Home > Main > The Hyperinflation Hoax: How Much Inflation is China absorbing for the U.S.?

The Hyperinflation Hoax: How Much Inflation is China absorbing for the U.S.?

December 21, 2010

The Chinese currency lock should be illegal, but we have to live with it today.  The currency lock has at least three major impacts on the United States.

  1. It sucks inflation from the United States
  2. It costs U.S. citizens jobs
  3. It allows me to purchase low priced toys for my children

The overall impact on the United States is debateable.  Warren Mosler believes that the trade deficit is a large net positive for the United States. The reason he thinks this is because we get real world goods for bits in a computer.  In terms of the real world, what “matters” (get it – matter?) more, the spreadsheet entries or the iPods?  Clearly, the iPod.

But I digress. Let us ask a question about inflation: How much inflation does China take away from the United States?  Or to be more precise:

If China allowed their exchange rate to float, what would the inflation rate be in the United States?

To do this exercise, I will treat China as a U.S. state that uses U.S. currency exclusively, and size China’s economy at its 2009 Purchasing Power Parity (PPP) size relative to the United States.  If we do this, we just add the two economies together to get the total size of the USD economy.  Then, we take the amount of inflation in each country and multiply it by the size of the economy to get the total amount of inflation.  After that we can play with how much inflation the U.S. would have with various China scenarios.

First, I assumed China is lying about its inflation rate and just gave it 10% inflation for the year. I used FRED data for the U.S.

The total amount of Inflation in 2010 was roughly $1.035T

Then, divvy up the inflation between the U.S. and China under different scenarios.  For example, if we gave all of the inflation to the United States, and none to China, the inflation rate is simply the total inflation divided by the size of the U.S.   economy.

This is the worst case scenario for the United States for inflation right now.  And the magic number is 7.26%.  This is pretty bad, but not hyper-inflation by any means. Of course, this will never happen – China is committed to its mercantilist economic strategy.

How about if we split the inflation normalized to the size of the economy?  The U.S. would get 61% of the inflation created in both countries – or 4.43% inflation here in the States.  Again, not bad.

However, China is mercantilist, so a more reasonable assumption would be that it slightly relaxes the currency lock and allows it to again appreciate at 3% a year.  I need to go back and do the math to determine exactly how much inflation this would push to the United States, but lets assume that it is 1/2 of the inflation sized by the economy.   We would experience about 2.2% inflation.

This post does not attempt to make any logical inferences about what might happen to the U.S. or Chinese economy, but is rather just trying to get back of the envelope estimates at how much deflation China is exporting to the United States.

Given that current Year over Year inflation is 1%, the amount of deflation China exports is significant to the United States.   However, China is not preventing hyperinflation in the United States.

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