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
March 31, 2021
Chinese Boycotts are the Least of Your Worries
‘For chief executives [and boards] around the world, watching the Chinese government go after Swedish clothier Hennes & Mauritz AB is excruciating — facing the evaporation of your hard-won China business over political issues largely out of your control,’ writes Michael Schuman in Bloomberg.’ ‘But it could be the new normal.’ ‘As relations between China and the U.S. and its allies deteriorate, Western businesses could increasingly get dragged into the fray.’
keep reading
March 31, 2021
'The Threat the U.S. Isn't Answering'
‘If BRI meets little competition or resistance, Beijing could become the hub of global trade, set important technical standards that would disadvantage non-Chinese companies, lock countries into carbon-intensive power generation, have greater influence over countries’ political decisions, and acquire more power-projection capabilities for its military.’
keep reading
March 31, 2021
'China Is Missing from the Great Inflation Debate'
‘Once again, massive fiscal spending in the United States has invited warnings of inflation and triggered dark memories of the 1970s. But these fears are based on a model that has since been obliterated by economic realities – not least the rise of China, which has fundamentally reshaped the US and global economies.’
keep reading
March 31, 2021
'Dominating the Digital Silk Road'
‘China’s Belt and Road Portal reports the Digital Silk Road has enabled six thousand Chinese internet companies and more than ten thousand Chinese technology products to enter foreign markets.’
keep reading
March 31, 2021
'Biden administration maintains Trump policy on Hong Kong'
'State department concludes territory should not receive preferential treatment under US law.'
keep reading
March 31, 2021
'China Owns, Partially Owns, or Operates 93 Ports'
‘Chinese firms own, partially own, or operate at least ninety-three ports across the globe.’
keep reading
March 30, 2021
'Profit or principle is the hard choice for foreign companies in China' George Magnus
‘Business risks for foreign companies in China are increasing after the recent exchange of sanctions between Beijing and western governments.’‘For foreign companies in China, the options seem delicately balanced. If they stand up for principles, they may put revenues at risk and will incur extra costs as they develop new supply chains. Yet if they prioritise their China profits, they could do irretrievable damage to their brands at home and in other markets, falling foul of shareholders and changing governance requirements.’‘It is an invidious choice but the latter is likely to be far more damaging to longer term performance and earnings, and corrosive of trust in the brand.’
keep reading
March 30, 2021
'How China keeps stumbling on the global stage' John Pomfret
‘Across the globe, Xi’s diplomatic representatives in Europe, Beijing, Hong Kong, Canada, Australia and elsewhere, are lifting up rocks and smashing their own feet.’‘The moves are befuddling — with a buoyant economy and a practically covid-free country, China is poised to see its influence rise if it plays it smart. But it’s not; instead, it’s alienating individuals and nations across the world.’‘I’ve been studying China for my entire adult life and I have to admit to being bewildered by China’s performance.’‘But I’m in good company. Thirty-one years ago, the great political scientist Lucian Pye wrote, “Just when all appears to be going well, Chinese officials create problems for seemingly unaccountable reasons.” ’
keep reading
March 30, 2021
'An Alliance of Autocracies? China Wants to Lead a New World Order.'
‘The world is increasingly dividing into distinct if not purely ideological camps, with both China and the United States hoping to lure supporters.’
keep reading
March 29, 2021
'Global Cycle Notes: U-Turn': China
‘A U-shaped recovery in the services sector beckons, but it’s still difficult to describe just what it will look like. No event in economic history compares, and the range of outcomes for wages, prices, employment, and financial markets is large.’
keep reading
March 28, 2021
‘At a Crossroads: The Next Chapter for FinTech in China’
‘As financial innovation has gained traction and the firms driving it have grown into sizeable players, the dynamic between innovators and regulators has begun to shift. Regulatory agencies have started to be more proactive in supervising the activities of technology firms after realizing that the size of many technology firms and FinTechs means they could threaten financial stability and peace in society if their innovation efforts and business practices were overly aggressive.’
keep reading
March 28, 2021
'New Trade Representative Says U.S. Isn’t Ready to Lift China Tariffs'
'The U.S. isn’t ready to lift tariffs on Chinese imports in the near future, but might be open to trade negotiations with Beijing, according to U.S. Trade Representative Katherine Tai.'
keep reading
March 28, 2021
China is not just shackling Hong Kong, it is remaking it
After the National People’s Congress, ‘election reform’ in Hong Kong, the dustup between the U.S. and China in Anchorage, and China’s going all ‘Wolf Warrior’ on the EU, that’s not such a bad thing.
keep reading
March 26, 2021
Beijing Targets American Business-2
'American businessmen, wishing for simple, lucrative commercial ties, have long resisted viewing U.S.-China relations as an ideological struggle. But strategic guidance issued by the leaders of both countries make clear the matter is settled: The ideological dimension of the competition is inescapable, even central.'
keep reading
March 26, 2021
'H&M, Nike Pay With China Boycotts on Xinjiang Human Rights Stance'
‘While both Western and Asian companies have frequently been targets of Chinese nationalism over the years, the latest flurry signals a shift in strategy by President Xi Jinping’s government as it confronts a more unified approach from the U.S. and its allies.’
