CHINAMacroReporter

Why Inflation Should Not Be A Problem

‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities. We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’
by

|

CHINADebate

April 29, 2020
Why Inflation Should Not Be A Problem

Part 1: Getting Back to Work & Consuming Again / Fed Actions

Part 2: Why Inflation Should Not Be A Problem

Part 1

Getting Back to Work & Consuming Again

‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities. We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Malcolm Riddell: ‘Tom, what's top of mind right now?’

Tom Barkin: ‘This is going to be a deep downturn. I'm focused on how fast can we recover, and there are two pieces to it.’

  • ‘The simpler piece is how hard is it going to be for us to call people back to work? I'll call that “operational recovery.” We're closing in on the point where it's time to go back to work with the appropriate precautions.’
  • ‘The second piece – the one I'm really most focused on - is how long will it take for consumers to come back and shop? What is it going to take to get us back into the stores, into the restaurants, into traveling again, into concerts, into ballgames? I’ll call that the “confidence recovery,” and it’s going to be a lot harder.’

Tom: ‘I'm trying to get some insight from China.’

  • ‘I've looked at some ShopperTrak data that would suggest Chinese retail traffic is somewhere around 50 or 60% of what it was before.’
  • ‘China is interesting, in part, because they're eight to 10 weeks ahead of where the U.S. is.’
  • ‘That's a pretty slow trajectory, and I could imagine the same kind of slow trajectory here.’

Fed Actions

Malcolm Riddell:‘Now let's switch over to the Fed actions, and how you see what's been done so far, and what you have left in your arsenal to deal with this recovery?’

Tom Barkin:‘Well, it was only a month ago that there were a lot of articles written saying we didn't have any ammunition left. That wasn’t right.’

  • ‘I think it's striking to see how many things we've been able to move forward, led by Chairman Jay Powell and the Board of Governors.’

‘Just for context, in response to the 2008 financial crisis, we took actions such as lowering rates, forward guidance, and quantitative easing.’

  • ‘They were specifically designed for the environment that we were in then.’

‘In the situation we’re in now the banks are healthy, which wasn’t the case back then.’

  • ‘The yield curve is flat, not steep.’
  • ‘And the markets have again been quite volatile.’

‘So in addition to taking rates down - the traditional tool - we've been heavily engaged in trying to settle down the markets, which underpin lending to individuals and businesses.’

Malcolm:‘How are you calming down volatility in the markets?’

Tom:‘Well, the bid-ask spreads in the Treasury markets were quite wide, so we started buying Treasuries.’

  • ‘Same in the mortgage-backed markets, and we've introduced facilities around commercial paper, around asset-backed securities, around money market funds - to provide a backstop to those very important markets.’

‘Then Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allocated $434 billion to us and Treasury.’

  • ‘We’re using that money to create additional backstop facilities.
  • ‘Every dollar of it has to be approved by Treasury under the Dodd-Frank Act.’
  • ‘These are new facilities for the Fed, and ones we couldn't do if we didn't have Treasury agreement and funding.’

‘We've announced a municipal lending facility that should go live in a few weeks.’

  • ‘We've announced a Main Street lending facility for four-year loans with first-year payments deferred for middle-market businesses that need that kind of liquidity.’
  • ‘We've announced, and already expanded, some investment-grade bond facilities, both for new issues and for secondary offers, and so all those are now out there.’
  • ‘We also established a facility that is intended to help free up bank capital to make more small business loans through the Paycheck Protection Program (PPP).’
  • ‘All of those are new authorities we didn't have two weeks ago, and so we're plenty busy now.’

‘I do think we ought to be appropriately humble.’

  • ‘This is a crisis where the first chair is held by the public health officials, and the second chair is held by the fiscal authorities.’
  • ‘We at the Fed have the freedom to be able to move relatively quickly, but we're the third chair here, trying to help out where we can.’

