Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 6th February 2011.
While an economy-wide inflation-fueled investment bubble is in full swing, policy-makers will look smart. At least, they will look smart to the economically illiterate. But when the bubble bursts, the policy-makers that looked ingenious will quickly begin to look decidedly less so. In fact, if they try to short-circuit the corrective process that must follow the bursting of an inflation-fueled bubble -- by ramping up government spending, for example -- there's a very good chance that they will end up being widely perceived as incompetents. Which, of course, is appropriate. In Japan, the process via which policy-makers go from being widely perceived as ingenious to being widely perceived as incompetent has run its full course, whereas the process is probably about half complete in the US and is yet to begin in China.
There's no doubt that the aforementioned process will eventually occur in China, because China's central planners have made similar mistakes to their counterparts in Japan and the US. In particular, they've fomented a massive investment bubble and have attempted to use inflation to cover-over the problems caused by earlier inflation.
Actually, when it comes to creating an inflation problem the managers of China's monetary system are at least as accomplished as the Bernankes and Greenspans of the world. For example, China's M2 money supply and bank loans were inflated by 53% and 59%, respectively, during 2009-2010 -- money/credit inflation rates that are way above anything achieved in the US during the Greenspan-Bernanke era. Moreover, it's not like this rampant inflation happened by accident. Unlike in the US, where the Fed influences but doesn't directly determine the extent to which the economy-wide supplies of money and credit change each year, the People's Bank of China (PBOC) has almost total control over the amounts of annual money creation and bank lending. Last year's 19% growth in China's money supply, for instance, wasn't far from the official target of 17%. This year the PBOC has a money-supply growth target of 16%, which pretty much guarantees that China's inflation problem will get worse almost regardless of what happens elsewhere in the world.
These days, inflation is a deliberate policy everywhere; it's just that in China the authorities have a lot more control over the process than is the case in most other countries. However, for some strange reason the Chinese government gets a free pass from many Western analysts who should know better. It seems that these analysts apply one set of standards to the US and a completely different set to China. To get an idea of what we are talking about, just imagine what the typical 'China-hugging' pundit would be saying about Bernanke and his Federal Reserve cohorts if: a) the US money supply had risen by more than 50% over the past two years, b) the cost of housing and food had risen by more than 20% in most large US cities over the past 12 months, and c) the Fed had just announced that it was targeting a 16% increase in the US money supply during the current year. Don't you think they'd be screaming "blue murder"? And yet, when this exact set of circumstances occurs in China these pundits gloss over it. Heaven forbid that they should stop their anti-US tirades for even a minute to acknowledge that central banks and governments outside the US are doing substantial economic damage.
We prefer to be consistent and to rail against destructive policy-making wherever it occurs. We've written extensively over the years on the huge problems wrought by the Fed's monetary machinations, but we aren't wearing blinkers and are therefore still able to appreciate the impoverishing effects of the monetary policies being implemented outside the US.
The extent of the problem caused by the deliberate inflation policy of China's government isn't yet apparent, because the bubble hasn't yet burst. When it does, the evidence of many years of bad policy-making will be too blatant to ignore. At least, we hope it will be, but perhaps we are too optimistic.
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