The Federal Reserve Board is holding a routine meeting this afternoon. But nothing is routine after a recession that has produced damage and unmasked distortions on a level not seen since the Great Depression — and in many ways never seen. The Wall Street Journal has a story about a debate shaping up between two factions on the board as to the exit strategy from the mammoth amounts of money pumped into the system to prevent deflation.
One argues that the economy is still weak, with high unemployment dampening spending and low house prices, so deflation remains a danger. The other says inflation is being masked by some of these same factors and could break out if the Fed doesn’t move faster to raise rates from essentially zero. Ben Bernanke doesn’t have command of the board as did his predecessor Alan Greenspan, so this lack of consensus is telling.
Not everything is in the Fed’s control. For one thing, demand for Treasuries fell in the most recent auction, a reminder that rates may have to rise to entice investors into U.S. debt. Also, as Greenspan said in the 1991 downturn, “you can’t push a string.” There’s a limit to what interest rates and monetary policy alone can do when the economy remains fundamentally broken.
The Back Story: Writing on the Harvard Business Review blog, Liu Shengjun offers some insights into the case of China’s prosecution of Rio Tinto. Although the article doesn’t provide “the truth,” as billed, for this is not a transparent legal system, it’s essential reading for doing business in China.
Fact is, Rio Tinto’s employees failed to respect “face” — key in our culture — so the government had to step in. Bribery is a weapon that companies, both local and foreign, often use in China, and courts and governments overseas have indicted several multinational companies — such as Lucent, Siemens, Daimler Benz, Carrefour, IBM, and Wal-Mart — for using corrupt practices in China. According to a survey conducted in 2007 by the Anbound Group, the Chinese government investigated 500,000 corruption cases between 1996 and 2006, and 64% of them were associated with international trade and foreign investment. Nothing is easy but everything is possible, as the Chinese saying goes, because of the enormous power and low salaries of many bureaucrats.
Among the lessons: Trust and “face” matter, and “keep a low profile.”
Today’s Econ Haiku:
Some hate this haiku
I’m walking my doggerel
So please lighten up