Part 2

Why Inflation Should Not Be A Problem

'American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’

Malcolm Riddell:‘Economic theory tells us that all debt the U.S. is adding could be inflationary.’

  • ‘How concerned are you about inflation?’

Tom Barkin:‘I'm not of the view that anything we're doing right now is going to drive runaway inflation.’

  • ‘Part of that is because American businesses have changed how they think about pricing, and how they think about negotiating, and American consumers have changed in terms of their price elasticity.’
  • ‘The rise in power of purchasing departments, and the rise in power of consumer price transparency create quite a formidable wall against runaway inflation.’

‘A good example of this: When the tariff issues were hitting China, and then the virus was hitting China, you started seeing supply chain problems.’

  • ‘In both cases, you could have made a case that American companies could have been raising prices aggressively in the context of one or the other.
  • ‘And you just didn't see it in the numbers.’

‘Why not? If you compare today to 20 years ago, prices are a lot more transparent than they used to be.’

  • ‘You try to increase 5% to a consumer, and they're going to come up with another option. That's what the internet has enabled.’

‘And if you're a producer and your costs go up and you want to increase 5%, in a lot of cases you have to go talk to a Home Depot, or a Lowe's, or a Walmart, and you have to go make the case for your price increase.’

  • ‘Now those folks have built their businesses on everyday low prices, and they're not interested in taking any price increases.’

‘These big low-price retailers have purchasing departments whose job is zero cost increases.’

  • ‘And so if the supplier comes in at zero, they go, "Thank you very much.” ’
  • ‘If the supplier comes in at plus 2%,they say, "No, why don't you make it zero?" ’
  • ‘If the supplier comes in at plus 7%, the purchasing manager says, "I'd hate to bid this out, but if you force me to bid it out, I'll bid it out." ’

‘If you're a manufacturer, to raise your prices, you have to believe that all your competitors are going to do exactly the same thing, that your quality is unassailable, that you can't be replaced by somebody out of Malaysia, or Vietnam, or China - and very few manufacturers have that confidence.’

  • ‘If you do have the confidence, and if you push it through, the purchasing manager will start right then on next year's buying.’
  • ‘And that purchasing manager is going to go find somebody who can manufacture against you at a lower price.’

‘One other impact of the crisis I should mention: The big low-price retailers are going to get more share because smaller retailers are going to go under here.’

