A tale of two economies, and how it affects us

By John Cheng

The world is seeing two economies, in growth rate and inflation. U.S. Federal Reserve chairman Bernanke, in a speech at a European Central Bank conference in Frankfurt on Friday, warned that a “two-speed global recovery,” with emerging market economies growing strongly while advanced Group of Seven countries are only crawling forward are hampering the cooperation the worldwide recovery need. For the past decade, the emerging economics have outpaced the developed economies and the gap has been widening. For the year 2000, the arithmetic average of the GDP growth rate for BRIC (Brazil, Russia, India and China) was 6.8 percent and the arithmetic average of G-7 (Canada, France, Germany, Italy, Japan, United Kingdom and United States) was 3.88 percent, the gap was 2.92 percent, and it had been increasing and widened to 7.44 percent in the year 2007. In the year 2008, U.S. saw zero growth and -0.14 percent for G-7 as a whole and yet the BRIC clocked the speed of 6.59 percent. In the recession year of 2009 China grew at 9.1 percent and India at 5.68 percent. This year China is expected to have grown at 10.46 percent but only 2.64 percent for the U.S. The recovery this year in the G-7 nations were unusually slow coming out of recession and the U.S. has never seen near 10 percent unemployment rate for so long. Fed defended their action for the round two of Quantitative Easing which had proved very unpopular among other nations, and went on to say that they could not rule out the possibility that unemployment might rise further in the near term and could bring an end to the tepid U.S. recovery. China and other countries had openly criticized Fed for using Quantitative Easing to devaluate the dollar, stoking inflation and threatened global economic stability. The consumer price index of China hit 4.4 percent in the month of October; the State Council of China said on Wednesday that it may impose temporary measures, including price caps on important daily necessities and a crackdown on speculations on agricultural futures, to curb inflation. People’s Bank of China raised the required reserve ration by 25 basis points, the second time in two weeks, continuing to mop up the excess liquidity. The Fed also claimed that Quantitative Easing was needed to squash deflation which could turn into a spiral. The inflation rate in the U.S. is now running at 1 percent, lower than Fed’s target of 2 percent and with the core CPI flat two months in a row it is worrisome. There are differences in the ways countries measure there CPI, in the U.S. food accounts only 13.74 percent of inflation while in China, food accounts for 40 percent of inflation and according the National Bureau of Statistics of China, food price went up 10.1 percent last month. Ben Bernanke also launched a direct attack on the slow pace of China’s steps to strengthen its currency, saying that China’s decision to undervalue the Yuan has essentially thrown a monkey wrench into the global economic recovery. China has maintained that the exchange rate is a sovereign issue of each country, which should be set by each country according to its own situation and the gradual appreciation cannot be rushed.

Sadly, the weak dollar had driven agriculture prices along with other commodity prices higher and faster than before, and it is having a devastating effect on the poor who only have a few dollars to spend every day. They are mostly likely from the emerging economies and the GDP growth rate means nothing.