If the Fed is looking to inflate away problems, what should Asia do?

By Edward Harrison of Credit Writedowns

I would be especially interested to hear the views of NC’s Asian readers on this post because Japan and China are usually considered antagonists with a long and sordid past.

Andy Xie thinks the Fed is on an inflationary path.  Last month, he wrote an article in Caijing which says that ‘stagflation lite’ is the Federal Reserve’s preferred outcome. What’s interesting is his recent article about the need for China and Japan to join forces under an ASEAN umbrella, rejecting the APEC umbrella shared with the U.S.

In last month’s article, Xie said:

The bottom line is that, regardless what central banks say and do, the world will be awash in a lot more money after the crisis than before — money that will lead to inflation. Even though all central banks talk about being tough on inflation now, they are unlikely to act tough. After a debt bubble bursts, there are two effective options for deleveraging: bankruptcy or inflation. Government actions over the past year show they cannot accept the first option. The second is likely.

Hyperinflation was used in Germany in the 1920s and Russia in late 1990s to wipe slates clean. The technique was essentially mass default by debtors. But robbing savers en masse has serious political consequences. Existing governments, at least, will fall. Most governments would rather find another way out. Mild stagflation is probably the best one can hope for after a debt bubble. A benefit is that stagflation can spread the pain over many years. A downside is that the pain lingers.

If a central bank can keep real interest rates at zero, and real growth rates at 2.5 percent, leverage could be decreased 22 percent in a decade. If real interest rates can be kept at minus 1 percent, leverage could drop 30 percent in a decade. The cost is probably a 5 percent inflation rate. It works, but slowly.

If stagflation is the goal, why might central banks such as the Fed talk tough about inflation now? The purpose is to persuade bondholders to accept low bond yields. The Fed is effectively influencing mortgage interest rates by buying Fannie Mae bonds. This is the most important aspect of the Fed’s stimulus policy. It effectively limits Treasury yields, too. The Fed would be in no position to buy if all Treasury holders decide to sell, and high Treasury yields would push down the property market once again.

I certainly agree with him. You don’t have to be in the hyperinflation camp like Marc Faber to think the Fed takes Ken Rogoff’s suggestions about 6% inflation seriously. In a May post, I said:

Basically, the Fed wants to inflate our way out of this depression – that’s the dirty little secret.  There is really no other policy choice because the mountain of debt in the United States is immense.  And I think Bernanke, Geithner and Summers have proven they are willing to do anything to reflate this economy and avoid debt deflation dynamics.

And when I say anything, I mean create asset bubbles that are being given intellectual cover by the likes of Frederic Mishkin. This is a policy of economic weakness.

So what should the Asians do?  China is desperate to employ its tens of millions of countryside transplants cruising its cities in search of urban employment. That’s a major reason it keeps its exchange rate fixed to a plummeting dollar, making not just Americans but Europeans irate?  Japan has been in a modern day depression for twenty years. Its sovereign debt-to GDP is now over 200%, risking a downgrade.

Xie says the two should join forces – in part as a rejection of the U.S., which he basically calls a fading power (although the paragraph above points to serious weaknesses in China and Japan as well).

Here is an excerpt of Xie’s article:

Yet the fundamental case for Japan to increase integration with the rest of Asia and away from the United States grows stronger every day. Despite high per capita income, Japan remains an export-oriented economy, having missed an opportunity to develop a consumption-led economy in the 1980s and ’90s. In the foolish belief that rising property prices would spread wealth beyond the industrial heartland in the Tokyo-Osaka corridor, the government of former Prime Minister Kakuei Tanaka pursued a high-price land policy, discouraging the middle class from pursuing a consumer lifestyle as they saved for property purchases…

The point is that Japan has a strong and genuine case that favors more integration with East Asia. The United States is unlikely to recover soon and with enough strength to feed Japan’s export machine again. There is no more room for fiscal stimulus. Devaluing the yen to gain market share is not an option as long as Washington pursues a weak dollar policy. Without a new source of trade, Japan’s economy is doomed. Closer integration with East Asia is the only way out…

