Juggling Dynamite

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.

Further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, “Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns.”
Essentially, the super-sovereigns underwrite sovereign debt—increasing the scale and concentrating the problems. Roubini characterizes super-sovereign intervention as merely kicking the can down the road: “There's not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone…So at some point you need restructuring. At some point you need the creditors of the banks to take a hit —otherwise you put all this debt on the balance sheet of government. And then you break the back of government—and then government is insolvent.”

Economist Gary Shilling says the middle class needs a reality check now that the ability to borrow is in systemic decline. Realistic adjustments to spending and our sense of necessities as well as career retraining are the way to recovery.