Wednesday, August 19, 2009

Debt Deflation Hits Reflationists?

I am not sure who leads in the current episode - stock prices or money supply. Or is there a causality at all? However, BNP Paribas writes in its "Daily Economic Spotlight" today:
China earlier this year was engaged in a massive explosion in money and credit that went way beyond the conceivable needs of the real economy. Excess money creation in China has few outlets. It took those that were available and so we saw a turnaround in house prices, a boom in the stock market (up by over 90% in 2009 by early August) and leakage into commodity markets. The Chinese government clearly thought that 6-month annualised rates of growth of credit and money were excessive and so signalled their disquiet. They began selling sterilisation bonds and further measures later on are to be expected.

Just the question of causality remains open?

China's "inflationary sins" are miles ahead of US, but who is worrying about the inflation risks in the US? Pimco? Buffett? Of course, bank trading rooms are much more forceful than Main Street.

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