Kass: China's Less Cheap; That's Bad for U.S.

This blog post originally appeared on RealMoney Silver on Feb. 5 at 7:32 a.m. EST.

"China has been the world's factory and anchor of the global disconnect between rising material prices and lower consumer prices. But its heyday is over. We're going to see higher prices."

-- Dong Tao, Credit Suisse

"This is what I call the perfect storm. We've got higher labor costs and labor shortages, plastic prices have gone way up, and we're doing more safety testing."

-- Alan Hassenfeld, Chairman of toy manufacturer Hasbro

"Companies are now ordering for the spring of 2009. Chinese (clothing and footwear) factories are coming back and asking for 20, 30, 40, 50 percent price increases."

-- Nate Herman, Director of International Trade at the American Apparel and Footwear Association

"There's a shift in sourcing driven by higher prices in China. We've already seen a big move in furniture to Indonesia."

-- Bruce Rockowitz, President of Li & Fung

"Because of new cost pressures here, American consumers could see prices increase by as much as 10% this year on specific products -- including toys, clothing, footwear and other consumer goods -- just as the United States faces a possible recession."

-- David Barboza, The New York Times

In the last economic cycle, China was a strong deflationary force.

The era of importing cheap goods from China, which helped to fuel U.S. corporate profit margins and enabled the U.S. consumer binge, might be over, as a weaker U.S. dollar against the Chinese yuan, stepped up enforcement of environmental laws, soaring energy and raw materials costs, and materials shortages are serving to increase the price of Chinese exports.

Though only rising by about 2.5% in 2007, the outlook for price hikes of Chinese exports has materially worsened, and this at a time the U.S. faces a domestic recession.

Over the last week, fourth-quarter 2007 earnings calls at Colgate-Palmolive (CL), Clorox (CLX) and Procter & Gamble (PG)) support the notion that inflationary pressures are rising -- this in direct contrast to the Fed, which sees no such inflationary evil and is hellbent on cutting interest rates aggressively in the face of its perception of deflationary/recessionary risks -- and so does Friday's ISM Prices Paid, which rose to 76 from a consensus forecast of 68.

All this occurs against the backdrop of 55-year highs in U.S. corporate profit margins and an extended and levered consumer who can no longer draw on his house as an ATM and has not saved.

Inflation is the cruelest tax of all.

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