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The financial times are once again set for a high level of uncertainty.
The euro-zone is entering a critical phase with European governments practically helpless in front of the growing Greek social unrest. The Southern countries are suffering while trying to reassure markets that everything will be fine, but they are trapped between the vulture funds mounting the pressure on sovereign bonds and syndicates fighting back on budget cuts. The bets are on, will the euro-zone survive?
Financial markets are showing greater uncertainty, with a flight to the dollar, still the currency of the world. Although in the short term a stronger dollar will fight off inflationary pressures in the US, inflation seems to be a growing problem. Inflation is not a problem yet in the US, but it starts to be a problem in the East.
China is tightening the monetary supply to fight inflation, and the latest move by the government of the Jiangsu province to increase the minimal wage by 13% shows that inflation is indeed back in China.It is not good news for the rest of the world, since consumption is still driven by the US, a temporary rising dollar with increased prices in China will make a deadly cocktail for the US once the dollar depreciates again.
Indeed, the US will face a triple inflationary pressure: national inflationary pressure, increased prices on imports due to a weaker dollar and an additional increase in prices due to more expensive labor in China.
Where is the reason to be found? First of all, since China fueled economic growth by stimulating local consumption together with monetary supply, inflation increased naturally compared to when Chinese products were shipped overseas. So now the Chinese government will have to manage growth while suppressing inflation. The only way will be to lower local consumption and to start exports again. However, since the rest of the world is still suffering heavily from the crisis, this might not happen before 2011. So China will be facing a dilemma: growth or inflation.
One last way to manage inflation in China is to reduce the burden of imports, by letting the Renminbi appreciate. But this would also mean higher costs for Chinese products for the rest of the world.
In the end, the Chinese government will choose whatever is best for their economy, and that means inflation for the rest of the world....
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