Friday, January 18, 2008

A shocker from the Economist

Having a little bit of inflation is like being a little bit pregnant.” Says the Economist. That opener stoked my curiosity as well as the headline of the article (fears of both inflation and recession). But I was clearly not prepared for the banter. Not from the Economist.

So how can I let go of an opportunity to pick on the Economist and to blog about it? After all, it’s a magazine that I and the whole world respect the most. Here’s my stab.

It says “inflation is a monetary phenomenon and the responsibility lies with central bankers”. Is that so? What can central bankers do to rein in commodity prices that are based on demand-supply dynamics? Suck out money supply or hike interest rates? That would impact productivity across the board and deepen budget deficits.

This is my favorite – “monetary conditions have been loose in recent years, with real interest rates low and credit growth rapid, particularly in emerging economies.” But subprime fiasco had its origins in the Wall Street, bang in the middle of Manhattan - not in any emerging economy, goddammit! Look at the billion $$ write downs at American banks like Citigroup, Merrill Lynch, Bear Stearns, UBS … In fact, these banks are now being bailed out by sovereign wealth funds from Asia and the Middle East !!

“The task of central bankers has become harder as globalization has shifted from being a disinflationary phenomenon to an inflationary one.” I say that depends on who creates value and therefore wealth. Where wealth gets created, there will be increased consumption led inflation. It’s a tenet.

“The downward price pressure from cheap Chinese goods may be abating while the developing world’s rampant demand for resources may continually drive commodity prices higher.” Yeah, but the global consumer is the one asking for better economics, right? China produces cheap goods because there’s a buyer out there. You stop buying Chinese goods and they won’t produce. But how many can really afford costly stuff?

The doubt lingers whether it’s a recession or inflation that the world is staring at. (See pic). That I agree and so I lifted that picture and put it right here on top. I read a lot of humor and find a ton of banter from less venerated journals. It saddens me when the Economist joins that league.

You’d better be careful, Economist. It takes a lot to build that reputation. Don’t lose it all in one short fling…” I caution.

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