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 11, 2021
'The Biden Team Wants to Transform the Economy. Really.'
‘Biden and his more activist advisers hope to modernize key industries and counter an economic threat from China, swiftly emerging as the world’s other superpower. “The package that they put together is the closest thing we’ve had to a broad industrial policy for generations, really,” says Scott Paul, the president of the Alliance for American Manufacturing.’
keep reading
February 10, 2021
‘What the ‘Hong Kong Narrative’ gets wrong'
‘For a significant cohort of the [“pro-democracy”] protesters, the more accurate label would be “anti-China activists.” The one thing that seems to unite them is not a love of democracy, but a hatred of China.'
keep reading
April 15, 2021
'TSMC faces pressure to choose a side in US-China tech war'
‘Taiwan Semiconductor Manufacturing Company (TSMC) has maintained its historic position of neutrality, reflected in the company’s strategy of “being everyone’s foundry”.’
keep reading
April 14, 2021
The Belt & Road in the Post-Pandemic World
In this issue of China Macro Commentary, I have focused just on the ‘Digital Silk Road’ and how it supports the business expansion of Chinese tech companies, and on BRI ‘connectivity’ projects: ports (China is involved in 93 around the world) and on the growing China-Europe freight trains traffic (This wasn't covered sufficiently in the Report, so I included a recent article from the Wall Street Journal), plus on the U.S.'s failure to meet the BRI challenge.
keep reading
April 13, 2021
'2021 Annual Threat Assessment of the U.S. Intelligence Community'
‘China increasingly is a near-peer competitor, challenging the United States in multiple arenas—especially economically, militarily, and technologically—and is pushing to change global norms.’
keep reading
April 13, 2021
In Battle With U.S. for Global Sway, China Showers Money on Europe’s Neglected Areas
‘The number of freight trains running between China and Europe topped 12,400 last year, 50% higher than in 2019 and seven times that of 2016, according to Chinese authorities.’
keep reading
April 11, 2021
'Why manufacturing matters to economic superpowers'
‘Whether such reshoring matters for national economies depends very much on the industry.’
keep reading
April 11, 2021
China in Jamie Dimon's Letter to Shareholders
‘China does not have a straight road to becoming the dominant economic power’.
keep reading
April 11, 2021
'Alibaba’s rivals on alert after China’s regulators hand out record fine'
“Everyone with a clear mind won't self-regulate, you just pretend that you do. Who will pay for the loss if you lost your competitive advantage because you self-regulated and others didn't?”
keep reading
April 10, 2021
Alibaba: 'Promote the healthy and sustainable development of the platform economy'
‘From the perspective of the long-term and healthy development of the platform economy, regulation by law and support for development are not contradictory, but are complementary and mutually reinforcing.'
keep reading
April 9, 2021
'The Best Explanation of Biden’s Economic Thinking I’ve Heard'
‘When President Biden’s thinking about the infrastructure investments necessary, a lot of it is in contraposition to what he is seeing China doing in terms of strategic investments.’
keep reading
April 8, 2021
Liu Ge: Competing with China a farfetched guise for US’ infrastructure plan
‘Historically speaking, it seems the only way for the US government to make costly public investments was to create an adversary that is presumed to threaten its security.’
keep reading
April 8, 2021
'Antony Blinken interview: The secretary of state offers a window into Biden's foreign policy decisions'
‘ “Our goal is not to contain China, hold China back, keep it down,” Blinken underlined.’
keep reading
April 8, 2021
'US adds Chinese supercomputing companies to export blacklist'
‘The Biden administration took its first trade action against China on Thursday, adding seven Chinese supercomputing developers to an export blacklist for assisting Chinese military efforts in a move that will likely further escalate frosty tensions between the world's two largest economies.’
keep reading
April 7, 2021
'Remarks by President Biden on the American Jobs Plan'
‘Look, do we think the rest of world is waiting around? Take a look. Do you think China is waiting around to invest in this digital infrastructure or in research and development?’
keep reading
April 7, 2021
China: 'Power Trader'
‘The theory of power trade better explains China’s economic and trade policies than does the theory of free trade or protectionism,’
keep reading
April 6, 2021
'Train Wreck: Ultimately companies have to choose.’
