Inflation is beginning to rear its ugly head in what many have warned is an overheated Chinese economy. The Communist government reported that prices rose at an annualized rate of 5.1 percent in November. Chinese officials blamed the surge on food prices, though independent analysts said the country’s fiscal and monetary policies were the cause. But the more important question for U.S. consumers and investors is whether such price woes will spill across the Pacific to this country.
“[T]there are some real lessons for the U.S. because we could face a similar dilemma,” writes Christopher Ruddy, CEO and editor-in-chief of Newsmax and Moneynews.
When the U.S. economy tanked in 2008 and a global recession followed, China opened the spigots of easy consumer and business debt, Ruddy writes, while enacting a stimulus program that, comparatively speaking, was twice as large as what the Obama administration did a year later. The Chinese intervention worked for awhile — its GDP may hit 10 percent this year — but now the inevitable downside of such massive government spending may be at hand with new evidence of inflation.
Will that happen here? Some analysts say inflation is not a worry because the U.S. stimulus program was spread out over a long period. “Another reason is that money has not gained velocity, that is, consumers and banks remain afraid to borrow and lend,” Ruddy writes. ”The economy is simply not taking off.” However, commodity prices remain high, and Federal Reserve policies such as quantitative easing are a recipe for inflation.
The late economist Milton Friedman famously warned that inflation is the inevitable hangover from splurges of loose credit and heavy government spending as officials seek to avoid or recover from recession. When they do realize inflation is hitting, Friedman wrote, it is too late to stop it. And this hangover can require a long and painful recovery of its own.