$300 for a Barrel of Oil? Or Would You Like That in Yuan?
China exports inflation: "This dynamic seems as inevitable as gravity itself." Chinese demand for oil and steel has pushed prices up in those markets. Now it is effecting commodities like cotton and food products. That's being passed on to developed markets like the U.S., and it will really hit home in 2012. This is in the process of happening.
At least since World War II, inflation has been America's primary export, believe it or not. Follow closely here:
•The dollar is the global reserve currency.
•The dollar inflates.
•Everybody still needs dollars to buy everything from wheat to oil.
•Dollar demand is relatively inelastic.
I'm not saying we don't feel the effects of our own inflation -- anybody old enough to remember the '70s knows that. But often the worst effects are felt by consumers outside our borders, who find that their gas and food prices are effected by the ever-shrinking dollar, year in and year out.
If the world decided to price things in, say, euros, suddenly we'd be importing inflation. The dollar's real weakness would come home in a very sharp and sudden and painful way, as we were forced to stock up on euros by buying them with dollars that nobody wanted anymore. I suspect the dollar price of a barrel of would easily double or triple under that scenario.
But how does that relate to China?
Chinese (and Indian) consumer demand has been pushing prices up on all sorts of commodities, but the increases most keenly felt are on wheat and oil. Remember, that the Arab Spring began as poor Egyptians could no longer afford to compete with (comparatively) rich Chinese for wheat. We're feeling the pain on oil prices.
I suspect there might soon be another element in play. As the link above details, China has been switching from export-driven growth to consumer-driven growth. They can't sell much more to us with our anemic economy and still enjoy 10% growth year after year. And anyway, China now has a 300-million-member middle class -- and they want iPads and Polo shirts, too.
Under export-driven growth, China needed dollars. Under consumer-driven growth, maybe not so much. That change alone might do much (or at least more than we'd like) to take away the dollar's demand inelasticity. And that would take away much of our ability to export our inflation, and turn us into an inflation importer.
It's a long process, to re-tool the world's second-largest economy from exports to consumer-demand. We can see the change coming.
But what will we do to cope?