Sorry Inflationistas, But You Are Wrong

china housing construction

Yesterday, a BI reader coined the term “biflation”. Biflation occurs when parts of the economy like house prices continue to deflate while other parts of the economy like commodities continue to inflate.

So are we doomed to a biflated economy? Yes, but only as long as China continues to keep world demand high.

Jim Chanos is the poster child for a Chinese real-estate bubble, and in his April 12th, 2010 interview with Charlie Rose, he offered logic that I think most readers would agree to: there is a Chinese real-estate bubble, the pivotal question instead is whether the government will be able to handle its bursting?

Indeed, the reason we have biflation is because of a trinity of supply, demand, and monetarypolicy. Supply is whatever the market demands, world demand for commodities is high because of China, prices for demanded goods (ie, commodities, not US real estate) is high because of a loose monetary policy. This is the economic theory as to why we have biflation. So what happens next?

Citing Mr. Chanos again, the question is whether the Chinese government will be able to handle the real-estate bubble. Will it be able to? Nope, not a chance. If governments could 100% fix things, then there would be no recessions and we all would work for the state. Indeed, that(thankfully!) is not the case. China’s real-estate bubble will burst, and the government won’t be able to handle its bursting.

We will continue to have biflation as long as China keeps world demand high, but once China falters, our biflation will turn to deflation. Sorry inflationistas, but you are wrong.

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