While this doesn’t actually work to curb lending, it does indicate that China continues to see inflation as a severe enough of a political problem to risk a serious slowdown. And while it’s not impossible, I’ve yet to see any nation succeed in cutting what they call inflation short of increasing their output gap- and most often with a dramatic slowdown.

So while the 9% of GDP US budget deficit continues to support modest GDP growth and only very modestly increasing employment, a combination that’s a pretty good environment for stocks, the risks outlined at year end continue to increase.

China continues to fight inflation which can soften thing sufficiently for a commodities retreat. The euro zone continues its austerity and is already showing sings of weakening domestic demand from levels that weren’t all that high. The US Congress continues to press for deficit reduction well before private sector credit growth is ready to take the hand off, and with all sides agreeing there’s a long term deficit problem there doesn’t seem to be much resistance.

It’s all deflationary, and I continue to watch for a strong dollar as a timing/cue to the potential global slowdown.
So far world crude prices hovering at just over $100/barrel are keeping the dollar in check, but doing so by bleeding off some US domestic demand.

China raises bank reserve to curb lending

February 18 (CNBC) — China ordered its banks Friday to hold back more money as reserves in a new move to curb lending and cool a spike in inflation.

The order raising reserves by 0.5 percent of deposits was the second such move this year by the central bank and followed six reserve increases in 2010. Reserves vary by institution but are about 20 percent for China’s biggest state-owned lenders.

Beijing is using a series of repeated, gradual hikes in interest rates and reserve levels to stanch a flood of lending that helped China rebound quickly from the global crisis but now is fueling pressure for prices to rise.

Inflation is politically dangerous for China’s communist leaders because it erodes economic gains on which they base their claim to power. Poor families are hit hardest in a society where some spend up to half their incomes on food and millions have seen little benefit from three decades of economic reform.