Wednesday, September 05, 2007
China's Newest Export: Inflation
Ben Bernanke, the Fed Chairman currently living the nightmare of the Alan Greenspan's free-money daydream, has publicly downplayed the immense benefits reaped by the American Consumer from China's deflationary manufacturing arbitrage, as we quoted in "Fed Big Flunks Eco 101" back on March 7, 2007:
Globalization hasn't had a significant impact on reducing inflation in the U.S. and may have raised it, Federal Reserve Chairman Ben Bernanke said.
—Wall Street Journal
Now, Mr. Bernanke may have been a great economist before succeeding Alan Greespan to the head of that class of academic thinkers, but he clearly never shopped at a Wal-Mart, or a Costco, or even a Safeway, for that matter, during the 1990s, when prices across America were falling thanks to the China arbitrage.
Indeed, if he had just wandered into a Best Buy now and then he would have seen what every retail CEO in America knew first-hand: stuff made in China cost a lot less than stuff made anywhere else, and those retail CEOs were pushing every one of their vendors to get with the program.
But not Mr. Bernanke.
Still, he did make it to the top of the economic pile. And, as the saying goes, even a stopped watch is right twice a day. So it looks like Mr. Bernanke's views on China's inflationary impact might, finally, be right.
While it is no secret that labor costs, and environmental costs, and energy costs are rising, along with the cost of just about everything else China needs to feed the manufacturing beast that now supplies American with 8 out of 10 everything, according to government statistics I just made up, the magnitude of the overall cost increase is certainly a shock to at least one major retailer of Chinese-sourced goods.
Like, 50% shocking.
I am not making that up: word out of one significant retailer is that some of the China-sourced merchandise they were expecting to cost, for example, $10 a unit prior to packaging, shipping, handling and mark-ups, is coming in at $15 a unit.
Now, after checking with other companies that also source in China, 50% gap-ups is not the norm.
But 10% is not unheard of, making companies work extra hard on packaging and distribution costs to get the entire impact down to a more manageable 5% or so.
Which, last I heard, was more than double Mr. Bernanke's inflationary "comfort level."
But, then again, since according to Mr. Bernanke's view of economic history, China never helped us when it came to inflation, then perhaps China will never hurt us.
It's a win-win all around!
I Am Not Making This Up
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The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:53 AM