Five years ago, I wrote an op-ed piece for the Financial Times entitled China and Japan: Natural Partners. At the time, a prevailing sentiment was that China and Japan were antithetical: Both were still manufacturing export-led economies and could only gain at the other’s expense. I saw complementary demographics and capital: Japan had a declining labor force and China needed to employ tens of millions of youths migrating to cities from the countryside. China needed capital and Japan had surplus capital. And their trade relations indeed tightened, as Japan had increased the Chinese share of its overall trade to 17.4 percent in 2008 from 10.4 percent in ’04.

Today, the situation has changed. China has a capital surplus rather than a shortage. Demographic complementarity is still good and could last another decade. As China shifts its development model from resource intensive to environmentally friendly, a new complementarity is emerging. Japan has already made the transition, and its technologies that supported the transition need a new market such as China’s. So even without a new trade agreement, bilateral trade will continue growing.

An FTA between China and Japan would significantly accelerate their trade, resulting in an efficiency gain of more than US$ 1 trillion. Japan’s aging population lends urgency to increasing the investment returns. On the other hand, as China prepares to make a numerical commitment to limiting greenhouse gas emissions at the upcoming Copenhagen summit on global warming, heavy investment and rapid restructuring are needed for its economy. Japanese technology could come in quite handy.

An FTA involving Japan and China would be a serious threat to American economic power. You can imagine that policy makers in Washington are opposed to this idea.  Let’s watch to see what kind of rhetoric comes out of Barack Obama’s China trip to see if this issue is discussed.

Xie’s article in its entirety is at the link below.


Andy Xie: Why China and Japan Need an East Asia Bloc – Caijing

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This entry was posted in China, Curiousities, Economic fundamentals, Guest Post on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. Moneta

    IMO, all hell will break loose when the US has managed to refinance its short term debt into long term debt.

    As long as a huge % of the outstanding debt is short term, they will talk of low inflation. When the conversion is over, all bets are off.

  2. i on the ball patriot

    Interesting tidbit here from Xie’s article:

    “As China shifts its development model from resource intensive to environmentally friendly, a new complementarity is emerging. Japan has already made the transition, and its technologies that supported the transition need a new market such as China’s. So even without a new trade agreement, bilateral trade will continue growing.”

    The developmental models, “resource intensive to environmentally friendly” are key indicators here, and on a global scale put the individual global players into either a ‘prudent’ or ‘greedy’ camp’. We can see what happens with that dynamic by looking at what has happened here in scamerica, where now all of the past prudent (environmentally friendly folks) will be forced to pick up the pieces of the greedy (less prudent, to be kind, folks) resource intensive bubble suckers.

    Given that broad dynamic as a guide what is scamerica’s present developmental model, resource intensive or environmentally friendly?

    This from CEPR gives an inkling …

    “The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.”


    What should Asia do? The question is what can Asia do? What can the prudent in scamerica do?

    Its the man behind the gun that has the fun son. Intentional, slowly metered out pain ahead.

    Deception is the strongest political force on the planet.

    1. i on the ball patriot

      A lot of the prudent in scamerica are buying arms as a means of self protection from their greedy brethren. Is there another parallel here with that same dynamic apparently being carried out on the international scene?


      “International Military Spending Grows
      Ryan Cole, Contributing Editor, Taipan Publishing Group
      Wednesday, November 11, 2009

      In the defense industry – as in many others – the developed world may not offer the best growth opportunities going forward.

      Consider: In the Pacific Fleet alone, the United States has five carrier battle groups, with a sixth undergoing retrofitting.

      China doesn’t have a single aircraft carrier. It hopes to have one by 2020.

      For years, the U.S. has spent more on defense than the rest of the world combined. Today, America spends almost 5% of GDP on defense. China, by comparison, spends roughly 1.4% of a much smaller GDP.

      Make no mistake: America will continue to have the largest military in the world – by an extraordinary margin – for years to come.

