BarroMetrics Views: China and Its Inflation Rate II

If you want to see what will happen to the US when the money deposited in the St Louis Fed Reserve hits the Main Street, you need only look at China.

When the sub-prime hit, China responded like the US - with massive injections of liquidity. For example in January 2010, bank lending was US$88 Billion, almost twice the monthly average in the second half of 2009.  The difference between the US and China,   was the Chinese banks lent the money to Main Street whereas US banks deposited the funds with the St Louis Fed Reserve.

The result was a massive rise in inflation. Figure 1 shows the exponential rise in inflation, especially in the past couple of months. The Chinese Government responded in typical fashion: what China has to do to stem the tide is to raise rates. But apart from a surprise and very small rate rise (0.25) in October, it has resorted instead to increasing the bank deposit ratios. That has not worked.

Figure 2: The FT reports that inflation is on the rise BUT some Chinese officials are concerned that any move to quell inflation will slow growth.

In my view this is what the FED will face when the FRED graph starts to drop. Unfortunately for the US while the perceived problem in China will be a slowing of growth, in the US it will be one of preventing stagflation, at best; at worst, a hyperinflation led deflation.

FIGURE 1  Inflation Rate

FIGURE 2 FT

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