Another Sign of a Brewing Economic Monetary Crisis in China?

If a grossly overheated export economy was not enough to tip off Chinese economic policy wonks to a changing financial climate -- as the VAT rebate reduction should have earlier this summer -- then the latest "price freezing" news in China should set off a new round of alarm bells. According to an AP wire story from last week "China's government has ordered some prices frozen and told officials to closely monitor others in its most drastic step yet to contain a surge in inflation. The order, issued late Wednesday, came after inflation rose to 6.5 percent in August -- its highest monthly rate in 11 years -- propelled by a double-digit rise in politically sensitive food prices ... A list on the Web site of the Beijing city government planning agency said products for which the state still controls prices include cooking oil, sugar, tobacco, salt, coal and fertilizer."

In the US, the government really only has one major economic policy level (at least under normal operating circumstances). And that's the Federal Funds rate, which Ben Bernanke decided to pull earlier this month to the tune of a fifty basis point reduction (an amount which surprised just about everyone). This contrast with China shows the power -- and potential danger of making too severe adjustments -- of central economic planning. In most of the West, we view the Fed -- and Fed equivalents -- as having the power of a conductor overseeing his orchestra. But China has the power to flog the musicians in just about any direction it wants to. I'm guessing we'll know soon after the Beijing Olympics whether this type of centralized economic authority will be effective in averting a prolonged monetary and economic crisis.

Jason Busch

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