More Policy Blunders

At least this one isn't in America:

http://news.xinhuanet.com/english/2008-09/11/content_9913884.htm

Here are the problems with the policy:

1) CPI is not necessarily an indicator of inflation (ie, an increase in the money supply). Especially if there are price controls in place (!). There are hundreds of factors that contribute to the CPI, and inflation is one of them. The kind of inflation that is promoted by most central planners affects producers first, so the increase in prices usually affects capital goods first before it trickles down to consumer goods.

2) Recession will not arrive because of weekening demand in the export sector. Recession will arrive because the entire world has been pumping liquidity into the global market (China especially) for the last ten years, and that credit bubble has to burst. Consumption will fall when credit runs out and real savings has to kick in. When it is realized that there is not enough real savings to support the inflated credit, the construction industry and capital goods industries will collapse. When those industries collapse, and unemployment surges, consumption will collapse behind it.

3) By enacting price controls, the government is protecting consumers, and encouraging consumption, at the expense of producers. The producers will be hardest hit by the credit collapse, because they are the first to receive the expanded credit, and they were the first to invest that credit in industries that ultimately won't be supportable long term. Since price controls are in place, profits are being drained. When the economy collapses, these producers will have no reserves to keep themselves afloat. Forget about growing, these companies will break in half because of their unsupportable debt, and the inability to make a profit.

The response, of course, will be more credit to artificially fuel growth, and more price controls to keep the CPI down. This will, of course, aggravate the problem. Unfortunately, I think China is going to have a really hard time getting out of this because of their political philosophy. It's a communist country. They are not going to be willing to relinquish control in order to let the market sort things out for itself.