Fighting inflation in China

Inflation is a political problem, especially in China, where it can mean regime change.

Inflation itself is not so much an economic problem- it doesn’t hurt growth and employment.
But fighting inflation can very much hurt growth and employment.

The first thing the monetarists do is hike rates, which actually more likely makes inflation worse through the cost and interest income channels.

But inflation also generally causes fiscal tightening as nominal incomes, spending, and therefore taxes of all kinds
tend to increase faster than govt spending. (In the US, for example, this led to Carter’s small surplus in 1979.)

And the budget deficit falling as a % of GDP works against domestic demand.
As does the various types of credit controls govts sometimes resort to.

The currency depreciates but trade probably doesn’t go anywhere as costs go up pretty much lock step.

So in the case of China, growth probably slows with the relative fiscal tightening and state lending curbs.

The currency could ‘naturally’ fall and if it does, China will be accused of using it as tool to support exports, so it may intervene some and spend some if its reserves to support it at times.

Not a major problem for the US, but very problematic for the euro zone even if China just stops buying euro debt, never mind sell some to support its own currency.

And, China may be an important factor in commodity prices…

All looking good for the dollar, which is still probably way oversold due to unwarranted QE fears.

Looking ok for bonds as well, not so good for stocks.

(Yes, this post is a bit forced and preliminary.
Haven’t been able to quite see it all through yet.
More later as things develop.)

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