How Will Oil Price Inflation and the Recent Earthquakes Affect China?

Excerpts from Dr. Enzio von Pfeil's June 6, 2008, appearance on Bloomberg Television Deutschland:

1. What is The Economic Time™ globally?
   • Increasingly, it is characterized by an excess demand for money and an excess supply of goods:
     • The excess demand for money stems from banks' reticence to lend, and
     • the excess supply of goods stems from American consumer confidence infecting that of the rest of the world.
     • More broadly, however, the "stage set" is that of stagflation - which we "flagged" two years ago!
2. What can Central Banks do about stagflation?
   • Nothing: it is of cost-push nature.
   • This means that oil prices are rising very much because of supply constraints, as are those of platinum.
   • Central Banks can fight only demand-pull inflation, where "too much money is chasing too few goods."
3. Various Asian nations are reducing fuel subsidies - for instance, Malaysia and India. Can China follow suit?
   • Not yet: the political scars from the earthquakes make a reduction in fuel subsidies political suicide.
   • So, the only interim solutions to keep the population at large at bay are:
     
     • Keep driving up the RMB in order to cheapen oil costs in RMB terms, and
     • give tax rebates to offset the effects of higher food prices.
   • In any instance, avoid buying Chinese oil refiners: they are disallowed from passing-on higher fuel costs, so their profits get hit.
4. Do you see China introducing alternative bio-fuels as a way of combating her dependence on oil?
   • Unlikely. She needs the arable land in order to produce food at a reasonable price for her growing population , and
   • the creation as well as usage of bio-fuels on a mass scale will require decades.
5. Where are you on the earthquakes in Sichuan province?
   • This tragedy will cost at least RMB 100 billion in reconstruction.
   • It is sadly not over: now we read of lakes that are about to burst.
   • The leadership has to be praised for its hands-on pragmatic approach.
   • It is not time to look into buying building materials stocks yet - the market is still too satiated with new IPOs.

Comments

[johnthebear:]

Getting to the heart of the question: Will China be successful in slowing inflation without going into recession?

The real estate deflation/recession is spreading from US residential into commercial property in UK, Spain, Italy and beginning to show up in Germany. It will take a while longer, perhaps 9 months to have an impact on China.

Oil is at the heart of the problem on a world wide basis. OPEC controls production of oil and it's price.

At one time our government gave Saudi Arabia our latest military technology in exchange for stable production and price of Oil.

Now, after years of rapidly rising prices, it may be that Saudi Arabia and other oil producers in OPEC feel so absolutely rich that they can now promote global recession to make the value of all assets all over the world drop so that they can use their huge wealth to buy banks, real estate, companies etc at bargain prices to give increased political power?

Let's face it the worlds banking system has already lost $400 Billion in capital and many banks are diluting their stock by selling new shares at substantial discounts to regain their capital. Some have estimated that over $1 trillion will be lost in the coming year. Who wants to buy more discounted shares of banks and throw good money after bad?

Does OPEC have a conspiracy to make a global recession with the ultimate aim of Islam domination of the world?

The world should wake up to this potential. 9/11 was a failed attempt to take the west down by force, hitting US financial center, the Pentagon, Congress and the White House. While a military victory is possible with nuclear weapons, but might they also try an economic war through the use of oil?

In this view of the world, it is very hard to figure how China will be affected.

2008 Jun 07 09:00 PM