Stagflation Warnings for China.

This is what I wrote in the EPJ Daily Alert yesterday morning:

China cut bank reserve requirements yesterday. It is far from enough to reverse the developing downtrend in the Chinese economy, but it will add to the price inflation problem. China is really backing itself into a massive stagflation----high inflation and slow economy. Given the reports of some unrest already in parts of the country, the possibility of widespread unrest as things worsen is a very real possibility.

This isn't the first time I have warned about stagflation in China in The Alert, on 12-6-11, I wrote:

Stagflation appears to be where the country is headed with extreme
readings on both the stag and the flation.

Now, others are picking up the view, including Nouriel Roubini and WSJ.

Here's what Patrick Chovanec just wrote (as reprinted at Roubini Global Economics):

Usually economists consider slowing growth and inflation as polar opposites –you can have one or the other, but not both at the same time. Over-rapid growth spurs inflation, but slowing growth reduces price pressure. However, if you print (or in China’s case, import) money and spend it on projects with a zero or negative return, you will get an initial GDP boost (as long as you keep spending), but eventually you will get stagnant growth AND inflation: stagflation.

This is from a WSJ editorial yesterday:

It might seem odd to worry about inflation, capital outflows and tight liquidity at the same time, but that's a consequence of China's distorted financial system. Because allocation of capital remains politicized, a significant portion of the credit stimulus has gone into wasteful projects; since that money is not creating real growth or productivity gains, it chases too few goods at higher prices. 

Meanwhile, those who need cash—including bankers and small and medium-sized businesses—can't get it. Liquidity injections might help bankers with short-term funding. But absent broader reform, that cash will only follow earlier credit down the inflationary rabbit hole.

It almost sounds like WSJ gets Austrian business cycle theory, but not quite. Though, I do wonder how they learned about "distorted financial systems," doesn't sound particularly Keynesian or supply-side to me.