October 25 2005
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>Yes...But! Year 5-51
Everything will cost more. Thanks to Red China and the cheap
labor there global inflation had been on hold for years. China
is Red not only because its still communist. It’s also
Red because its products are colored red with blood: the blood
of the thousands of Chinese miners perishing there each year
killed digging cheap, dirty coal which, in turn, gives cheap,
dirty energy and cheap products for our cost- conscious consumers.
To be truthful Chinese goods are really ‘bads.’ Their
lax environmental laws prematurely kill thousands of other
workers as well. When life is cheap its products are too. At
least for a while. That now is changing. Dirty coal makes China
one of the world’s greatest polluter and a major source
of green house gases - causing Climate change. China’s
cheapness may have tipped the balance in hitting us with Katrina,
Rita, Wilma and the ever more ferocious hurricanes in the future.
Cheap and abundant labor, and growth at any cost, including
human life, are the reasons why our manufacturers have flocked
to this temporary bargain paradise. Temporary because China
wants to go clean, which means more oil and natural gas, more
pressure on prices, thus more inflation. Temporary also because
in China too the price of labor is going up, as the masses
clamor for more. Once inflation is on the loose it feeds on
itself, it’s like the Bird Flu, impossible to contain,
like a hurricane, relentless in its course.
Curiously oil and food are not counted when calculating official
inflation. So higher prices won’t bother you as long
as you don’t eat or drive. This economic exception came
to be because 30 years ago the oil price suddenly jumped. It
then was correctly seen as temporary. But today is a different
story. No longer does it make sense to exclude the most essential
societal ingredient, oil, from the Consumer Price Index. It’ll
never go down again. So we better face reality. We, who eat
food, heat homes and use engines for mobility, no longer are
inflation-proof. As a matter of fact, America's inflation rate
has almost doubled over the past year to 4.7% in September,
its highest since 1991. Thus the bankers of this world, Canada’s
David Dodge with his funny voice, and Mr Greenspan with his
enigmatic pronouncements - the soon-to-be replaced chairman
of the American Federal Reserve by Ben Bernanke - have no other
option but to increase interest rates.
In Great Britain inflation has risen from 1.1% to 2.5% over
the past year, well above the Bank's 2% target and the highest
rate since 1996. The average inflation rate in the G7 countries
now stands at an estimated 3.2%, its highest for 13 years.
World-wide - excluding Japan, where consumer prices continue
to fall slowly - the average inflation rate is 3.7%.
Normally people expect a real return on their money of 2 percent
above inflation. Hint- buy Real Return bonds. Thus their money
should earn at least 6.5 percent in North America, where, despite
11 increases in interest rates since June 2004, real rates
are still negative. Negative means that the rates banks pay
for their money is below the rate of inflation. That signals
one thing: The Bank of Canada and the Washington based Federal
Bank will need to keep pushing up interest rates into 2006
and 2007.
That is bad news for those who have mortgages that are tied
to the bank rate. Perhaps, if you have a variable mortgage,
it’s time to investigate a fixed rate.
If only wages would go up in the same pace. If only... Now
even labor is a world commodity. The automakers, especially
the US based Ford, General Motors and Daimler-Chrysler must
compete with world-wide companies not burdened with high employment
costs. It’s not inconceivable that General Motors and
Ford declare bankruptcy to escape their onerous pension obligations
and medical costs. This would allow them to cancel their union
agreements as Delphi Corporation did, with 175,000 workers,
earning some $27.00 per hour plus costly benefits. Now the
new boss there talks of reducing that to $12.00 per hour. That
hurts. Thank China.
Just as the weather is wacky, so is the entire labor scene:
security everywhere is blowing away.
Home heating costs are going to crush the public this winter,
and the next and the ones thereafter. Combine that with ever
higher utility bills, higher tax bills, higher mortgage rates,
higher price of gasoline - now having a brief spell of deflation
- and you’ll see the prices of houses drop- especially
those monster places, where 3 people occupy 3,000 square feet
somewhere in the middle of nowhere, making 2 cars a must.
So, it’s no surprise that wood is making a comeback.
I use clean waste wood from the local pallet factory. Warms
you twice: when you haul it and when you burn it. And it saves
money, a good thing for many consumers who are already at their
debt-ceiling and beyond. Actually the Canadian savings rate
in September was negative, because people had to dip into their
meagre reserves to stay on the level. The only thing that,
so far, has kept the North American Middle Class afloat, is
higher house prices. Once they go down, and they will as mortgage
rates go up, we might see the economic equivalent of a hurricane,
a fitting metaphor as inflation actually means ‘air blowing
in.’
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