Tuesday, December 11, 2007

China: Inflation Rising

Inflation Picks Up in China; Trade Gap Grows
Consumer prices were 6.9 percent higher in China in November than a year earlier — the biggest increase in Chinese prices in almost 11 years. The big contributors were food prices, which vaulted 18.2 percent, and fuel prices, which climbed 5.5 percent as the Chinese government raised regulated retail prices for gasoline and diesel, although these prices remain slightly below world levels at $2.65 a gallon.

Is this really all that surprising? Let's go back in time a bit.

June 12, 2007
China must keep real interest rates positive: NDRC
"Let's make it simple: we can't put our money in the bank if interest rates are negative. We must at least give deposit holders some interest," Zhou said in a live Web cast on the Chinese government portal www.gov.cn.

Make the money so toxic that you have to buy something with it before it loses its value. That's a fantastic way to run an economy.

"There's no need to worry about big price increases. The scenario is unlikely to play out," said Zhou.

Yeah, that not worrying theory is working out just great so far.


Anonymous said...

China took a page out of Greenspans book - Don't ever let cash be a store of value. If the economy or consumer spending even thinks about slowing, immediately apply liberal doses of low or negative real interest rates at regular monthly intervals.

Greenspan to wage earners: You will spend your money or we will spend it for you.

It really is amazing the silliness that results from manipulated interest rates.

Stagflationary Mark said...

I'm still trying to figure out the cause and effect. Maybe the government is somewhat powerless once the money has been printed.

The money simply floods everywhere.

Picture our banks. Once the real estate bubble starts to pop, they no longer need to attract deposits like they once did. They no longer write as many loans. Therefore, they offer lower rates. Meanwhile, investors try to hoard cash (buy less goods) since they are scared.

Too much cash laying around, when there are no alternatives to invest in, can seem to lead to lower interest rates. Make that lower real interest rates.

Anonymous said...


I'm not sure reserves have as much to do with residential mortgages loans as most think. I think the view has been that since RE loans are backed by property and a wage earners promise to pay interest on an appreciating asset, reserves are not required. This is why the current housing deflation combined with 100% LTV is such a big deal. Back when a 20% downpayment was required the system was safe.

If you want to lose sleep, just look at fannie mae's and freddie mac's balance sheets. They were insolvent years ago, and now its off the charts. 40% of U.S mortgages are backed by the GSE's. There is north of a trillion of assets backed by say 50 billion in dubios equity, all insured by credit default swaps. There is no way to insure or hedge a balance sheet of that size. Nobody can make heads or tails of their balance sheets. Its just treated like a gov't bond. They also guarantee rmbs's out the wazoo.

Stagflationary Mark said...

think the view has been that since RE loans are backed by property and a wage earners promise to pay interest on an appreciating asset, reserves are not required.

That "appreciating asset" assumption is seriously stress testing our financial system, and the party is just getting started.

It is like a mother who never wants her son to fall. At some point he thinks he's invulnerable. Safety nets at every stage simply encourage more risk taking. At some point the mother becomes overwhelmed.