Is China to Blame for All Our Financial Woes?

Bill Bonner - Fri 14 Dec, 2007

People now blame China for everything. Food up? China is too hungry. Fuel up? China is using too much energy. Now, China is even getting blamed for the price of Christmas trees. Chinese Demand Sends Christmas Tree Prices Soaring, says the headline....

It was raining in Baltimore yesterday. Today is overcast. Rain, sleet and snow are said to be on their way.

Well, what do you expect? It’s almost winter. And winter is traditionally a tough time.

“Things have changed so much,” said a friend yesterday. “Now, when we travel, for example, we go from a heated car to a heated terminal to a heated plane to a heated cab to a heated office. We no longer know what the weather is outside. And we certainly don’t care.

“I think that is part of why we are so blasé about economic and financial threats. There just doesn’t seem to be any real world anymore. It is all controlled. Everything is under control. We have that illusion…that we can control the weather…that we never actually have to suffer it.”

But winter is still a lean time for many people. USA Today:

“Soaring fuel prices are creating a crisis among low-income people and senior citizens who can’t afford to heat their homes…”

“This is a scary, scary winter. I don’t know what folks are going to do,” said one do-gooder.

Core rate inflation is still nothing to worry about. But they don’t include food or fuel in the core rate. And residential heating oil is expected to average $3.23 a gallon this winter – up 30% from last year. Propane is up 250% - from only 50 cents a gallon to $2.50.

People now blame China for everything. Food up? China is too hungry. Fuel up? China is using too much energy. Now, China is even getting blamed for the price of Christmas trees.

“Chinese Demand Sends Christmas Tree Prices Soaring,” says the headline. 

Followed by: 

“A combination of rising Chinese demand and the biofuel boom is pushing up Christmas tree prices in Germany. Producers say they just can't keep up with demand from Asia's economic giant.” 

“According to the German timber industry's umbrella organisation, the HDH, demand for Christmas trees is rising due to increasing exports and the growing number of single-person households. Meanwhile the supply of trees has decreased because several thousand hectares of tree plantations in Germany have been given over to more profitable uses, such as lucrative biofuel crops.”
So the Chinese are greedy for Christmas trees too!

*** In the Middle Kingdom itself, prices are rising so much that government officials have decided to do something stupid. They’re holding prices down. From the NY Times:

“That fear of inflation - not to mention political and social unrest - has led Beijing to prevent the country’s mostly state-owned oil companies from increasing diesel prices at the pump in pace with global oil prices. Raising fuel prices for farmers, whose incomes have lagged behind those of city dwellers and who need diesel for their tractors, is one concern. Lower diesel prices also essentially subsidise every manufacturer in China’s elaborate export machine.” 

“Low diesel prices frequently make trucks more cost-effective than trains, which pollute less. Sales of large freight trucks in China outpace those in the United States by a wide margin. Demand for diesel at service stations is so great, and supplies are so tight, that rationing and shortages have become common. Truck drivers idle for hours only to be allowed to buy as little as five gallons of fuel.”
Let’s get this straight. China holds the price of fuel down so that its factories can continue making cheap products for the US. The US, meanwhile, prints dollars so that its consumers can continue buying cheap products from China. Then, China accumulates dollars – its trade surplus is nearly a quarter of a trillion this year. Then what happens? What do they do with the money? 

Ah, this is where it gets interesting. There’s a new trend in global finance. Both the exporters – like China – and the oil producers – such as Saudi Arabia – have to figure out what to do with the loot. They need to find a way to use it without destroying its value. So, they are creating their own Sovereign Wealth Funds.
More to come… 

*** Not much action in the markets yesterday – except that the price of gold fell sharply. Still above $800. 

*** And commentators are still wondering what this stock market is doing. Up, down…up, down - where is it going? We don’t know. But it still looks to us as though there is much greater risk on the downside than there is the hope of reward skyward. Recession looks inevitable. Earnings are falling. Where’s the upside? 

Even Alan Greenspan now says the US economy is “getting close to stall speed.” How would he know? He must have read it in the paper. 

Most likely, stocks have begun to turn down. The tide has turned. That great wash of liquidity that buoyed up all asset prices – from apartments in London to soybeans to trash art – is ebbing. We saw it first at the very margins – the low, tidal sub-prime flats that began to dry out in the summer. Now, we’re beginning to see it in deeper sectors of the economy. 

But wait, we know what you are thinking, dear reader. What about all this new liquidity the central banks are putting into the system? Won’t it turn things around? Won’t it reverse the tides? Won’t it prevent a recession?” 

Yes, the central bankers are working overtime. They’ve launched a concerted, coordinated effort to make sure the banks have money As the Financial Times put it, Ben Bernanke has gotten out his helicopter (referring to a remark he made before he became Fed chief, in which he said he’d drop money from helicopters if that was what it took to prevent a Japan-style slump). 

As we said yesterday, central bankers may be able to kill a boom. But they can’t necessarily revive one that is determined to die. Occasionally, they run into the problem economists describe as ‘pushing on a string.’ They make money available to banks. But the banks aren’t able to get the cash to the people who really need it. Remember those poor people who can’t buy heating fuel? Well, between a rich Wall Street banker and a poor person in Detroit are a whole legion of intermediaries – not a one of whom wants to lose money. Who wants to lend money to someone who may not pay it back? They’ve tried that; it didn’t work. Who wants to lend to a lender who lends money to people who can’t back it back? Ditto. And who wants to invest in debt based on a loan to a lender who lends to lenders who lend to thousands of people who can’t pay it back? Been there; done that too. That’s when the string starts to bend. The feds push more money ‘into the system,’ but the system doesn’t want it. 

Is that what is happening? Is that what will happen? We can’t tell you that. But we can tell you that it does happen from time to time. It did happen in Japan recently. And it’s bound to happen here, sooner or later. That, of course, is when Ben Bernanke really does start looking around for a helicopter.
*** Impressions from our travels: 

Johannesburg: sun, traffic, brown, green, black, orange, malls, shorts, razor wire, security barriers, Blacks in the backs of pick-up trucks, business parks, walls, gates, California, Texas, highways, wealth, growth… 

Mumbai: haze, smog, crowds, colours, horns, smells, spices, sandals, skinny people; fat, brown flesh; mildew, stains on white buildings; art deco, noise, shiny leaves, dust, scarves, dyed hair, body odour, sleeping on sidewalks, tiny taxis, pictures of ganesh, beggar girls in bangles and bright skirts… 

Melbourne: palm trees, skyscrapers, beaches, tans, pedal pushers, pants with huge pockets, young people, cottages, roses, flowers, streetcars, steel, glass… 

This article is from The Daily Reckoning. With over 500,000 readers every day The Daily Reckoning has become essential reading for anyone who’s interested in their money. If you think you'd enjoy witty, irreverent and often hilarious commentary on economics and investment - for FREE - then sign up today.