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China's New Inflation Bodes Ill for US



December 16, 2010 – Comments (12) | RELATED TICKERS: YANG , BRIS.DL

By Christopher Ruddy

A well-known American businessman called me recently. He wanted to talk politics, but he started the conversation by saying, "Short China. If you want to make a lot of money, short China."

He alluded to having information about the precarious state of China's economy, but he couldn't share all of the details. This was just two weeks ago, but some data is starting to emerge that my friend may be right.

Just this past weekend, China announced that inflation had hit a 28-month record of 5.1 percent for November.

The announcement seemed to stun many as a complete surprise. The Chinese government was quick to blame surging food prices. But food prices had nothing to do with it. Rising food prices are an effect — not a cause — of inflation. Indeed, Chinese fiscal and monetary policies had everything to do with it.

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12 Comments – Post Your Own

#1) On December 16, 2010 at 12:43 PM, mtf00l (43.10) wrote:

This is off topic, what is your avatar and what is it about?

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#2) On December 16, 2010 at 12:54 PM, 100ozRound (28.52) wrote:

It's the Ludovico Technique

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#3) On December 16, 2010 at 1:01 PM, kdakota630 (28.87) wrote:


LOL!  It's from a scene from my all-time favourite movie, A Clockwork Orange.  

Long story short... the protagonist of the film (Alex) is convicted of murder and while in jail chooses (as a way of getting out of jail sooner) an experimental therapy called the Ludovico technique.  My avatar is taken from one of those scenes where he's in a straight-jacket and his eyes forced open to prevent him from looking away at a movie screen (part of the Ludovico technique), in particular the 2nd scene he's in that situation when he becomes fearful that the technique will probably leave him with an aversion to his loved Beethoven's Ninth Symphony (although in the book it's all classical music).

A Clockwork Orange on Rotten Tomatoes

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#4) On December 16, 2010 at 1:27 PM, jlmjlm77 (97.82) wrote:

Does China have any real options other than letter the value of its currancy increase?

If so, why are people not buying their currancy? 


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#5) On December 16, 2010 at 1:31 PM, davejh23 (< 20) wrote:

It's interesting that several foreign markets are down nearly 10% from November highs and the US markets have not markets having been positively correlated recently.  If we don't get some kind of correction soon, I'm betting on an all out crash in 2011.

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#6) On December 16, 2010 at 2:08 PM, mtf00l (43.10) wrote:

Thanks K.  I'm familiar with the movie just didn't recognize the avatar.  That's awesome.  I'll let my vivid imagination run away with me! =D

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#7) On December 16, 2010 at 3:17 PM, rfaramir (28.66) wrote:

"Rising food prices are an effect — not a cause — of inflation. Indeed, Chinese fiscal and monetary policies had everything to do with it. And there are some real lessons for the U.S. because we could face a similar dilemma."

They start off right, then blunder. Yes, inflation of the money supply is the cause of rising prices, and yes, monetary policies had everything to do with it.

But there is a stronger connection to the US than just a "similar dilemma": they have pegged the RMB to the US dollar, so they have committed to inflating the exact same amount as we inflate. So *WE* have caused their rising food prices (and ours), because WE are inflating our money supply and they refuse to let us undercut them so they match us and share our fate of rising prices.

End the Fed! Or at least end fractional reserve banking, which is fraud, and then back what's left of our currency with gold.

Oh, and they may have a harder time weathering our joint money supply inflation: while their people work harder than ours do, and produce more real products, they don't have as much capital to make them highly productive workers, and they can't export their inflation (the US dollar is the world's reserve currency for now), so their people are hit harder by it than Americans. On the other hand, they are more used to hardship than we softies are, so though it will hit them harder, they may be better able to bear it than we are.

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#8) On December 16, 2010 at 6:40 PM, ChrisGraley (28.49) wrote:

I'm wondering if it's now possible that China goes through deflation! Don't ask me to explain, it's an extremely long answer, but when I look at the real estate bubble and the ghost cities, and the huge holding of US debt, I can't help but think that in today's times that they might be bitten by the enemy that they never saw coming 20 years ago.

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#9) On December 17, 2010 at 5:27 AM, JakilaTheHun (99.92) wrote:

The author's point about the stimulus package is a good one, because that's pure money-printing.  However, he ignores the bigger issue with China, which is (a) the Dollar peg and (b) the shadow banking system.

The Dollar peg restricts China from dealing with inflation in the way that the Federal Reserve here in the US does not have to worry about.  

The shadow banking system is also a problem in China because there's really no way to reign it in.  This is a natural occurance in a government that is overprotectionist and overregulates.  Look at most third world economies and the legal and regulatory systems are so convoluted and horrible, that black market economies emerge.  You don't want black markets, because they sweep everything underground and make things more difficult to monitor. Not to mention, they are inherently inefficient and tend to lead to other problems.

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#10) On December 17, 2010 at 5:33 AM, JakilaTheHun (99.92) wrote:


I'd say that deflation would be a natural consequence of an asset bubble bursting in China.  It certainly happened in Japan and China has basically modeled itself after Japan from the '60 - '80s. Or more accurately, maybe I should say "Japan on steroids." 

The only thing that might make me hesitant to suggesting that deflation will occur in China is how extremely interventionist the PRC is.  In a more market-oriented economy, deflation would almost be a given, but the authorities in China may certainly decide that they'd rather have high inflation rather than deflation. 

The troubling sign to me is that in spite of rapidly rising inflation, they have decided to stop taking aggressive actions to cool it off.  Maybe this is just a brief lull and they'll resume trying to stomp inflation down, but I worry that they might decide to try to "control inflation" through less effective means.  We already know they are trying to stomp out food price inflation with price controls, which have pretty much always failed historically.

So all in all, this seems very unpredictable to me.  I'd like to bet more on a China collapse, but it's unclear to me what form it will take at this juncture. 

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#11) On December 17, 2010 at 11:19 AM, mhy729 (30.29) wrote:

God I wish somebody would conduct a DDoS attack on the websites these spammers are promoting.  Or infect their systems with a trojan or something.  So f'ing annoying.

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#12) On December 20, 2010 at 4:20 PM, kstarich (28.74) wrote:

Yep, I see it in the astrology chart for China.  A very hard transit of Pluto oppose Uranus once in 240+ year transit.  Most likely a major revolution 2011 with the people and they will look to India for bailout.

Your business friend will be right.

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