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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: pogohere who wrote (75217)12/10/2006 9:15:31 PM
From: GST  Read Replies (2) of 110194
 
There is no issue that credit expansion is running ahead of productive investment in the United States. Credit comes from Japan and increasingly from places like China and the middle east that run huge trade surpluses. However, within China there has not only been an astonishing rise in money supply, but also an astonishing mobilization of resources -- notably human resources and capital investment to put that labor to productive use. The enormous trade surplus of China and its massive US dollar reserves are the result of China increasing the supply of available labor and openning their economy to foreign capital investment. This labor pool has been globally disinflationary and there is constant upward pressure on the RMB -- a currency that only a few years ago had no value on international markets. You might not have been around, but the initial financing of the three gorges dam was going to be entirely based on counter trade because nobody thought foreigners would accept the RMB. Now it is hard to keep people from buying RMB as a hedge against further dollar weakness.

We are now at a point where the Chinese labor pool is showing strong signs of running out of near term growth potential -- this is clearly the case now in southern China. Ditto for commodities. Soaring commodity prices are well known and the causes are complex, but nobody who looks at commodities can seriously doubt that the shifting demand and supply balance has played a role in prices -- it is certainly a factor as important as credit and money supply. What is less obvious is that China can no longer keep up with demand as factories in the south cannot attract and retain enough workers. We are on the cusp of increased inflation, RMB appreciation and tighter terms of credit, even as our economy slows -- indeed in part because our economy is slowing.

You can stand back and wonder at why anybody would bother to debate the definition of inflation -- it is silly really as there is little serious dispute as to what is meant by inflation outside of a few fringe elements. But admit it or not, this thread is dominated by people who define inflation in a way so silly that it makes a mockery of the concept of a grown up conversation of the bond bubble ans its consequences.
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