Australian hedge fund manager John Hempton is out with a new piece on his blog about “The Macroeconomics of Chinese kleptocracy“, the main takeaway of which is:
But ultimately the Chinese establishment like inflation – it is what enables their thievery to be financed.
The more serious threat is deflation – or even inflation at rates of 1-3 percent. If inflation is too low then the SOEs – the center of the Chinese kleptocratic establishment will not generate enough real profit to sustain the level of looting. These businesses can be looted at a negative real funding rate of 5 percent. A positive real funding rate – well that is a completely different story.
The Chinese establishment has a vested interest in getting the inflation rate up in China. Because if they don’t all hell will break loose.
Unless the Chinese can get the inflation rate up expect a revolution.
I know John (who appears to be a well-intentioned but generally naive political conservative) would likely strongly disagree with the following characterization but…
This is the kleptocratic model prevalent in all major developed and developing world economies– inflation is the keystone piece of these systems and it is why CB presidents from Bernanke to Draghi to Shirakawa are all intent on creating and maintaining it.
If the inflationary engine fails to turn over, the loot-truck stops making its rounds. If the loot-truck stops making its rounds, the elite and their scumbag offspring don’t get paid and all the world’s peasants (you don’t have to work a farm to be an economic peasant) suddenly wake up to just how desperately poor they are after being continually ripped off for decade upon decade.
But, I’m a cynic, so of course I’d see the world that way. More reasonable men, like Mr. Hempton, are more prevalent in the world than I, so everyone is spared my dark view of things and can instead bask in the glory of knowing that, while our systems may not be perfect, at least they’re not as bad and out in the open as China’s.