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On the Effects of Chinese Inflation

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Dec 20, 2009
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I have often thought that international macroeconomics boils down to looking at all of the big nations that have some degree of economic flexibility, and are willing to make non-economic decisions for political purposes. They drive the excesses in the global economy through their actions.

It is not as if their actions have no cost, but that the cost is realized later. They get to impose their will for a time, but eventually their non-economic actions catch up with them, impoverishing them, and set the stage for the next set of actors to abuse their power.

Tonight, I want to talk about China. Bloomberg has a great piece up about Andy Xie, former Morgan Stanley economist who posits that China will head into inflation because of their monetary and fiscal policies. If true, it is my opinion that a bursting of a China Bubble will decrease demand across the world. The world depends on a China with increasing demands for all kinds of raw goods.

My view is that China is stretching itself too far economically. The powers that be chose too fast of a growth path, and inflationary consequences will come, and spread to assets in China, as well as Western nations.

In the long run, there is no free lunch. No country can permanently force the rest of the world to do their bidding, whether that is buying up debt, or buying goods or services. Eventually the terms of trade change, and either value is delivered, or trade collapses after a default.

David Merkel

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