More

CHINAMacroReporter

April 17, 2022
Is China's Tech 'Crackdown' Really Over?
Today, I’m sharing with you a bit of Ms. Schaefer’s analysis of the tech ‘crackdown’ (but not of the AI and algorithm law). She explains why...
keep reading
April 17, 2022
China: 'Sleep Walking into Sanctions?'
A looming risk is Russia-like sanctions on China. The sanctions on Russia are causing plenty of disruptions. But those disruptions would be nothing compared to the catastrophe of Russia-like sanctions on China. The good news is that if China does violate the sanctions, the violations would likely be narrow and specific - even unintentional. So secondary sanctions - if they come at all - likely won't hit China’s economy and financial system deeply – or (fingers crossed) U.S.-China relations.
keep reading
April 5, 2022
Russian Sanctions' Impact on China
In the meantime, some contend, China has a payment system, the Cross-Border Interbank Payment System or CIPS, that could make it independent of SWIFT.
keep reading
August 1, 2021
'Why China Is Cracking Down on Its Technology Giants'
‘Why, you may ask, is China crushing some of its most innovative unicorns? We’re in a new era led by President Xi Jinping, and politics are in command.’
keep reading
August 1, 2021
'The most significant philosophical shift since Deng'
‘Carnage in China's financial markets signals the beginning of a new era as the government puts socialism before shareholders and regulatory changes rip apart the old playbook. According to some analysts, it is the most significant philosophical shift since former leader Deng Xiaoping set development as the ultimate priority 40 years ago.’
keep reading
July 25, 2021
How China's Middle-Class China is Transforming China and the World
‘Among the many forces shaping China's domestic transformation and its role on the world stage, none may prove more significant than the rapid emergence and explosive growth of the Chinese middle-class.’
keep reading
July 22, 2021
Part 2 | The DiDi VIE (as an example)
‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
keep reading
July 22, 2021
Part 1 | 'Owning Chinese Companies Is Complicated'
‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
keep reading
July 22, 2021
Part 3 | Revising the Rules
‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
keep reading
July 22, 2021
China: Signals Blinking Red & Oops, We Missed the Risks
I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
keep reading
July 22, 2021
'Crackdown on US listings: Will China close $1.6tn VIE loophole?'
‘If Chinese authorities start to question “Variable interest entities”(VIEs), amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’
keep reading
July 18, 2021
Why the U.S. Lacks Leverage over China
During the celebration of the Chinese Communist Party’s Centennial celebration, Mr. Xi stood in the same place on the balcony facing Tiananmen Square where Mao Zedong stood when he announced the founding of the PRC; Mr. Xi wore a gray Mao suit, among a sea of blue western suits; and he centered himself right above the portrait of Mao, who is similarly attired.
keep reading
July 18, 2021
'I will aim for Mao's Status.'
‘There on the gate was Xi Jinping, Chinese president and party general secretary, in a gray Mao suit. Just below his feet was the portrait of Mao Zedong, also dressed in a gray Mao suit.’
keep reading
July 18, 2021
'US warns companies of risk of doing business in Hong Kong'
“In the face of Beijing’s decisions over the past year that have stifled the democratic aspirations of people in Hong Kong, we are taking action,” said Antony Blinken, US secretary of state. “Today we send a clear message that the US resolutely stands with Hong Kongers.”
keep reading
July 18, 2021
'Biden’s Warning on Hong Kong'
‘The pretense of Chinese and Hong Kong authorities is that their crackdown on the rule of law and dissent will have no effect on Hong Kong’s viability as an international center for trade and finance.’
keep reading
July 18, 2021
'China Plans to Exempt H.K. IPOs From Cybersecurity Reviews'
‘China plans to exempt companies going public in Hong Kong from first seeking the approval of the country’s cybersecurity regulator, removing one hurdle for businesses that list in the Asian financial hub instead of the U.S.’
keep reading
July 18, 2021
Hong Kong and the Limits of Decoupling
‘The United States’ inability to make China regret—much less reverse—its transgressions in Hong Kong suggests that financial separation, sanctions, and economic barriers are less reliable tools than many in Washington believe.’
keep reading
July 15, 2021
Part 1 | 'Joe Biden is determined that China should not displace America'
‘Biden’s emerging China strategy, while still protean, sounds of a kind with Mr Doshi’s prescription for “blunting and building”.’
keep reading
July 15, 2021
The Biden Doctrine and Its Discontents
President Biden has framed China as a threat both to the U.S. and the liberal world order.
keep reading
July 15, 2021
Part 2 | Joe Biden is determined that China should not displace America
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 15, 2021
'What's Wrong with Biden’s new China doctrine'
‘Mr Biden’s aides invariably start any discussion of China strategy with the need to restore American greatness after decades of decline.’
keep reading
July 8, 2021
Didi: Xi Surprises Us Again
