“China’s inflation trap”

The always-excellent Peking Duck on the future of the Chinese economy:

We’ve seen all kinds of warnings over the years about China’s economy. Several years ago it was all the rage to talk about the “hard landing” China was in for after so many years of growth. Never happened. The banks were going to implode and drag the country down. Never happened. The property bubble was going to pop. Hasn’t happened yet (though I think it’s inevitable). Doom and gloomers also made the general prediction that China’s collage of overwhelming problems — the environment, corruption, local unrest, the class divide — would all contribute to “the coming collapse of China.” It was imminent. I thought so too, back in the earlier days of this blog. Yet China keeps on going, the same existential problems dragging on it like shoes stuck in tar. And yet it keeps going.

Since so many “experts” have been so wrong for so long about China’s economic downfall, it’s risky to point to yet another calamity and say it could bring things crashing down. Maybe the effects of inflation won’t go that far, but I’m not so sure.

Just about nothing is as catastrophic as rampant inflation. A deflationary depression is the only thing worse, but they’re pretty close. As prices inflate, your money can be turned into confetti before your eyes. And it forms a vicious vortex as everyone demands more pay which only fuels higher prices and rents, and one thing feeds on another and the catastrophe spirals out of control.

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My own amateur opinion mirrors what I recently read in this superb post that is too complex and detailed for me to quote from, but that should be read by all. The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

In the meantime, my heart goes out to the Chinese people. Inflation is devastating, and I hate to think of how many decent people are going to see much of what they worked for washed away.

One thing- one of the links he provides claims that a severe slowing of the growth rate won’t lead to increased social instability. He provides Japan as an example, but I think the contrary examples provided by many North African and Middle Eastern countries this year might provide a more accurate model of what could happen here.