      But, as America’s share of world GDP continues to shrink, so too will America’s dominant edge in military spending.

      The largest growth in military spending will be in smaller and developing countries. China’s military spending is undergoing rapid expansion – with double-digit growth now and for the foreseeable future.

      As China grows, so do its neighbors. Taiwan must increase defense purchases to continue to have a deterrent to invasion. India must increase defense so as to not lose influence in shared border states – not to mention to protect against Pakistani instability. In fact, India’s defense spending rose over 34% this year.

      Even Japan, which already possesses one of the largest militaries in the world, must increase defense spending to offset China’s superior numbers, and China’s nuclear weapons.

      Meanwhile, even as Russia turns more hawkish, former members of the Soviet Union increase their deterrent force in order to protect their borders. Every satellite state looks at Georgia, and Chechnya, and starts purchasing weapons.

      In all, the four BRIC nations now account for 15% of worldwide defense spending.”

      More here;


      The gangs arm themselves …

      Deception is the strongest political force on the planet.

  3. wethepeeple

    “In the arsenal of revolution, the perfect weapon is inflation.” Garet Garett. Rise of the State is that revolution. Governments use a myriad of bait and switch tactics to form and manipulate public opinion. The most obvious is “security” within the concept of “social contracts” between the state and the people described by Hobbs in Leviathan. What people will part with for “security”. Here are several of the State’s fear campaign that they will provide security for the people:
    The Global War on Terror is secured by militarism/defense complex. The Global Warming/Climate Change Threat is secured by Green Environmental/Cap and Trade. The uninsured health care threat is secured by universal health insurance. The Financial Meltdown/Recession/Depression/Credit collapse is secured by liquidity and “consumer protection” regulation. The Energy Crisis secured with controlling supply via Iraq and Afganistan pipeline dreams. The State propaganda line provides universal “security” for all, but without transparency or input from the people. The people have lost their sovereignty over their government, which the founding father’s warned us about. They codified our sovereighty over government in the Constitution and Bill of Rights, creating a government of the people, by the people and for the people. In all of this, the State needs one vital thing to continue its debt feast, aside from foreign creditors, and that is tax revenue. Tax revenues, and therefore size of the State, are highly positively correlated to inflation; deflation contracts tax revenues and starves the State. (Lost in this is the fact that tax cuts and a smaller State can increase tax revenues.) In this New Deal 2.0, inflation must win or the State fails. The relationship between the size and power of the State, inflation, and tax revenues is critically important. Zero interest policy, ZIP and its’ offspring a weak dollar assures inflation and will continue, and those in power will consolidate power.

  4. Mickey, Akron, Ohio

    While the ‘economic entente” between Japan and China sounds plausible, historical factors suggest that it has its limits. But there’s another reason – political/military – linked to this that has to be factored into why Japan/China will likely continue to purchase our debt or at least not cash in the IOUs.

    At the end of the Cold War the US emerged as the only country with sufficient military capabilty to impose order/stabilty. When it came to the collective means of violence the US had comparative advantage. We can kill people more efficiently than any other nation. Of course, this is debatable on sevral points. But humor me for now…

    For obvious historical reasons neither the Japanese nor the Chinese can dispatch troops or wield miltary force anywhere in Asia without invoking the memories of colonialism or imperial aspirations and antagonizing the entire region, yet alone the US. So, rather than spend the monies to develop a military with sufficient capabilities to project “force dominance” and challenge the US, it’s much more reasonable to buy US debt and “rent” the US military to maintain the global stabilty required to conduct commerce. And at the same time, engineering talent and scientific research can be put to more commercial endeavors thereby undermining the economic hegemony of the US over time with both countries and other Asian countries as well knowing full well that at some point guns and butter will not be an option for the US. It will be one or the other and “guns” is the only card we have left to play!

