Thursday, March 11, 2010

The China Inflation: Implications for the U.S.

China’s inflation reached a 16-month high as consumer prices rose 2.7 percent in February from a year earlier, according to the National Bureau of Statistics.

This should come as no surprise. China's M2 money supply measure rose 25.5 percent on an annualized basis in February and 26 percent in January.

The main reason for this spectacular money growth is China's continuing policy of propping up the dollar. The dollar support is, of course, done by printing up yuan to buy the dollars.

As the price inflation grows,and it will given this money growth, there will be more and more domestic pressure in China to halt, or slowdown, the dollar support. At such time, a dollar collapse is likely, but, of more consequence, rates on Treasury securities will experience even more pressure as the Chinese pile all the dollars they currently buy into Treasury securities, that will stop.

All signs point to huge new supplies of Treasury debt, with dwindling sources of demand, not a pretty picture.

1 comment:

  1. Reminds me of the U.S. supporting Britain back in the late 20s