There is inflation in everything. Yes, even in the choices available to a columnist who has to write something every week. I mulled over suggesting to Cambodian schoolchildren that they should charge Ben Bernanke, chairman of the American Federal Reserve Board, in the International Court of Justice for depriving them of their free breakfast. The World Food Programme (WFP) cut off rice deliveries to 1,344 Cambodian schools last month after prices doubled and suppliers defaulted on contracts. Schools will run out of food by 1 May, depriving about 450,000 children of meals, WFP estimates. But it appeared more interesting to explain that their policies may be more the result of believing their own disinformation than anything else.
Yes, America’s decision makers have continued to delude themselves that inflation — as measured by their dubious approaches — was contained just as they thought that the subprime mortgage crisis would itself be contained. Their support to Wall Street institutions, supported by their comrades in China, has extracted a global inflation price.
We were wrong to believe that democracies were mostly exempt from the ills of disinformation that authoritarian societies are prone to. “Weapons of mass destruction” should have sharpened our sceptical instincts. False prosperity, instead, dulled them. But disinformation is persistent and growing stronger.
On Thursday, the US released the somewhat arcane monthly durable goods orders statistics. It refers to orders received by manufacturers of durable goods — consumer and manufacturing. On the same day, data on sale of new homes in the US was released, too. That was a dismal report. Sale of new homes was worse than expected and was at its weakest in 17 years. In contrast, orders for durable goods were seemingly better than expected. Details that revealed growing inventories and reduced capital spending were ignored.
What happened then was fascinating. Major newswire services and newspapers chose to highlight the apparently better reading on durable goods orders and either soft-pedalled or ignored the terrible new home sales data. It was too much of a coincidence for most news services to do so. “Hear no truth, speak no truth” is now intrinsic to the era of embedded journalism. The consequence of this would be to bear out the bears on the American economy.
If American stocks enjoyed the benefit of the “Greenspan put” and subsequently the “Bernanke put”, then China’s stock investors are beginning to appreciate the value of the “Wen put”. The Chinese government is working overtime to put a floor under its domestic stock market. Not a day passes without announcements meant to boost the stock market — whether it is restriction on sale of blocked shares, on new share offerings or reduction of stamp duty on stock market transactions. In true authoritarian tradition, they believe that they are the puppet masters who can keep growth up, inflation down, asset prices up and the renminbi down.
All the talk that China is allowing an accelerated appreciation of the yuan is just that. The central bank has quietly allowed the currency to weaken against the US dollar in response to the recent dollar stabilization. It appears that, for China, rebalancing is just a matter minding the bilateral dollar-yuan exchange rate and to ignore the rest. On a trade-weighted basis, the nominal exchange rate of the Chinese yuan has barely moved up against all other currencies since October 2006. Dissembling is universal in a globalized world. China’s inflation problem would be here to stay.
Indian readers tempted to chuckle at this evolution of America into a “People’s Republic of America” and China into a “United States of China” should hold back. The Indian government is trying to address inflation through export caps, threats and other administrative measures while pursuing fiscal expansion, administrative expenditure and lower interest rates for home loans. There would be no dearth of examples of injurious policymaking, if we examine further.
Let us be clear on one thing. Governments, when faced with extreme instances of threat to sovereignty and integrity, are allowed to deviate from established norms of accountability. Such instances are effective if they are rare and if they pass a stiffer burden of proof. Instead, policymaking is now routinely made a slave to the fate of political parties and narrow interest groups.
History’s verdict on the ultimate effectiveness of such practices is unambiguous and overwhelming. They end up achieving nothing, not even the selfish objectives that motivated them in the first place.
The reaction of investors to these developments has the stamp of indifference and complacency—attitudes that prevailed for the better part of the last two years. Nothing, it appears, has been learnt. They have bought stocks, bid up the dollar and risky assets almost everywhere, including Indian stocks. Further, they have also sold down precious metals. Forgetting the lessons of history condemns investors to relive them.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org