    Whether we’re there yet is open to debate. Conservative author, Andrew Bacevich, argues that we are. A number of books/analysts dealing with Pentagon strategy lend themselves to the interpretation that the military can and will be used to enforce the new world economic order on the planet. I suspect the ongoing debate within the Pentagon as to what is deemed the national interest is fierce. But why else would Japan and China continue to hold such massive amounts of US debt? Because it’s in both their economic and POLITICAL interests to do so – at least for the foreseeable future.

  5. But What do I Know?

    I read many Fed officials and hangers-on talking about interest rates and asset prices, but they never seem to be able to focus on what is truly important–the production of useful things. Money is a way (the best way so far) of motivating people to work, but in order for money to maintain its motive power it must seem fair–that is, it cannot be created at will and without consequence by a few; it must maintain the illusion of scarcity. This is the organizing principle of our society, and it is this tenet that is undermined by a policy of inflation. A monetary regime which desires higher prices seeks to lower the living standards of its subjects–as consumers we should all root for low prices.

  6. lark

    Very interesting article but it has the drawback of so many business and financial predictions in being weak in history and an understanding of social context.

    Close neighbors does not make for close friends in the case of China and Japan. Read your 20th Cent. history.

  7. dr

    “Ken Rogoff’s suggestions about 6% inflation ”

    Rogoffs lives in the fantasy world of the 1970s where development world wages were able to move up with inflation. Because of globalization those days are gone. Price inflation with wage depression will only make US citizens poorer and less able to pay debt.

    1. Fed Up

      ““Ken Rogoff’s suggestions about 6% inflation ”

      Rogoffs lives in the fantasy world of the 1970s where development world wages were able to move up with inflation. Because of globalization those days are gone. Price inflation with wage depression will only make US citizens poorer and less able to pay debt.”

      Exactly, but the fed (who represents the spoiled and the rich both domestic and foreign) will then monetize the debt (they will also consolidate “banking” into fewer and fewer entities that do what they want) and leave the lower and middle class citizens to be poorer (negative real earnings growth / lower standard of living).

      The idea is to “steal” the currency and assets of the lower and middle class and give them to the spoiled and rich of the world so they can turn everyone else into debt slaves / permanent rentiers.

      1. cougar_w

        … and then the spoiled rich will be eaten, their bloodlines extinguished, and their holdings consumed in flame.

        Why would they bring that down on themselves? It amazes.


        1. Fed Up

          The spoiled and rich are also going to “own” the military by “owning” the gov’t thru “lobbying”.

  8. wally

    “TOKYO (Reuters) – Treasury Secretary Timothy Geithner said on Wednesday he believes strongly in the need to maintain a strong dollar”

    So… are you calling Timmy a liar?

  9. ndk

    If stagflation is the goal, why might central banks such as the Fed talk tough about inflation now? The purpose is to persuade bondholders to accept low bond yields.

    I disagree. I think it’s for broader public consumption. The shift to fiscal conservatism could not be more sharp, and the Fed has pressured friends in the Executive Branch to help out. I’m aware this view puts me in the minority.

    I think that China has played this economic collapse absolutely perfectly, if not particularly communally. Remember that the U.S. can’t unilaterally inflate so long as the peg remains. China maintaining the peg extends their unfair competitive trade advantage, protects the balance sheet of the PBoC, paradoxically protects their existing dollar hoard, gives them the money to purchase hard resources and friends, and cripples Western economies.

    I get to say, for once, that I called this one: China accrued a large stockpile of commodities and foreign reserves at pleasant prices, and depressed the Yuan severely through the false facade of pegging to a weakening dollar. This over-investment will drive interest rates artificially low in those economies, spurring more borrowing, consumption, and eventually, more defaults and deflation.

    Encouraging more intra-Asia trade would be another great move. I think that will happen. We’ve seen it with Russia through commodities, and they’re branching into Africa as well.

    The only reason for China to break its peg is if it finally becomes unable to sanitize the huge amount of capital flowing into the country. That could very well happen, but there are still a lot of tools in the box for them to continue this sanitization. It will end in tears of overcapacity, but see, deflation is not a huge issue in China, where banks are hugely overcapitalized and houses are bought with very large cash down payments. Overcapacity only really hurts the debtors severely. Again, played perfectly.