MUST READ: Bill Reinsch succinctly but brilliantly summarizes the situations in China and the U.S. and between the two.
keep reading
April 6, 2021
'Buy American!': Pushing U.S. Companies to Onshore Supply Chains
The debate about how to deal with China commercially ‘has moved in two directions: running faster—improving our innovation capabilities in critical technologies to better compete with China—and slowing China down by restricting its access to U.S. technology.’
keep reading
April 4, 2021
'Why Defending Taiwan is in the U.S. National Interest'
‘As long as Washington assesses that American security is best served by defending forward—an approach that has served the United States well over the past 70 years—Taiwan’s de facto independence will remain a key US interest and driver of American policy in Asia.’
keep reading
April 4, 2021
'Why China Is Going All "Wolf Warrior," All the Time'
‘All this is to say that, living in Beijing as I do, I think the current approach is predictable and consistent with everything else we are seeing in China in the New Era.’
keep reading
April 3, 2021
'With Swarms of Ships, Beijing Tightens Its Grip on South China Sea'
‘Not long ago, China asserted its claims on the South China Sea by building and fortifying artificial islands in waters also claimed by Vietnam, the Philippines and Malaysia.’
keep reading
April 2, 2021
'Genesis Celebrates Launch In China With Dazzling, World Record-breaking Drone Show Over Shanghai's Iconic Skyline'
'The spectacular visuals were coordinated to present the world of Genesis, delivering an audacious storytelling concept while also breaking the Guinness World Records for "The Most Unmanned Aerial Vehicles (UAVs) airborne simultaneously".’
keep reading
April 2, 2021
Mo' Infrastructure, Mo' Problems Copy
‘China’s reliance on building roads, railways and airports to support growth has caused a spike in debt, with some of that money funneled into unnecessary infrastructure and uneconomic boondoggle developments.’
keep reading
April 2, 2021
How Does the U.S. Compare to China?
Two reports from Bloomberg – ‘Biden Starts Infrastructure Bet With U.S. Far Behind China’ and ‘Biden’s Biggest-Ever Investment Plan for U.S. Still Trails China’ – highlight a few of the differences.
keep reading
April 2, 2021
USTR | '2021 National Trade Estimate Report on FOREIGN TRADE BARRIERS'
‘Made in China 2025 seeks to build up Chinese companies in the ten targeted, strategic sectors at the expense of, and to the detriment of, foreign industries and their technologies through a multi-step process over ten years.’
keep reading
April 2, 2021
‘2021 Report Card for America’s Infrastructure’
‘The 2021 Report Card for America’s Infrastructure reveals we’ve made some incremental progress toward restoring our nation’s infrastructure.’ ‘For the first time in 20 years, our infrastructure is out of the D range. America's Infrastructure Scores a C-.’
keep reading
April 2, 2021
'US to make it easier for diplomats to meet Taiwanese officials'
'Plan to loosen restrictions on contacts with Taipei threatens to provoke China.'
keep reading
April 2, 2021
Biden Starts Infrastructure Bet With U.S. Far Behind China
Even though he didn’t rely solely on the China challenge to justify his new American Jobs Plan; devoted to infrastructure and more, President Biden certainly he had China in his sights. Because as Jonathan Hillman, a senior fellow at the Center for Strategic and International Studies, wrote“The United States is entering what could be a decades-long competition in which economic and technological power will matter just as much, if not more, than military might.” “Starting this race with decaying infrastructure is like lining up for a marathon with a broken ankle.”
keep reading
April 2, 2021
President Biden Lays Out His ‘American Jobs’ Plan
‘It has become a cliché in U.S. policy circles that the best China policy is to invest in core U.S. capabilities: education, infrastructure, and research and development,’ writes Evan Medeiros of Georgetown University in ‘How to Craft a Durable China Strategy,’ in Foreign Affairs.
keep reading
April 2, 2021
'China’s Dangerous Double Game in North Korea'
‘Beijing’s North Korea policy is primarily motivated by a desire to counter U.S. power in the Asia-Pacific region and increase Chinese influence on the Korean Peninsula.
keep reading
April 2, 2021
'Japan’s Suga to Be the First Foreign Leader to Meet With Biden'
‘Japan walks a narrow line as it seeks to maintain close ties with its only military ally, the U.S., while avoiding damage to economic ties with its biggest trade partner, China.
keep reading
April 1, 2021
'Convicted in Hong Kong'
‘Everyone in the former British colony understands the message being sent from Hong Kong’s new masters in Beijing:’
keep reading
April 1, 2021
'U.S. dollar at risk as China races ahead on digital yuan'
‘So why should America care about any of this?’
keep reading
April 1, 2021
PRC Foreign Ministry Response to the USTR's 'National Trade Estimate Report'
‘The accusations and slanders made by the US against China's industrial policies are groundless.’
keep reading
March 31, 2021
'Consumer boycotts warn of trouble ahead for Western firms in China'
‘Western executives in China cannot shake an unsettling fear that this time is different.’‘Their lucrative Chinese operations are at rising risk of tumbling into the political chasm that has opened between the West and China.’
keep reading
March 31, 2021
'How the Pandemic is Changing the Belt & Road Initiative'
‘The building of roads, railways, ports, and power plants is giving way to a BRI centered on technology—primarily telecommunications, connectivity, health care, and financial services.’
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.