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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: John McCarthy who wrote (93086)	1/20/2009 2:41:34 AM
From: Elroy Jetson	2 Recommendations Read Replies (1) of 116555

If China prints more money it can, given normal conditions, creates inflation in China. This in turn raises the price of labor and toothbrushes - in Chinese Renminbi. (But these are not normal times - with thousands of factories closing in China, you had better not count on inflation anytime soon.) Meanwhile outside of China . . . if the increased printing of Chinese currency causes a rise in Chinese Renminbi prices, this devalues the Chinese currency relative to other currencies. So inflation is not exported, unless the value of the Chinese currency does not decline. How could the value of the Chinese currency be kept from falling with internal inflation inside China? The Mundell-Fleming model says China can only control two of three factors in foreign exchange. If they decide to prevent the value of their currency from falling they have to either . . . A.) Give up control of their interest rates, and other economic policy, such as Fiscal Spending programs, or; B.) Implement currency controls prohibiting the free movement of capital in and out of their nation. The end result of either of these policies will be the further rapid collapse of their export market and thus 40% of their economy, and the political unrest which will accompany an economic depression far worse than what America experienced in America. We're talking about a 40% unemployment rate in China. Oh sure, I bet that's really likely. No doubt the Communist Party will order than up right away. China has traditionally chosen a fixed-exchange and choice B. But now they don't want to give up choice A. Fiscal spending programs are going to be the key to maintaining stability in China. So they have to either give up a fixed exchange rate, or they have to stop capital flows out of China as their export market vanishes. The reality is the exact opposite of what the article writer suggested. The "China Boom" exported inflation of commodity prices to the U.S. and as that boom collapses, this is reversing inflation for the U.S. and around the world by reducing the internal Chinese demand for these commodities. .

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