keep reading
March 26, 2021
'The Illiberal Tide'
But even more problematic is that the reporting on any given action by another country may look so benign to the non-Chinese reader that he or she dismisses it as something China, even when it reacts forcefully, couldn’t be serious about. That is a mistake. Too often what looks ‘benign’ to the rest of the world is as serious as a train wreck to Xi Jinping.
keep reading
March 26, 2021
Beijing Targets American Business-1
‘Beijing’s message is unmistakable: You must choose.’‘If you want to do business in China, it must be at the expense of American values. ‘‘You will meticulously ignore the genocide of ethnic and religious minorities inside China’s borders; you must disregard that Beijing has reneged on its major promises—including the international treaty guaranteeing a “high degree of autonomy” for Hong Kong; and you must stop engaging with security-minded officials in your own capital unless it’s to lobby them on Beijing’s behalf.’
keep reading
March 25, 2021
China Goes All 'Wolf Warrior' on the U.S. & the EU
Today is the Tracker’s first issue. Covered here are two events where China went all 'Wolf Warrior' first on the U.S. and then on the EU.
keep reading
March 25, 2021
3 | China explains why it is going all 'Wolf Warrior' on the EU
China has found that bullying works a lot of the time, Why is China engaging in "Wolf Warrior" diplomacy
keep reading
March 25, 2021
2 | In Anchorage, Yang Spoke for the Party Leadership
‘Yang's temper tantrum has been interpreted by some commentators as being all about Chinese domestic politics. But it would be a mistake to see Yang's performance as mere bluster designed for home consumption. In Anchorage, he was speaking for the top leadership of the Communist Party.’
keep reading
March 25, 2021
2 | More to come?
‘This isn't about siding with America, it's about defending European sovereignty against a bully.’
keep reading
March 25, 2021
1 | Bitter Alaska Meeting Complicates Already Shaky U.S.-China Ties
'Mr. Yang, also noted “important disagreements” remained, and in remarks to Chinese state media suggested Beijing wouldn’t back down.'
keep reading
March 25, 2021
1 | The first U.S.-EU alliance against China
"Europeans will have to step up their reaction against China after insults, intimidation and sanctions against scholars and MPs. This isn't about siding with America, it's about defending European sovereignty against a bully."
keep reading
March 24, 2021
'There Will Not Be a New Cold War' Thomas Christensen
‘China’s vital position in the global production chain and the lack of struggle for ideological supremacy between authoritarianism and liberal democracy mean that the rise of a new Cold War is unlikely.’
keep reading
March 21, 2021
Just About in Place
To help us understand the makeup of the team, The Wire China has put together a great chart with bios of each member.
keep reading
March 21, 2021
'A Taiwan Crisis May End the American Empire' Niall Ferguson
‘No matter what other issues Kissinger raised — Vietnam, Korea, the Soviets — Zhou steered the conversation back to Taiwan, “the only question between us two.” ’
keep reading
March 20, 2021
'After the protests - China is not just shackling Hong Kong, it is remaking it'
‘The old Hong Kong is gone. Judge Mr Xi’s China by what it builds in its place.’
keep reading
March 17, 2021
How to Meet the China Challenge
How the Biden administration characterizes the China – strategic competitor, rival, enemy, and the like – and how it develops strategies – containment, confrontation, competition, cooperation, or some combination of these - will have an impact, to a greater or lesser degree, on most every industry and every market.
keep reading
March 13, 2021
'China All but Ends Hong Kong Democracy With "Patriots Only" Rule'
‘The National People’s Congress on Thursday approved a drastic overhaul of election rules for Hong Kong that would most likely bar many pro-democracy politicians from competing in elections, cementing Beijing’s grip over the territory.'
keep reading
March 13, 2021
'Understanding China’s 2021 Defense Budget'
'Like previous years, the first day of the new National People’s Congress session was highlighted by the widely anticipated announcement of China’s 2021 defense budget. This year it is set at 1.36 trillion yuan ($209.16 billion), a 6.8 percent increase from the 1.27 trillion yuan budget set last year.’
keep reading
March 13, 2021
Xi’s Gambit: China Plans for a World Without American Technology
‘China’s new five-year plan, made public on Friday, at the National People’s Congress (NPC), called tech development a matter of national security, not just economic development, a break from the previous plan.’
keep reading
March 13, 2021
'The five-year plan's big target - A confident China seeks to insulate itself from the world'
The National People’s Congress concluded on Friday, March 11. As I’ve mentioned before, analyses of the impact of the plans and policies on China and the world will start to come out in a week or two. In the meantime and to keep you immediately informed, today’s issue covers the NPC’s outcomes more generally, beginning with a full summary from The Economist.
keep reading
March 12, 2021
‘Enter the Trump Buddha'
“Trump, the Buddha of Knowing of the Western Paradise.”
keep reading
March 11, 2021
Artificial Intelligence: How to Beat China
‘China is organized, resourced, and determined to win the technology competition. AI is central to China’s global expansion, economic and military power, and domestic stability.’
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.