    China needs to keep demonstrating in public that it’s hugely worried about U.S. debasement of its currency — not that hard a sell — to help fiscal conservatives really put the screws to themselves and their country. Whine, kvetch, moan, and stop borrowing in the US and rest of the West to whatever extent possible. We’re Calvinists. It’ll help.

    But as far as actions to back up those words? Par the course, Asia, you’re doing it right by yourselves, and after the US’ demonstrated intention not to repay its debts, I don’t even think you need feel so guilty about playing a little competitive game yourselves.

    1. Moneta

      The only reason for China to break its peg is if it finally becomes unable to sanitize the huge amount of capital flowing into the country
      Actually China had everything to gain from keeping the peg as long as Americans were gorging themselves on their exports. Now they are full of reseves and can jerk the US around.

      It kind of bothers me when people say that they kept their currency artificially low. We could say that since the early 70s, the US has been exploiting its reserve currency status to exploit the rest of the world. Maybe karma does exist on earht after all.

      Since the US is overstuffed and Amercicans won’t be able to import so much, it problably makes sense for China to increase its currency. Then it can buy up resources on the cheap and laugh at us all the way to the bank.

  10. Jesse

    Asia needs to do what it is already doing, only more of it. It needs to establish regional currency trading agreements. It needs to encourage domestic consumption and be prepared for the rise of a type of middle class. It must shift its reserves away from dollar debt instruments, on the short end of the curve, and avoiding non-Treasury instruments like Agency Debt.

    China is already doing all of these things. The Fed is buying up the mortages as a response. They are encouraging their people to buy gold and silver and making it easier to do so.

    It is the American people that need a wake up call. They are going to take it in the neck, in a big way.

  11. David McCarty

    You are doing a great service to all of us. Thanks! I would love to figure out why we see such a correlation between stocks and the value of the dollar.

  12. fromchina

    Andy Xie argues from a purely financial stand point, and his suggestion of a tighter China-Japan relation certainly makes sense in that regard. Both China and Japan understand that.

    For Japan economics is the dominant concern. That’s why they are actively pushing for closer ties. China has far bigger ambitions and is playing a larger long term game of global dominance. For that purpose the US has not yet outlived its usefulness in China’s judgment. So China is procrastinating.

    Don’t expect anything dramatic to happen between China and Japan anytime soon. What’s more likely to happen near term is China will use the implicit threat of such an alliance to bargain for more from the US, such as lifting bans on sale of sensitive technologies.

    1. Moneta

      When Americans can’t buy their imports anymore, then the peg will go. And China will be able to pick up resources on the cheap.

    2. mad professor

      “China has far bigger ambitions and is playing a larger long term game of global dominance.”

      IF this is so (and that is still a question), then they will be the shortest empire in history. there is a larger dynamic going on right now than simply a game between nation-states imho.

      1. fromchina

        Chinese understanding of an empire is different from the West. It is more about economic, cultural and political power than military power. We are in fact seeing that plan slowly unfolding all over the world.

        You are right it is not, strictly speaking, about nation-states. There is indeed a larger dynamic. China is driving that dynamic and intends to control it.

          1. Dennis

            I love comments like these. “Those asiatics, their values are so alien and different from our short sighted, self destructive ways. Nothing will stop their superior, cold, calculating intellect.”

  13. Dave Chiang

    APEC already has long ago lost its relevance. Encompassing all the nations of the Pacific Rim including Latin America, APEC is far too unwieldy. The real action of regional Asian economic integration is at the ASEAN+3 conferences that are held annually on Hainan Island, China. ASEAN+3 includes the Southeast Asia, Japan, South Korea, and China. Although New Zealand and Australia may be later included in the regional grouping, the Chinese have systematically vetoed the participation of both India and the United States. Anyway, I’m not sure the United States would be willing to sign a free trade agreement with China due to political considerations. The US Treasury Dept as a matter of global strategic policy also has restricted 1.6 billion population China to a smaller voting share at the Western institutions, IMF and World Bank, than little Holland.

