China at turning point?

July 24th, 2007

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In our previous article, How does the US export inflation?, we mentioned about the price inflationary effects that the US has on the rest of the world. China, on the other hand, through its artificially low Yuan and massive growth in industrial productive capacity over the past decades, had a disinflationary effect on the rest of the world. As we said before in The Bubble Economy,

… another force was at work in curbing Australia?s consumer price inflation – the rise of Chinese manufacturing. In recent years, Chinese productivity had soared, which means overall, the Chinese economy was producing more and more goods at lower and lower costs. In China itself, that had a good deflationary effect – the fall in the consumer price levels. As China exported more and more of its cheaper goods to Australia, the effect on Australia was disinflation (decelerating growth in consumer price inflation). That helped keep a lid on the Australian consumer price inflation.

Today, this piece of interesting news caught our eye: China’s Exported Inflation May Signal Interest-Rate Pressures,

China, a source of cheap manufactured products for the past two decades, may be starting to export inflation as the world economy grows at the fastest pace in a generation.

Prices of U.S. imports from China increased 0.3 percent in May from the previous month — “the first sign I’ve seen that this disinflationary pressure” from China’s cheap goods may be fading, former Federal Reserve Chairman Alan Greenspan said last month.

If this is true, then it means that China’s industrial productive capacity may be reaching its limits.

As we had warned before in Have we escaped from the dangers of inflation?, with central bankers around the world ?printing? so much money, there will be no escaping of price inflation in the long run. Modern central bankers’ discourse have consistently failed to make clear the root cause of price inflation?monetary inflation. Thus, we urge our readers to read this article of ours once again: Cause of inflation: Shanghai bubble case study.

The reason why central bankers could get away with not raising interest rates despite the ballooning supply of fiat money is because of China. Now that China has its own price inflation problems to worry about and may be reaching the limits of its own productive capacity, the global economy may soon be paying the price (forgive the pun) of irresponsible central banking, principally the Federal Reserve of the United States.

Therefore, we see that in the months and years to come, barring a serious deflationary crunch, the era of cheap money will be ending i.e. interest rates will be rising. With that, the heavy gears of the global economy will change gradually and the business cycle will turn (see our articles on the Austrian Business Cycle Theory).