Tags: Trade | Wars | Asia | Inflation | us

Trade Wars, Asian Inflation May Hinder US Growth

Wednesday, 19 Oct 2011 10:06 AM

By Ashish Advani

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I recently discussed China and warned about how we could see possible slowdowns there.

It has started happening. China announced its quarterly GDP number, and it reflected signs of stress and sluggishness. While it is still growing at a whopping 9.1 percent GDP, it has slowed from the double-digit level and 9.5 percent achieved in the past two quarters.

China is not the only country that is slowing down. We are seeing slowdowns all across Asia.

We have India slowing to 7.8 percent or lower. We have slower growth in Taiwan, Malaysia, the Philippines, Thailand, Vietnam, South Korea and many other countries.

And the causes of these slowdowns are all the same: inflation.

I have often written about how the United States has exported inflation to Asia. The unintended consequence of the Federal Reserve printing money is that it found its way to Asia and created unprecedented liquidity in those markets. And as a direct consequence, we saw inflation shoot through the roof there.

The Central Banks in these countries tackled the inflation threat and raised interest rates. China raised rates a dozen times; India raised rates 15 times in the past year and half. And others are not far behind.

While the actions by the various Central Banks in Asia are beginning to curb inflation, it has also slowed growth in these countries.

Combine this slowdown all over Asia with the lack of any real growth in the United States and the marginal to negligible growth in Europe — now we have a recipe for disaster.

Back in 2008, we had a tremendous amount of stimulus, which pumped up unnecessary spending — and then you had incredible growth in Asia.

This time we are already out of money and Asia is not growing as robustly as last time.

If the U.S. economy stalls, we are in for a real humdinger of a recession.

This is not boding well for the globe as we spin toward a slowdown to recession in the United States. Whether Europe leads the United States and the world into the next recession or vice versa, it is not looking positive globally.

And to add fuel to a simmering fire is the hair-brained logic of our Congressional members. For them, the fault almost always lies with China.

Every time they are faced with crisis at home, they love to point fingers to the outside and blame others. For several years now, they have wanted to label China as a currency manipulator.

As per the U.S. Congress: The deficit problems in the United States are the fault of China. The fact we overspend is China’s fault. The fact we bought McMansions, Hummers, yachts, overspent on almost all aspects of our lives are all faults of China.

And so the U.S. lawmakers would like to punish China by imposing levies and taxes on China.

Obviously, China is not taking this new round of attacks lightly. Chinese officials have appealed to the World Trade Organization (WTO) and in turn are accusing the United States of the same fault of currency manipulations. Their claim is that the U.S. dollar is falling due to the irresponsible behavior and relentless printing of money that the Federal Reserve has unleashed on the world.

One must not bite the hand that feeds it. Or at least if you must bite it, make sure that you have a fall-back measure that will sustain you. And by challenging China, the United States will turn away the largest holder of its debt and the continual buyer of U.S. debt. Annoy China too much and the consequences can become even more stifling. In an environment where the growth has stalled at best, is this the wisest way of spending your political capital?

Even with growth in Asia slowing, we still have between 6–9 percent growth rates. Here it is 1-2 percent and Europe is 0.5 percent to 1 percent. As the U.S. dollar decline begins again, we will see capital go back to Asia where it earns a decent return. That is where I will reallocate once the fear psychosis which grips the market today subsides.

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