    On 1st January 2010, the ASEAN nations will merge into China’s economy through a regional free trade pact with 90% of exports free of tariffs and restrictions. Sometime in 2010, the rising Chinese economy will overtake Japan’s with the world’s 2nd largest GDP. By 2020, China’s GDP will overtake the United States given the respective current rates of economic growth. Inter-regional East Asian trade using the Chinese yuan has been formalized by the ASEAN+3 organization. The Chinese yuan is rapidly evolving into a regional reserve currency. There also have been informal discussions between the Chinese and Middle East oil producers including Saudi Arabia to utilize a basket of currencies including the yuan and Gold for payment of energy. The ASEAN+3 strategic move towards a currency basket for the payment of oil would threaten the existing financial hegemony of the US Dollar as a global reserve currency.

    A 3rd wave of globalization is taking place between developing nations of the world. Largely ignored by the West, a new Silk Road route is evolving across the Far East, Central Asia, the Middle East, and Africa. Billions of Chinese capital are being poured across the Eurasian continent and African development. Likewise, the Middle East is rediscovering Asia with Islamic banking in Malaysia, Saudi investment in Chinese petrochemical facilities, and even Arab investment in Singapore semiconductor plants. More Arab traders now visit the Chinese city of Yiwu for business than the United States or Europe. Emirates Airline is the world’s fastest growing due to booming travel between Asia and the Middle East. The stupid US wars in Iraq and Afghanistan are merely a mindless distraction to the real economic events of history. The new world order will look a lot like the old world order of a couple of a centuries ago. All of the US Aircraft Carrier battlegroups are powerless against the tide of history. Driven by an insular perspective on the world, it is the United States that will soon be isolated and overtaken by global events.

    1. ComparedToWhat?

      As a continental power, inherently exceptionalist and inward-looking, the US will pull back, raise the draw-bridges, and recreate itself based on original principles.

      Heh, just kidding! The caudillos of Northern Mexico will continue to accommodate themselves to whichever way the wind is blowing. I’ll Be Gone, You’ll Be Gone.

  14. bobh

    Meanwhile, Geithner is in Japan, telling the world that we will maintain a strong dollar. It’s a lie, of course, and everyone in Asia knows it, but there may still be a few old pensioners in America who don’t get what is happening to their savings, and Geithner needs to keep them confused while his friends finish wiping out their nest eggs. What is noteworthy is how well-suited Geithner is to the job of stone-cold, bald-faced liar. I guess if someone more powerful than him tells him to say it, it’s not a lie.

  15. Fred

    >Rogoffs lives in the fantasy world of the 1970s where development world wages were able to move up with inflation. Because of globalization those days are gone. Price inflation with wage depression will only make US citizens poorer and less able to pay debt.

    You’re oversimplifying. Inflation moves everything up at once, at least domestically speaking. That is, US wages will rise in step with prices on US produced goods and services, and the rise in wages will make it easier for households to pay off fixed-rate debts (almost all of which are denominated in dollars). Imported goods and services, on the other hand, may rise faster than wages as the dollar falls in response to inflation. Thus, those people who consume a large quantity of foreign goods and services (oil, in particular) may well see a decline in their standard of living. Otherwise, 6% inflation will cause the usual redistributional effects–the elderly living on fixed pensions and annuities and with their savings in CDs will suffer, younger workers will large fixed rate mortgages will benefit, stock and bondholders will suffer due to the inflation tax.

    1. Fed Up

      “That is, US wages will rise in step with prices on US produced goods and services,”

      For wages for the lower and middle class, I totally disagree. Now wages if you are working for Goldman Sachs is a different story.

    2. cougar_w

      Wages have not moved in real-dollars since the 1990s, if not the 1980s. Two jobless recoveries into the current century and we cannot rationally expect that to change.