Beijing shocked the financial world when it pulled the rug out from under Didi days after its IPO on the New York Stock Exchange and also announced new regulations reigning in overseas IPOs and Chinese companies already listed.
keep reading
July 4, 2021
The Chinese Point of View
Here are a few of my thoughts on the importance of Wang Jisi’s ‘The Plot Against China.’ Yuen Yuen Ang’s ‘The Evolution of Chinese Corruption’ speaks for itself - but note especially how Mr. Xi's anti-corruption campaign could hurt China's economy. I have now lived long enough that when a friend complains about his or her spouse, I say to myself, ‘There are no doubt two sides to this story.’
keep reading
July 4, 2021
'How Corruption Powers China's Economy'
‘China has managed to sustain four decades of economic growth despite levels of corruption that even Xi has described as “grave” and “shocking.” Why does it seem to have bucked the trend?’
keep reading
July 4, 2021
'How Beijing Sees U.S.-China Relations'
‘In Chinese eyes, the most significant threat to China’s sovereignty and national security has long been U.S. interference in its internal affairs aimed at changing the country’s political system and undermining the CCP.’
keep reading
July 1, 2021
Five Themes that Point to Where the Chinese Communist Party & China are Heading
As the Chinese Communist Party begins its second century, it’s useful to identify enduring patterns that might aid us in understanding China today and the directions it might be heading.
keep reading
July 1, 2021
From Rebel to Ruler: One Hundred Years of the Chinese Communist Party by Tony Saich
‘In our discussions, you've identified five themes that have been more or less consistent throughout the history of the party but have oscillated between different points on a continuum:’
keep reading
July 1, 2021
'From Rebel to Ruler': Tony Saich on Chinese Communism at 100
‘At so many points during its century-long existence, the CCP appeared to be in its death throes, whether as a result of external attack or self-inflicted internal strife.’
keep reading
June 27, 2021
European Chamber in China: 'Business Confidence Survey'
A mere 9% of European companies are considering moving any current or planned investment out of China, the lowest level on record. Instead, companies are strengthening their positions in JVs, onshoring supply chains and increasing spending to secure market share. The ambition not only to stay but also to expand their China footprint is more than justcapital flooding in due to optimism about growth. Companies are taking action to secure their operations in China and mitigate exposure to geopolitical trends in order to have a better chance of navigating a future that looks to be fraught with risk, at least in the near- to medium-term.
keep reading
June 27, 2021
'How China & America Should Compete'
‘China and the West urgently need a new framework for understanding the state of the world and their place in it. Such a framework must recognize, first and foremost, that properly regulated economic competition is not a zero-sum game.’
keep reading
June 27, 2021
'Jimmy Lai & the Death of Free Speech in Hong Kong'
Jimmy Lai’s tabloid, the Apple Daily, with its peculiar blend of scandal, gossip, and serious political reporting, was Hong Kong’s indispensable voice of free speech. Now that voice has been silenced, and Lai is in prison with others who tried to protect the right of Hong Kong’s citizens to speak and write freely, to be ruled by law, and to vote for their own autonomous government. Their politics are diverse Yet they stand together. When freedom is under siege, people cannot afford the narcissism of small differences that is tearing apart liberal politics in countries where people think democracy can be taken for granted.
keep reading
June 27, 2021
'European Companies in China: Between Decoupling and Onshoring'
‘Instead of leaving the market, European companies are exploring ways to separate their China operations from their global ones.’ ‘Following the Covid-19 outbreak, European companies in China spent the first few months of 2020 solemnly appraising their investment strategies.’
keep reading
June 24, 2021
'Apple Daily closed, but press freedom stays in Hong Kong'
‘Freedom of the press is a good thing. The West's freedom of speech must be consistent with national interests and public security.’
keep reading
June 24, 2021
Bitcoin’s growing energy problem: ‘It’s a dirty currency'
“Bitcoin alone consumes as much electricity as a medium-sized European country.”
keep reading
June 24, 2021
'China steps up crackdown on bitcoin mining industry'
‘China’s latest intervention places further pressure on what was once one of the world’s most vibrant markets for trading and mining digital currencies.’ ‘It comes at a time when many governments are scrutinising the industry’s effect on the environment and determining the types of financial oversight that should be applied to cryptocurrencies.’
keep reading
June 24, 2021
'Congress on China: Then and Now'
‘With the Senate voting on June 8, 2021, to adopt the United States Innovation and Competitiveness Act, it is safe to say that this is the most comprehensive action by Congress on China policy EVER.’ ‘The language of the United States Innovation and Competitiveness Act is about a long-term competition with China as opposed to war with an enemy.’
keep reading

Heading

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.