It isn’t so much a feeling as a fact; the world seems to be spinning in two separate directions at the same time. While the reason for this might be left to the confusing realm of physics, the economic reality of this parallel event has created a pick and choose belief system that can put even your own fundamental principles at odds with itself. When you begin talking like an economist, suggesting that “on the other hand” this might mean that, you will know you have reached this kind of symmetry.

Let’s start with the Fed. It seems a foregone conclusion that the Fed will stop raising rates in the near future, perhaps as early as June. Excitement abounds on Wall Street as the chances that the steady tightening they have engaged since the overnight rate was an inviting 1% may come to an end. They seem fully focused on the direction of the interest rate in spite of the fact that the Fed wants these investors to believe that they are now data driven. That is quickly becoming the new buzzword reference to the old “wait and see” approach offered by Alan Greenspan.

So much for clarity. Without pinning their hopes on any one specific piece of data, the Fed has begun to issue quiet warnings of how their actions may be affecting that information. Phrases, such as “may be needed”, recently included in the latest release of the Fed minutes from their March meeting, are being systematically dismantled by the governors of the FOMC with words of caution about possibly having gone too far.

Could this mean that interest rates will stabilize perhaps even retreat by the end of the year? In this universe, the one you and I reside in, it is possible that they have gone too far.

In a parallel one, however, they have no choice but to keep tightening. They see a diminishing labor pool in their universe. In ours, we see recent jobs numbers with far too many of the newly created jobs going to service workers. They see an increase in wages in their universe while we see an increase in prices in ours, offsetting any gains we might think we are getting. (In a Parallel Universe, Part Two, we will discuss what John Snow calls a “long-term trend to differentiate compensation” and how Congress continues to clamp down on the average American for no particular reason.)

In our universe, these price increases are real. In the parallel universe where the Fed lives, inflation is controllable, even manageable and is the reason why their rate hikes have been described as “data driven”. Inflation, the real one you and I and the rest of this country is forced to deal with is running about 4.3%. Remove the hardship of fuel and food and the number is halved. But who can remove those two commodities and call it reality except the Fed?

The problem with inflation lies mostly in its measurement. To define it could mean determining the value of money (problematic at best as central banks set monetary policy at the behest of their own governments), the illusion of wealth (which if you own a home in this country and haven’t leveraged it to the hilt, has given you the feeling that you have more money than you actually have when in fact, unless you tap that wealth, you only have conversational riches), or the effect of prices on supply and demand (which is measured by indexes such as the Consumer Price Index, a measurement of a basket of goods priced in an urban setting with gasoline factoring into only 5% of the total weight of that statistic).

With a slew of economic news as yet to be released before the next meeting, there is little likelihood that recent statements made by Fed governor Janet Yellen, president of the Federal Reserve Bank of San Francisco and her cronies suggesting that the Fed had gone too far actually mean that they have. Acknowledging this simply implies that monetary policy may be out-of-step with what is actually happening right now to the consumer and, also in the same parallel universe, the businesses that service them.

In the real universe, Chinese president Hu Jintao would visit the White House first when arriving in the United States, a nod to the leaders of this country that many visiting dignitaries feel obliged to do. Greet your host, have dinner and a photo-op and then tour the factories and farmlands of this great nation of consumers. Not so the Chinese president.

In a parallel universe, you first visit Bill Gates. And why not? To the Chinese, this is the United States. It is easy to blame the Chinese for their lackluster control of their currency, as John Snow and the policy advocates at the Treasury are wont to do, but the explosive growth in China is not just due to exports to hungry American customers. It is due to American business investment in that country.

Schmoozing with the Microsofts and the Boeings is just good business for the Chinese. With investment by American companies on the rise in that country – as of 2005, 49,000 firms have set up operations there, the Chinese are well aware of the boost international investment has given their economy and their people. Washington seems to want more from the world’s largest emerging nation. They should be careful what they wish for.

Unaware that the reality is in the 10.2% growth rate, deemed unsustainable (under the current Communist regime as voiced by many who make a regular habit of international assessments) compared to our much more mature 3.5% rate, the Chinese president will listen to more talk of human rights, copyright protection and democratic normalcy when he finally visits Washington. Mr. Hu will smile and nod and make nice with the rhetoric understanding all the while that without China, our economic situation would appear very dire indeed.

It should be noted that the Chinese have substantially slowed their purchase of Treasury debt in recent months. They have done so at a meticulously slow rate to avoid any appearance of alarm. They are still flush with dollars as the trade gap widens each day (the surplus reached $203 billion in 2005) but they are looking towards creating more internal development to handle their expansion.

For all of their rapid growth, they still worry about how it appears to the rest of the world.

They have sought to depress their double-digit growth numbers by spreading their economic statistics over longer periods. They have acknowledged that the country’s quest for commodities have forced them to do business with less savory providers of needed goods.

Cries from Washington about their devalued currency, the Yuan, are gradually being addressed on the Chinese mainland as they begin to invest in their own infrastructure. While Mr. Hu has yet to exert the pressures needed to create a western version of a vibrant economy – one that has good judicial, civil, and financial systems in place for support – he has achieved the right amount of moderation or should I say, he has been able to suppress the voices of political change.

Perhaps, with so much money at stake and such growth as yet realized, the parallel economic universe the Chinese are thriving in might cross over into the real world. We are intrinsically tied to the fate of their nation as American manufacturers, claiming American made goods such as Boeing planes, are actually more than just assembled here, turn to China for an alarming number of parts. If we blindly accept how they do business, do they need to change?

The old Chinese curse, understated and unlikely to be mentioned on this face-saving trip, the first since Hu took office in 2003 suggests that we “might live in interesting times”.

© 2006 Paul Petillo
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