Some years ago, in still another life for me, I taught writing classes at the university here in my hometown. One class I taught was “Writing and Critical Thinking,” which focused on analyzing arguments and then developing written arguments both for and against a premise. Now, if I were king for a day, I would dictate that every person in the US of A take that class. Not only would it improve everyone’s overall communication skills, but it would also help us see that not all issues are black and white; shades of gray dominate the spectrum in which all issues reside.
The point of telling you this is that market pundits and analysts are often guilty of structuring their arguments in simplistic terms, which negates the subtle nuances inherent in complex economics. For example, I often hear/read that China is headed for an economic slowdown and this means a resulting slowdown for the global economy. On the surface, this appears sensible, and to a degree, it is true, but another way to see a Chinese slowdown is that it will actually help speed up the global economic recovery.
The issue facing China is inflation. For some years now, it has engineered a growth rate that is not sustainable over a long time. An economy simply cannot grow at an annualized rate of 10% or more. The pressures are just too great and the expectations of a continuing boom period are high, which can breed unrest. So now, China is taking steps to slow down its economy because continuing a forced growth rate of 10% or more is creating inflation and civil discontentment verging on civil unrest. Housing prices are extremely high, gas prices are high, food costs are rising, pollution is rampant, and, most of all, culture shock is setting in as traditional life patterns are changing. All of this points to potentially bad things happening.
Now some analysts point to the fact that China is the engine of global economic growth, and if its economic growth rate should fall precipitously, it could mean that Europe and the U.S. would follow suit, as all three economic entities are so closely entwined.
Most commodity prices fell on concerns that China may take more steps to slow its economy. Demand from China has helped send commodity prices sharply higher over the past year.
Now, it is all about perception, but what if China succeeds in engineering an easing of its growth rate? This would mean lower oil prices, lower food costs, and lower prices for industrial metals for the rest of the world. These lower prices would mean less inflationary pressure, which, in turn, would help speed up economic recovery in both the U.S. and Europe. Despite what the Fed is telling us, inflation is here, has been here for some time (forget housing), and it is costly to our economic recovery (thank you China). Imagine if the average price of gas dropped substantially, or the cost of milk, bread, and eggs dropped, or airline tickets went down instead of up. In the end, it always comes down to consumers and how much money they have to spend. If the cost of living goes down, more money goes to discretionary spending, which boosts economic growth. Think about it as a good thing if commodity prices drop, because it is a good thing.
Trade in the day; invest in your life …
