Imports and Inflation
Philip Barton
The Chinese economy continues to produce an abundance of cheap, quality goods that flood western markets. These goods, produced by a seeming endless procession of minimal wage labour flocking in from the rural areas of China, are the sole reason why the developed economies have not experienced horrendous price inflation over the past ten years. Western governments have printed their currencies far in advance of that justified by increases in their own countries production. That very real monetary inflation has been hidden from the western consumer by the reduced prices of imported goods.

This will not continue for much longer. China is now a relatively free economy. Employers are free to hire and fire at will. Employees are free to stay or go at will. These freedoms will see higher wages, much higher wages, and the consequent ending of the abundance of cheap, Chinese goods.

The ability of workers to move from one employer to another means that the free markets will quickly ensure that that the more competent receive more money. They will be paid more money either to stay where they are, or to move to an employer who more accurately assesses the value of their talents in relation to his own future profits.

This is where China is now. It will be years before cheap labour stops flooding in from the rural areas, but notwithstanding that, the wages of factory workers in Shanghai are already up almost 50% from the same time last year. Much of what China is now producing requires a highly skilled workforce. That requirement for a skilled workforce coupled with a free economy is going to see much higher labour costs resulting in much higher priced goods for export in the very near future.

What will happen when the effect of massive western currency inflation is no longer cushioned by imported Chinese price deflation? Much, much higher retail prices in the western world is the answer. Those higher prices coupled with the high levels of personal debt in countries such as the US, UK and Australia are going to produce financial hardship. This is not even factoring in the effects of ongoing rises in the price of oil.

The US Fed will no longer be able to simultaneously talk tough about inflation whilst continuing to sit on its dead hands doing nothing. Already the credibility of the mandarins is at breaking point over the official inflation figures which are laughably at odds with the reality of normal people who have to buy their own food, pay their own medical bills and put fuel in their own cars.

The Fed will be forced to raise interest rates in an attempt to control their inflation to a level unimaginable and unbearable to those who have leveraged themselves to the hilt at easy-money interest rates. Interest rates in the US under Fed chief Volcker in 1980 reached 19% before inflation was brought under control. Currency inflation is much worse now and the rising price of imported Chinese goods is going to expose that fact sooner rather than later.

That same economic integration which has contributed to rising standards of living internationally could well now invert and lead to a synchronized, world-wide, economic recession... or worse.


Philip Barton
philipbarton@bigpond.com

July 11, 2006