Bloomberg reports that, “Under Bernanke’s chairmanship, the Federal Reserve’s steepest interest-rate cuts since 1990 are limiting his Asian counterparts’ options to curb inflation.” Instead of raising their own borrowing costs or letting their currencies appreciate faster, governments are resorting to regulating meat and egg prices in China, stockpiling cooking oil in Malaysia and subsidizing utility bills in Indonesia and the Philippines.
“Such measures may backfire. Artificial price curbs and subsidies only feed more demand for oil and other commodities, and ultimately will make it harder to contain inflationary pressures worldwide, officials from the Group of Seven nations warned at their Feb. 9 meeting in Tokyo.
“Asia’s governments have experience with the destabilizing effects of runaway prices. China’s inflation contributed to the unrest that triggered the 1989 Tiananmen Square demonstrations. Indonesia’s attempt to increase fuel costs in 1998 was the spark for protests that led to the ouster of President Suharto after almost 32 years in power.”
Colleague Dan Denning, at the helm of the DR-Australia, believes Bernanke’s cuts “might be undermining social and political stability in Asia… ”
“Not that it was his intention to do so, but maybe Bernanke can succeed where than man standing in front of the tank in 1989 could not, putting massive political pressure on the communist regime. Such are the unintended consequences of playing around with the value of money. A surprising result, yes. But not impossible.
“Asian governments aren’t letting the rising cost of food be passed on to consumers in the form of high prices. Instead, they are setting price controls and subsidising consumption or providing rebates.
“You have total pricing dysfunction.
“On the one hand, years of cheap credit has led to over production of scarce resources based on demand that’s not sustainable when credit contracts.
“On the other hand, you have governments blocking higher prices from being passed through to consumers, where they would eventually curb demand.
“What do you get in the end? Well I reckon you’d get patterns of resource consumption that hit a brick wall sooner or later. And then you will have some really [angry] people who can’t find any cooking oil or any food to cook in that cooking oil.
“It’s one thing to replace cars with bicycles, or to cut energy consumption by shutting factories, or turning your air conditioner down a few degrees. But what do you substitute for the calories you get from, say, wheat?
“Let them eat dirt! I don’t know. But I’m storing up on canned goods.”
Markets and Money