Thursday, December 04, 2008
deflation in china
Despite still relatively high CPI and PPI inflation at the current juncture, we believe that a perfect storm for deflation is gathering strength under the surface and is expected to bring about a deflationary impulse in 1H09, which may morph into persistent deflation in 2H09 and beyond, barring an aggressive policy response up front.
Deflation is not always a bad thing. However, it is very difficult to make a distinction between ‘good’ and ‘bad’ deflation in practice, given the entwining supply and demand shocks. Our best judgment is that the potential deflation that we envisage to emerge in 1H09 will be a mixture of ‘good’ and ‘bad’ deflation, with the former likely dominating the latter. ...
The initial deflationary impulse due to positive supply shocks should bring about cost savings, especially to the energy- and raw materials-intensive sectors. However, with sticky nominal wages, we believe that persistent deflation will cause real wages to rise, profit margins to fall and employment to be cut back, which may set off a deflationary cycle with far more serious consequences. A deflationary environment generally favors bond holders (or creditors) over equity investors (or debtors).
The key is to prevent deflationary expectations from getting entrenched. We expect further aggressive policy responses in the coming months.
this just in -- things are not going well in china. looks like michael pettis and vitaliy katsenelson are gaining adherents.
with a property market collapse now accelerating and multiplying china's woes, the chinese government has begun to devalue the renminbi. this of course is exactly the opposite of the needed adjustment. governments on both sides of the pacific are attempting to prevent the united states from closing its current account deficit -- the united states by attempting to force further lending and consuming, china by weakening its currency to protect its exporters -- and to continue the unsustainable and dying system of vendor finance. god help us if it works -- the result would merely enlarge the ultimate problems of both countries while postponing them for a little while, as did government measures in 2002-2004 under alan greenspan and the bush administration.