Home > Main > Hyperinflation Hoax: China still cannot emport that much inflation to the U.S.

Hyperinflation Hoax: China still cannot emport that much inflation to the U.S.

May 29, 2011

We do not face much inflation threat here in the U.S.

It’s a never ending battle against the forces of willful ignorance over here at the Trader’s Crucible. We now have Soc Gen and The Business Insider warning about how we will be facing huge inflation from China.

One thing you’ll notice in many of these hyperinflation hyperventilation pieces is a distinct lack of math. Yes, the story sounds good – China and India are growing rapidly – but the math does not support the story that there is an ocean of inflation that will swamp the U.S.  The numbers do not support this narrative at all.

The math is simple: Take the total amount of inflation in the U.S. and China, and then divvy it up anyway you like.  The total amount of inflation will remain nearly the same no matter who gets it.  If you want 0% inflation in China and see what happens to inflation in the U.S., you can do this with math.

Note that the total size of the combined Chinese and U.S. economies is huge.  Some of the inflation that China is experiencing must be allocated to China as well.

Total Inflation Calculations for China and U.S.

I wrote a whole post on what to do and how to do it.  It is not hard work and requires nothing more than a few spreadsheet calculations.  I used extremely aggressive assumptions about inflation for China at 10% in my calculations.  But even using this very high 10% figure, there isn’t that much inflation in the world.    Unless something fundamentally changes, the U.S. does not face a huge inflation threat from China.

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  1. Tom Hickey
    May 29, 2011 at 9:19 am

    The only big inflation threat the world faces now is from the supply side, specifically food and energy. Food inflation is already biting down hard in those parts of the world where the percentage of income spent on food is higher than the developed world. Greater food shortages, especially grain staples, and higher prices are expected due to climate change.

    Energy return on energy invested is also declining as reserves of cheap petroleum are depleted. There is an expected lag of several decades before alternatives can offset the price rises.

    Of course, shocks like weather and war can accelerate this trend. Petroleum is already pricing in a possible MENA disruption greater than at present.

    The point to emphasize is that inflation arising from the supply side is different from that arising from the demand side, but governments tend to treat them the same way, that is, as demand side problems.

  2. TC
    May 29, 2011 at 9:30 am

    “The only big inflation threat the world faces now is from the supply side, specifically food and energy. Food inflation is already biting down hard in those parts of the world where the percentage of income spent on food is higher than the developed world. ”

    I agree that we face some serious pressures on the Supply side. And there is no doubt that an increase in food costs matters more to poorer people than to richer people. It is very possible that the basket of goods purchased by the average Chinese citizen is highly food based.

    So my analysis about how much inflation the U.S. faces is overstated due to this bias.

    I also think there is a rather large speculative bid to energy, which tends to spill over into food due to the fact that most of our costs for food are either fertilizer or transport based.

    I am a long term energy bull, and EROEI is a huge worry of mine over the long run. I wish we had 10x the energy at our disposal.

    We do not really have good tools at our disposal right now to focus on inflation resulting from supply shocks vs. demand pull. It is an age old problem, and the current monetary levers don’t address the issue at all.

    It’s yet another area where the MMT paradigm is better than the conventional paradigm. We have more power to impact what matters, that is people working.

  3. Detroit Dan
    May 29, 2011 at 9:12 pm

    Well said. Time for an MMT revolution in economics…

  4. Kris Smith
    May 30, 2011 at 9:58 am

    Tc, I think it would be useful to make a distinction between what is happening in commodity markets and broader measures of inflation. With commodities we are talking about demand for the marginal barrel of oil vs. available supply, not GDP comparisons. As emerging countries grow a larger middle class they consume more beef which pressures grain prices (1 lb. Grain = 1 lb. Beef vs. between 5-15 lbs. Grain = 1 lb. Beef), etc. These conditions have little to do with the state of monetary and fiscal policies around the world.

    • Kris Smith
      May 30, 2011 at 10:00 am

      Oops! This was already covered. Sorry about that.

      • TC
        May 30, 2011 at 10:24 am

        I think you have a point – we did not address it exactly and in very clear language. It was more implied rather than directly addressed. We were talking about push vs. pull inflation – supply lead vs. demand lead – inflation.

        But one of the points of this blog is to make these hugely important distinctions in language normal people can understand.

        Inflation caused by “people can afford more stuff because they are more productive” is not bad. In fact, it’s criminal to shape monetary and fiscal policy around a culture of denying people the fruits of their honest labor.

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