China's Future

The subtitle is "NY Times Reporter Should Take Econ 101".

Re China Says Economy Grew 11.5% by Keith Bradsher in today's NY Times:

Quotes from the article:

"The temptation to buy stocks or property or spend on consumer goods — retail sales were up 17 percent in September from a year earlier — has increased as bank depositors have found themselves earning regulated interest rates as low as half the inflation rate."
...
"Through massive purchases of dollars and other currencies, as well as by easing restrictions on overseas investments by Chinese citizens, China has greatly slowed the appreciation of its currency and maintained a competitive advantage over other Asian nations."
...
"China has controlled the overall rise in consumer prices partly by freezing all government-set prices, notably for gasoline, water, electricity and natural gas. The freeze began Sept. 19 and is to last until at least until the end of this year. On Sept. 19 the government’s National Development and Reform Commission also banned any increases in the maximum allowed prices for medicines, air and rail trips and certain agricultural commodities like wheat, rice and cotton."
...
"Price controls, a tactic tried and discarded in the United States in the 1970s, run the risk of temporarily tamping down inflationary pressures that later burst out with even greater force."

So far, so good. But here comes the error:

"China is hoping that deflationary pressures, like the country’s massive investments in everything from highways to new factories, will soon offset higher food prices."

Sorry, but massive government spending is not deflationary, it is the opposite: inflationary.

The rapid growth of the Chinese economy is destined to end badly. No one can predict exactly how or when it will end, but it is very easy to see that it cannot be sustained.

My educated guess is that inflation in China will be the trigger, as opposed to the accumulated American trade deficits with the rest of the world. It is a lot easier for the efficient currency markets to make gradual adjustments in the value of the dollar, than it would be for the Chinese command economy to deal with exploding inflation. Also, the American economy seems to be benefiting, on net, from cheap goods and services from China, whereas it is hard to see how the building inflation in China can end peaceably.

My way-out guess is that runaway inflation in China will lead to massive social unrest in the years to come, and that unrest will outpace any movement toward a liberal democracy. Therefore, China will eventually break up into smaller, more manageable pieces (countries).