      The middle-class in the US is headed for extinction. They were the engine that pulled the entire train, and they’ve run out of fuel. Permanently. Massive, corrosive, spiraling deflation cannot be far off, and if BB thinks he can print himself a new middle-class — without real jobs and without any hope for a sustained standard of living — then he must be taking some serious recreational drugs.

  16. R.Mutt

    That is, US wages will rise in step with prices on US produced goods and services

    Not with unemployment at +10% they won’t. Workers are scared to death right now, they will not ask for more money.

  17. The Rage


    There is NO INFLATION. There is no “inflating” away of debt. All the debt is already steralized and financed. CPI is not inflation and never was. Yet, these idiots think it is.

    They have no reason to “inflate away anything”.

    Don’t you people get it. Recovery is the word for rising asset prices which the monied powers use to push recoveries in the consumer west, however, it is beginning to run out of juice. Thanks to the peg and other sickening instruments of destruction, the real economy in the US has been SLOWLY deflating away for years. The 00’s saw this real fever pitch. Without the real economy, the economy can’t grow within any means. Consumption and higher asset prices won’t “recover it”. Partial recovery is the best you can hope for before it replodes.

    Much in the way liquidity was blamed for inflation in the 70’s for the lack of economic growth, so will be the pushing up of asset prices for economic recovery. That is over. All it will do is continue to deflate the real economy and lack of economic growth will continue.

    We know the only way to generate “inflation” is and it won’t be pretty.

  18. Dennis

    I’m sorry but why is China and Japan natural partners? Both countries are natural competitors, as both chose essentially the same development model: sacrifice the well being of your citizens for the greater glory of state supported enterprise.

    During this crisis China has increased its share of the world trade, since Americans are net importers who did the Chinese “rob” ? The other semi industrial nations of the emerging markets. The rise of China is fine and dandy for countries like Russia and Brazil and the tip pot nations of Africa, after all someone needs to buy those soybeans and oil, but what about countries who follow a similar development model, ie the Vietnam, Japan, Taiwan, etc…you know the rest of the emerging Asian industries…China is a threat and a competitor.

    And finally, and most importantly, who replicates the role of the American consumer in a China/Japan FTA? The Japanese citizens who own most of the bonds issued by Japan (and hell, debt levels 200% of the GDP are definitely sustainable…sure Japan wasnt able to get out of a slump during two booms but hey…nothing like a world wide recession to really get the economy growing) I bet they cant wait to go on a splurge once their savings are cut through a Japanese bond haircut while they slowly age into oblivion…or is it the Chinese citizens, you know the ones who have to save for private medical care, and education, while they watch their purchasing power wither further away as the Dollar-Yuan continues to be devalued by the PBOC?

    As to the level of debt, does anyone know the status of China’s balance sheets? Especially the regional and sub regional governments? Instead of letting a thousand flowers bloom, the cadres in the provinces are letting a thousand towers grow like wildflowers. Who bails them out?

  19. Aki_Izayoi

    Inflation does solve problems, according to Alan Guth, it solved the flatness problem. Guth should be the Chairman of the Fed

  20. ron tough

    American capitalism works better than any other system of economics in history….and if you truly believe that a 20 years old Chinese command economy is going to overtake 200 years of a democratic free market economy, you are seriously mistaken.

    1. ndk

      If you believe that America’s got the democratic free market economy and China has the central command economy, you may have missed the events of the past fifteen years.

  21. erik

    The argument that Andy Xie knows the enmity between China and Japan because he is Chinese is a piss poor one.

    A FTA between China and Japan is currently not in the offing and will not be over the short-term. Even it it was the main problem would not likely be the construction of a free trade block in East Asia, but rather, the inability of the US administration to move forward with trade liberalization in general including the Doha round of trade talks and several outstanding FTAs with important bilateral partners. That is to say: Instead of trying to play defense, the US should attempt to go on the offensive itself.

  22. Phil

    I am neither Japanese nor Chinese but I am French and as we’ve showed with the Germans, being antagonists and having a long and sordid past does not preclude getting over it.

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