Will Inflation Lead Growth?

[qll]

Unlike China, western countries worry a lot about inflations.

This is an academic question. Is high inflation a good thing? In the past, it is not in the US. But in Chinese history, high inflations led over-investment, but did not stop growth.

China has one of the highest inflations, but China does not raise interest rate fast enough to stop the speculation in stock markets and real estate. Everyone is still happy. Employees see higher wages. Business sees higher profit and higher sales.

Is this because most chinese have huge savings and tend to gamble? Or the inflation theory does no longer hold?

I remember when I studied Capitalism, I was taugh there is a 4 yr cycle: inflation, overinvestment, deflation. But this cycle never takes place since early 90's. Even the 2000 dot com crash does not slow the economy for long.

 

[risktaker]

I'm not an economist but in my thinking, inflation is a problem if and when it's above the GDP growth rate. So if GDP grows 2% and inflation is 5% then it becomes problematic. The situation in China is somewhat a different case because of the foreign currency reserves the country is amassing due to its huge trade surplus. I don't believe any other country in history has had such an enormous trade surplus. This now gives them huge flexibility in their finances. Something the US is in no position to match.

As for economic cycles, they're still present just "different".

Who know what the *real* inflation rate is in the US. It's probably 5% and it is definetely above GDP growth and a serious threat.

The government keeps changing the way it's calculated so that they may screw those who are owed all those $trillions. I feel very sorry for retirees and savers in this country.

While people in general may be feeling better (their houses are worth more compared to a few years ago) and employment has remained stable (lots of crappy service jobs have been created) the country itself is worse off today than in the last recession.

Inflation is creeping higher (food, labor costs, energy, housing, etc)
Debt levels are astronomical (both government and private)
The $ is approaching record lows and just may collapse due in part to the enrmous negative balance of trade.

 

[Bogan7]

Quote from qll:

Unlike China, western countries worry a lot about inflations.

This is an academic question. Is high inflation a good thing? In the past, it is not in the US. But in Chinese history, high inflations led over-investment, but did not stop growth.

China has one of the highest inflations, but China does not raise interest rate fast enough to stop the speculation in stock markets and real estate. Everyone is still happy. Employees see higher wages. Business sees higher profit and higher sales.

Is this because most chinese have huge savings and tend to gamble? Or the inflation theory does no longer hold?

I remember when I studied Capitalism, I was taugh there is a 4 yr cycle: inflation, overinvestment, deflation. But this cycle never takes place since early 90's. Even the 2000 dot com crash does not slow the economy for long.

I hope you never get a job teaching in the real world. Inflation and how the central bankers respond to it is the greatest challenge they face. people have grown very complacent over the last 10-15 years as we have been within a low inflation environment and I am sure many on here havent felt the sting of high inflation.

Inflation and inflationary expectations (a key factor) seem to be on the rise again as the huge liquidity driven bull run looks for fewer and fewer assets i.e. recent M&A activity and UK property prices. If inflation is allowed to get out of hand again and I am not saying it has and just as importantly if the market start to think the Fed is behind the curve then there will be a very sharp correction as corporate earnings are revalued.

Just my 2 cents

 

[Bogan7]

And as far as China goes the reason they can go on a massive economic expansion and have real inflation not a major prob is they had a massive under allocation of labor and resources that was put into play with the resulting productivity gains reducing the inflationary impact.

 

[risktaker]

In my view the China situation can simply be put this way...they produce waaaaaay more than they consume and most of what they produce brings them serious foreign currency reserves. Something no other country on earth currently can come close to.

That's completely opposite of the situation in the US.

The only thing nowadays the US produces is lots of HUGE houses which brings no foreign currency and does not benefit the country since they require LOTS more Chinese shit to fill them up.

Quote from Bogan7:

And as far as China goes the reason they can go on a massive economic expansion and have real inflation not a major prob is they had a massive under allocation of labor and resources that was put into play with the resulting productivity gains reducing the inflationary impact.

 

[risktaker]

A funny thing about China.

I remember 20-30 years ago they mostly made lots of plastic toys which they stamped "made in Hong Kong" so most people would not object to buying them.

Then they went into exporting clothing items for a while and that was "accepted" by US consumers.

Then they started producing a lot of electronic stuff for export and while people initially thought of them as inferior they soon found out that MOST electronics was now produced there.

Nowadays even big items like furniture, cars, appliances are produced there all for export in addition to local consumption.

Even apple juice along with "organic" foods are imported from China!

What will happen when they start producing luxury cars and jets in 10-20 years?

 

[qll]

Quote from Bogan7:

I hope you never get a job teaching in the real world. Inflation and how the central bankers respond to it is the greatest challenge they face. people have grown very complacent over the last 10-15 years as we have been within a low inflation environment and I am sure many on here havent felt the sting of high inflation.

Inflation and inflationary expectations (a key factor) seem to be on the rise again as the huge liquidity driven bull run looks for fewer and fewer assets i.e. recent M&A activity and UK property prices. If inflation is allowed to get out of hand again and I am not saying it has and just as importantly if the market start to think the Fed is behind the curve then there will be a very sharp correction as corporate earnings are revalued.

Just my 2 cents

I never felt inflation since I entered college. I only felt stock prices and house prices never go down much and keep rising. I think they are already out of hand. Could you tell me exactly what happened in the last inflation period?

My Chinese memory was that: in the 80s, the wage went up from 30yuan a month to 100yuan. Price for fish went up from 4c yuan to 20c yuan. My parents' savings over many years mean nothing. The bank will pay interest plus inflation rate. However, years after, we felt much richer, because we could buy many products never seem before. The import tax dropped from 100% to 20%. Foreign made products with lower cost are much better deals. In this inflation run, we did not feel any pain at all.

 

[polpolik]

Quote from risktaker:


What will happen when they start producing luxury cars and jets in 10-20 years?

By then, China would be ushering into the industrialized nation and their wages will go up at which point, another poor country will take over the manufacturing, and China will start importing stuff as it is cheaper now to import than to produce.

 

[qll]

Quote from polpolik:

By then, China would be ushering into the industrialized nation and their wages will go up at which point, another poor country will take over the manufacturing, and China will start importing stuff as it is cheaper now to import than to produce.

The wages here are going up FAST. A programmer with equal skills will cost 50% of the US rate. Cheap labour is only for low quality labours.

I can spend $2000 a month in USA living well in a small city. But I need to spend $4000 a month in Beijing to be in the middle class. (it is true that with $1000, one can live well in a small city like Chongqing and Wuhan in China.)

A BMW 328 costs $35K in USA with leather seat and auto shift. A BMW 325 costs $50K in China. LV bags, Hugo perfumes cost much more in China too.

 

[Bogan7]

Quote from qll:

I never felt inflation since I entered college. I only felt stock prices and house prices never go down much and keep rising. I think they are already out of hand. Could you tell me exactly what happened in the last inflation period?

My Chinese memory was that: in the 80s, the wage went up from 30yuan a month to 100yuan. Price for fish went up from 4c yuan to 20c yuan. My parents' savings over many years mean nothing. The bank will pay interest plus inflation rate. However, years after, we felt much richer, because we could buy many products never seem before. The import tax dropped from 100% to 20%. Foreign made products with lower cost are much better deals. In this inflation run, we did not feel any pain at all.

better yet read up about the the housing crash of the late 80's in the UK when many couldnt afford their houses and simply walked out. if you want a great read find the hyper inflation story of post first world war Germany of Zimbabwe or South America when prices litterally went up during lunch.