IPad-Eating Central Bankers Face Inflation Surge: William Pesek
The economics of production is unpredictable. Just ask Steve Jobs.
Stock analysts are buzzing about how Japan’s unfolding crisis will affect production of iPhones and iPads. The country is a vital hub for everything from flash memory chips to batteries to the touch-screen overlay glass used in the Apple Inc. (AAPL) chief executive officer’s products.
A month ago, the worry was that companies were putting too many production eggs in a single basket -- China. Here comes highly developed Japan to remind us that the age of globalization can surprise in tantalizing ways. Which Silicon Valley or Detroit executive thought a magnitude 9.0 earthquake, a 23-meter (75-foot) tsunami and crippled nuclear reactors might knock a Group of Seven economy offline indefinitely?
Supply-chain disruptions are part of a bigger and underappreciated phenomenon: the extent to which Japan’s plight may worsen global inflation.
Along with forcing executives to scramble for production options outside Japan -- an effort that puts the pricing power in the hands of factory operators -- this crisis places additional pressure on raw material and food prices. That’s horrible news for Asia, where central bankers have been scrambling to head off consumer-price gains.
South Korean inflation climbed to the highest level in 29 months in March, adding pressure for another interest-rate increase. Korea is one of eight Asian economies that tightened monetary conditions last month. India, the Philippines, Taiwan, Thailand and Vietnam raised rates, while China and Malaysia told lenders to set aside more cash as reserves.
Even with China now No. 1 in Asia, the region’s developing economies are highly vulnerable to trade links with Japan. A strong yen also gives Japan considerable purchasing power over everything from food to oil to commodities needed to rebuild the devastated northeastern Tohoku region.
Without talking hyperinflation here, Japan’s experience is another force boosting costs. A look at disruptions to Asia’s supply chain during the past dozen years -- the SARS epidemic in 2003 or the so-called Y2K computer scare at the turn of the millennium -- buttresses the point. Both boosted prices for consumers and producers.
Price trends in microchips, lumber, liquefied natural gas and other items show that investors sense a similar dynamic is afoot. Also, Japan’s ongoing radiation crisis is causing something approaching panic in overseas markets. Cargo ships and airplanes are being turned away for the faintest hint of radiation, no matter how minuscule. That too could boost global prices.
Asia was experiencing a food crisis long before Japan’s March 11 quake. In February, the World Bank said global food prices had surged to dangerous levels, pushing 44 million more people into extreme poverty since June. Now, the region must contend with a wealthy population of 127 million outbidding everyone else for food.
Rising global prices aren’t just about too much demand meeting too little supply. They’re also about too much liquidity meeting too few investment opportunities. The Bank of Japan, which has held rates near zero for a decade, pumped hundreds of billions of dollars into the financial system since the quake.
Pedal to Metal
The Federal Reserve also is keeping its foot on the monetary accelerator. Its own Japan-style quantitative-easing campaign is flooding the world with liquidity at a time when central bankers from Brazil to Singapore are struggling to keep a lid on asset prices. A quirk of globalization is that BOJ and Fed liquidity is doing more to pump up real estate and stock values a world away than in their own domestic economies.
I wonder if that’s partly the point William Dudley, president of the Fed Bank of New York, was making in Queens last month. Asked by a group of average Americans about surging food and gas prices, Dudley pointed to Apple’s tablet as evidence inflation isn’t a problem. Today, he reasoned, you can get the newly improved iPad 2 for the same price as the original.
“I can’t eat an iPad!” quipped one member of the guffawing crowd, according to Reuters. Another reportedly asked: “When was the last time, sir, that you went grocery shopping?”
Dudley was pointing out the Fed’s view that “core” inflation is what matters. Yet he may have been referring, indirectly, to the monetary leakage the central bank is experiencing. The internationalization of the dollar and the U.S. economy means the Fed’s largess is often felt more in Bangkok and Hong Kong than Cleveland and Albany.
That goes for the BOJ, too. A malfunctioning credit system continues to hamper its decade-long battle to boost prices. As the BOJ pumps more yen into the financial system, speculators overseas will have more money with which to place bets. Put that together with supply-chain snafus and a surge in demand for commodities and you have a recipe for higher global costs.
Japan’s top exports in any given year include cars, electronics, steel, video games, heavy machinery, comic books and Hello Kitty. This year the nation has a new offering, one the world may not like.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
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