The Hyperinflations Were Partially Correct --- They Simply Chose the Wrong Country
March 11, 2010
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The Hyperinflationist Brigade has been out in full force for at least a year now. Big names such as Jim Rogers, Mark Faber, Peter Schiff, and about 95% of the world's supply of goldbugs have all jumped aboard the train. The basic theme that has been echoed over-and-over again is as follows:
(1) The U.S. is headed towards hyperinflation
(2) The Federal Reserve is response for creating such hyperinflation
(3) Invest in China --- that's the future!
Well, not so much. The hyperinflations were correct that there is potential for hyperinflation ... they simply chose the wrong country.
China's Bubbly Problem
The most recent figures from China show M2 money supply growth of 25.2%!!! That's right ...
25.2%!!!!
That is a scary figure! Throwing around the "H"-bomb might even be totally appropriate here.
The goes back to China's currency manipulation, combined with its massive stimulus packages that make the US stimulus look puny in comparison. China's currency manipulation is designed to increase exports at all costs, while the government has focused on maintaining and even increasing productive capacity. This has come in spite of the fact that China's most important trading partner (i.e. the US), does not seem to be buying as much. In fact, Americans are saving more and being more cautious with their money.
When you ramp up capacity, but you're selling less, what does that leave you with? Well ... excess supply. But that doesn't explain the inflation; just the economy inefficiency being created. The inflation is explained because the Chinese government has essentially put their economy on steriods in order to maintain their 8% growth targets. They are throwing money around to increase production, when none is needed.
The Chinese policy actions have been so extreme that China now faces the opposite situation as the US. Instead of underemployment, they can't find enough workers. Wages are starting to shoot up. Real estate prices have been shooting upwards everywhere, as well. The Chinese government has unleashed a beast they may struggle with for quite a while.
Markets may not be perfect and I'm no market fundamentalist; but allowing the markets to manage themselves is still the best way to produce an efficient resource distribution. And the Chinese government has moved away from that principle. Ironically, so have the so-called "Libertarians" like Jim Rogers that seem to be pouring money over there.
Deflation, Again?Meanwhile, in the United States, where prices are skyrocketing at rates of 400% per day due to the evil manipulation of the Federal Reserve ... oh wait ...
Actually, the most recent M2 money supply figures show the annualized growth of the past three months to be ... get ready ...
0.5%.
And it's trending down.
Didn't all that massive government spending cause inflation? What about all that "printing" we've heard about Bernanke engaging in? Haven't we seen this before? Oh, yeah, that's right ... Japan in the 1990s.
You see, Japan went on a massive spending spree after their crash in the 1990s, as well. And yet, all that spending couldn't even cause much of a dent in inflation. In fact, Japan dipped back into deflationary territory a few times in that decade.
But central banks are responsible for monetary policy, not fiscal policy. And just like the US, the Japanese central bank's main goal --- price stability. The thing about central banks --- since they aren't voted into office, the people at them tend to be fairly focused on achieving this goal.
Meanwhile, fiscal policy in the developed world is largely handled by elected legislators, who are constantly under pressure to increase spending and lower taxes. Politicians can spend all they like, though; we're not living in the 19th Century any more. In the olden days, if the Legislature spend too much, they simply created more money. This created inflation and sometimes, hyperinflation.
In the developed world today, hwoever, things are more complicated. The US is more like Japan than Zimbabwe and Congress and the Fed will continue to be at odds with one another. Congress wants to spend, spend, spend. The Fed wants price stability. The end result:
Crushing Debt.
That's precisely what the combination produced in Japan. But don't get me started on that. I hope we're not going there, but I'm not terribly optimistic. Right now, I see a Congress that likes to spend and likes to cut taxes at the same time. I see a President who does the same. Both parties seem to be exactly alike. Maybe that should be my next post --- my plan to dramatically scale back US spending (and even lower taxes in the long term).
In the meantime, I'd keep away from China. I've been bearish on China for a few months, but these money supply figures are a real alarm bell to me. I'd also keep away from most commodities, because they could get pounded when China's imaginary growth pyramid finally starts to collapse.
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