The battle between currencies and countries is intensifying with news of the latest rate hike in China strategically announced just as Fed Chairman Bernanke is doing the speaking circuit trying to defend his plan for QE2 to the angered international community.
The People’s Bank of China yesterday ordered a 50 basis point increase in the amount of money that lenders must set aside, two days after the cabinet announced measures to tackle inflation. Stocks and oil fell on the central bank announcement, highlighting concern that Chinese efforts to cool the nation’s fastest rise in consumer prices in two years will cause growth to falter.
Speculative capital has flooded into emerging economies over the past 18 months intensifying since August with the US Fed's announcement of plans to add another $600 billion of “liquidity” to the global financial system. Excess liquidity has caused dramatic spikes in commodity prices around the globe over the past year and this is causing crippling inflation to the cost of basic necessities everywhere. In developing countries like China civil unrest looms where household incomes are too modest to absorb the increased living costs.
Two good interviews today explain the tensions now building over these issues between the key global players:
See: Gordon Chang, author and China analyst: on the US China outlook
and Analyst Keith McCullough on Bernanke, China
One thing seems very clear: China needs to slow inflation and stem the threat of its billowing asset bubbles. They will do this at the expense of growth. Those banking on China to backstop global growth over the next couple of years will just have to dial down their expectations.
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