STAFF NEWS & ANALYSIS
Inflation Bell Tolling for China?
By Staff News & Analysis - November 29, 2010

Out of Control Inflation Leaves Chinese Regime With A Few Options … Chinese authorities have finally admitted that inflation is out of control. No matter how Beijing plays with the Consumer Price Index (CPI) by using rent instead of the purchase price when calculating housing costs, the rapidly rising prices migrant workers must pay for meals and the daily increasing food prices with which housewives must contend make it hard to cover up any more. Deutsche Welle's recent report on the political impact of China's inflation tells us why the Chinese Communist Party (CCP) admitted the existence of runaway inflation. Although it wasn't a secret, the warning by officials of the National Development and Reform Committee to prepare for higher inflation is very rare. It is also uncommon that here would be such differing estimates of the inflation rate, ranging from 5 percent to 15 percent, between the National Bureau of Statistics, the National Development and Reform Committee and the banking industry. For the past decade, China's broad money supply (M2) has increased 18 percent annually, nearly twice the official GDP growth rate. Considering the poor quality of the official GDP data, M2's relative growth rate is even more alarming. – Epoch Times

Dominant Social Theme: Is it time for a war yet?

Free-Market Analysis: Working with elves is not like working with humans. They tend to be scatterbrained and imprecise – financial analysis being a good deal different than toy making. So why is it we ask, that only a few "big uns" as the gnomes call us, a bunch of Swiss shorties (gnomes) and a scattering of vague elvish types were able to predict this state of affairs in China (regarding price inflation – see article above) close to two years ago. It is pretty serious stuff, after all. And entirely predictable if one understands free-market economics.

But did Bloomberg suggest ruinous Chinese inflation – at some point in time, anyway? The Wall Street Journal? Forbes? Sure there were reports of Chinese price inflation: but these were almost invariably of the variety that indicated that the Chinese powers-that-be had a problem that they were taking steps to correct. Maybe there were a smattering of reports that indicated the situation was far more dire than that (we never saw them).

In any event we went ahead and wrote that the Chinese miracle was over; that sooner or later, inevitably, price inflation was going to cook the communist party and the old men who run it. Find an article in the mainstream press even today that predicts this. They are few and far between, though moreso in the alternative press (which still casts the Chinese as an efficient ogre, the yin to the Western, dissolute yang).

Our elves make virtually nothing. Our Swiss gnomes like to say they "pretend to work" and we "pretend to pay." Even we few big uns don't make a lot, certainly not compared to the top brainiacs at Forbes, Fortune, Businessweek, Bloomberg, the WSJ, etc. Our elves don't have any advanced degrees; there is no possible way our Swiss gnomes could ever participate in higher education. (They tend to "cavern-school.") But these mainstream reporters went to the best schools and participated in the finest matriculations. So why was it up to a bunch of shorties, expats and others to make the "hard calls" regarding China.

We challenge anyone to go back even to early 2010 and find numerous mainstream articles definitively calling out Chinese price inflation and what it is going to do to Chinese society and the CCP. Hey, the take-down of the hottest, largest economy is a big deal. We just wrote about it again: "What Happens When China Collapses?" And you can see another of our articles on the subject way back in July of 2009. (But we've written about 20-30 of them, we figure.)

Click here to read: Chinese Bank Announces Bombshell / Friday, July 10, 2009

The mainstream media is almost relentless in its inability to spot patterns of any kind. Everything that happens in the mainstream media is a sudden, jarring surprise. North Korea goes to war (almost) with South Korea. Surprise! Sovereign debt crisis in Europe. Surprise! Economic crisis? Surprise! Chronic joblessness? Surprise! Gold up? Surprise! Silver up? Surprise! Gold and silver up even higher? Surprise! Say, when China begins to have food riots, will that be a surprise too? We are way past assuming this is merely ignorance. Or if it is ignorance, it is purposeful ignorance.

