — Xi has solidified his own authority at the expense of the most important political reform of the last four decades: the regular and peaceful transfer of power.’ ‘In doing so, he has pushed China towards a potential destabilising succession crisis, one with profound implications for the international order and global commerce.’
keep reading
May 15, 2021
‘Scenario One & Two: Xi Steps Down'
‘In this scenario, Xi thwarts the current consensus by handing over his leadership positions to at least one individual from the current Politburo Standing Committee (as per existing regulations).’
keep reading
May 12, 2021
The Poem that Cost Billions
The billion dollar losses that came from quoting an 1,100-year-old poem, toWhy foreign companies in China have Stockholm Syndrome
keep reading
May 10, 2021
'A 1,100-Year-Old Poem Cost Meituan’s Outspoken CEO US $2.5 Billions'
‘On Monday, because of an 1,100-year old poem about events 2,200 years ago posted by the founder of food delivery giant Meituan, investors panicked, and sank the company’s market cap by $15.6 billion. And Meituan CEO Wang Xing, who posted the poem, lost $2.5 billion of his wealth.’
keep reading
May 9, 2021
'The Housing Bubble That Just Won’t Pop'
‘China’s cities are plagued by a diverging trend: high demand and exorbitant prices for residential properties in tier 1 cities and yet an oversupply in smaller, lower-tiered cities.’
keep reading
May 7, 2021
'Would China really invade Taiwan?'
‘Is Taiwan really "the most dangerous place on earth?" No. Or at least, not right now.’
keep reading
May 7, 2021
'Don't Help China By Hyping Risk Of War Over Taiwan'
‘China is marshaling its full range of capabilities to intensify pressure on Taiwan below the threshold of conflict.’ ‘Beijing's goal is to constantly remind Taiwan's people of its growing power, induce pessimism about Taiwan's future, deepen splits within the island's political system and show that outside powers are impotent to counter its flexes.' ‘Its approach is guided by the Chinese aphorism, "Once ripe, the melon will drop from its stem [瓜熟蒂落]," ’‘This strategy may require more time than war, but it would come at less cost and risk to Beijing.’
keep reading
May 7, 2021
'China Threat: A "perception gap" between the U.S. and Taiwan'
‘While the U.S. talks up the medium-term military threat, the democratic island sees the moves as part of a bigger, more immediate problem: "gray zone" warfare from Beijing that is meant to wear down the morale of not just the Taiwanese military, but also the island's people.’
keep reading
May 7, 2021
'The most dangerous place on Earth'
‘Taiwan is an arena for the rivalry between China and America.’ ‘Although the United States is not treaty-bound to defend Taiwan, a Chinese assault would be a test of America’s military might and its diplomatic and political resolve.’
keep reading
May 7, 2021
'The Most Dangerous Place on Earth'
‘China's top priority now and in the foreseeable future is to deter Taiwan independence rather than compel unification,’ note Richard Bush (Brookings (retired)), Bonnie Glaser (German Marshall Fund in America), and Ryan Hass (Brookings Institution)
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.