When Conflicting Civilizations Collide

[Surferbeetle]

The June 30th WSJ has an interesting report on China's manufacturing sector

Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports. "Such a high dependence on foreign trade is not good for China," says Yu Yongding, a Beijing-based researcher at the Chinese Academy of Social Sciences, a government think tank. For the U.S. and Japan, he says, trade is equivalent to around 20% the value of gross domestic product. For China, it is about 75%.

Meanwhile on this side of the pond Mr. Fisher of the Federal Reserve Bank of Dallas provides some insights on inflation...

It is only natural to cast about for a solution—any solution—to avoid the fiscal pain we know is necessary because we succumbed to complacency and put off dealing with this looming fiscal disaster. Throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else.

We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.

Earlier I mentioned the Fed’s dual mandate to manage growth and inflation. In the long run, growth cannot be sustained if markets are undermined by inflation. Stable prices go hand in hand with achieving sustainable economic growth. I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers’ purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency.