U.S. Inflation • 14 March 2008 • The SnowBlog
I don't know what percentage of cheap goods sold in Walmart are made in China. I remember reading it was over a third some time back. Isn't it amazing you can do your manufacturing halfway round the world more cheaply than at home. I don't know how common that is, but it made think about the effect the wilting dollar will have on U.S. inflation. My guess is that in most inflationary situations, foreign imports are luxury goods, as far as the average household is concerned. So you switch to home-grown products. But America has been using China as its industrial heartland for some years now. And only China's policy of reinvesting the dollars it receives back into the U.S. has kept their exchange rates favourable for that situation to continue. So what happens now as the U.S. is forced to cut interest rates (making U.S. investment less attractive) and weakening the dollar? The cost of Chinese goods will already be rising. And as it rises, it will increase the price not just of foreign luxuries but of a thousand everyday items. Which will hit poor families hardest. They're also the families who rely on stores like Walmart for jobs. Did shifting exchange rates ever target the cost of living so accurately? Add in the fact that the sub-prime crisis is also most worrying for those with low incomes and I think that this is not a good time to be poor in America.
Maybe it will play out like post-War Britain. This time next year, America will have a major recession on its hands and for the first time in a long while a Democratic majority in both houses and a Democrat president. Maybe for America, just as it was for us, the time will be right for universal healthcare and a strengthening of the social safety net. (That's if the processes Naomi Klein talks of in the Shock Doctrine still allow some good to come from a crisis.)