The Mises Institute has been around for a decade now, online. Congressman Ron Paul has been speaking out nationally about the Federal Reserve for several years. The business cycle exists. In its modern, ruinous form it is a product of central banking. You won't find the mainstream writing about that either. As for the eventual meltdown of Communist China when it does happen … Surprise!

The article we open this analysis with in the Epoch Times (an international publication of the much suppressed Chinese Falung Gong) is part of a trend to more fully spell out what's going on China. (About time, we suggest.) The Times, later in the article, even spells out Chinese options in much the same way that we have these past 20 months or so. Here is a condensed version:

Option 1: An Active Response. That more currency is in circulation than there are productive assets is the main reason for the inflation, especially when taking into consideration the $2.4 trillion in foreign reserves, which have been converted into RMB and put into circulation, and the over ten trillion yuan issued to stimulate the economy in recent years. To eliminate inflation, the most effective way is to get the money back. Part of the foreign reserves could be returned to people. How can that be done? One could allow the yuan to trade freely …

Option 2: A Passive Response. This option is not as effective as Option 1, but it would still strengthen the currency and cool down inflation. Appreciation of the RMB is a simple way of easing inflation. One could use monetary measures to either increase interest rates immediately, or appreciate the RMB substantially, or both…

Option 3: Do Nothing. It is also possible that CCP could choose to do nothing. This is in their interest, but doesn't guarantee that the people would do nothing under the huge pressure of high inflation. The public's anger and discontent are bubbling underground and could burst at any time…

Option 4: Transfer the Crisis. CCP could choose to transfer the crisis should inflation go further out of control. They could: launch a war, provoke war between other countries, or issue a new currency, forcing people to exchange the yuan, which is what North Korea did. Of course, there are also risks associated with this option.

These options are more elaborate than our statements on the China, price inflation and the CCP, but only because the article's writers and editors seem to believe that there is still some way back from the massive price inflation the CCP has unleashed on China (Option 1). There is not. Even were the Chinese government to somehow place the inflated yuan directly in the hands of the Chinese people, it wouldn't make a difference. It would just make the price inflation worse in fact.

Option 2, we've suggested – raise interest rates. But this comes with its own problems as there is not a central bank in the world that ever "gets it right." The end result is always the same. Once the government and central bankers have declared war (they always declare "war") on price inflation, the battle is waged and will not stop until the economy itself is a barren desert, a scorched earth, bereft of its bankrupted entrepreneurs and failed larger businesses.

Options 3 and 4 we've discussed as well. If the Chinese CCP leadership does nothing, price inflation will continue to increase until it is intolerable. The options will be then to leave China (for the old men of the CCP anyway) or to come up with some way to distract the Chinese people and focus their wrath on something other than the party leadership which will be seen as having betrayed the country one time too many.

We have lately been exploring the idea that much of what is going on in the world today is some kind of shadow play. This does NOT mean that the power elite has not had its reversals in the age of the Internet. It does mean, if our suspicions are correct, that much of what is occurring is predictable and thus HAS been predicted. Certainly the Anglo-American elite anticipated the economic crisis – though perhaps they didn't anticipate its death. Certainly, China's coming meltdown is being anticipated as well, thought not written about regularly as of yet. When it is being written about regularly, well … watch out!

After Thoughts

So what are the possibilities, then, if some of what is occurring today is in a sense being "stage managed?" Even the crises seem to have a ring of predictability. Negotiations are always breaking down at the eleventh hour and then being salvaged. What is just as disturbing is the idea that so much misery is in fact, in a sense, planned, is the increasing drumbeat of war (see other article, this issue). The Middle Eastern wars (both Iraq and Afghanistan) grind on in our view. The Koreas are on the brink and Iran is obviously next up for the US and NATO, if it comes to that. The war on terror itself is constantly expanding and is now being promoted in Yemen. Central banking is an inherently unstable system and sometimes it breaks down altogether as it did in the 1930s. It took a world-wide war to kick-start a renewed and grander incarnation of the wretched system. Will there be war again?

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