What we hear
The Fed prioritizes inflation over bank turmoil with its latest rate hike
By Li Zhouli@vox.com Updated Mar 22, 2023
In recent months, inflation has slowed but remains high. Consumer prices, for instance, are still roughly 6 percent higher than they were at this point last year, and many experts had urged the Fed to hold off on another increase until the dust had settled on the instability in the banking sector.
Additionally, such hikes could hasten the possibility of the country going into a recession. Higher interest rates are designed to reduce economic activity, including consumer spending and hiring. Contractions in bank lending could also reduce economic activity and add to a slowdown. Should spending, hiring, and lending fall too much, that’s a recipe for a recession.
What we don’t hear
Can U.S. Contain China Via Supply Chains?
Mar 09, 2023
Zhang Monan Deputy Director of Institute of American and European Studies, CCIEE
(The Chines researchers are biased, but the numbers are accurate)
It, (US), uses sanctions to force manufacturing transfers, seriously disrupting the international division of labor in the global industrial arena and rattling global supply chains, which have also shown signs of de-Sinicization. The share of U.S. imports sourced from China declined from 21.4 percent in 2018 to 17.7 percent in 2021
Kearney Management Consultants ran an index calculation comparing U.S. imports from China (including Hong Kong) with U.S. imports from 14 low-cost economies in Asia, to gauge the degree of de-Sinicization. The index has fallen from 66 percent at the start of Trump’s presidency to 55 percent by the end of 2021, a decline of 11 percentage points in five years. This represents a decline in U.S. dependence on the Chinese industrial chain.
Based on 2022 import levels, these tariffs, (US 2018 tariffs on good from China), currently impact over $350 billion of imports and exports and increase consumer costs by roughly $51 billion annually.
Economist tell us that inflation is caused by too many dollars chasing too few goods. In this case inflation is caused by retailers increasing prices, because of goods cost increasing due to shifting sourcing from the low-cost producer, China, to higher cost producers in Indonesia, Vietnam, Mexico, India, etc. These shifts reduced the volume of goods purchased in China which increased the cost on the remaining volume and shifting the small volumes to higher cost produced in several locations, resulting in higher cost on those items.
If the increased manufacturing cost increases were not enough, US importers are now receiving smaller shipments from multiple locations, causing increases in the cost to ship the products to the US.
So, US buyers are paying for tariffs, higher cost producers and higher freight cost. Unemployment is not increasing because business are not hiring to meet new demand, they are hiring to supply renewed demand from the COVID shutdown and production being moved back to the US from China.
So, why are the Feds continuing to raise rates if the problem is not overheating in the economy, because with interest rates being at all-time lows if the US went into a recession the Feds would have no room to lower interest rates to spur the economy and the Federal Government would have to pump cash into the economy as they did during COVID to keep the economy from crashing.
The Feds and businesses are taking advantage of the situation to build themselves a recession cushion. After a couple of production cycles, prices will stabilize at the higher rates, unless the US drops the tariffs on China and trade goes back to normal, and, US consumers will have to learn to live with them.