Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

China Inflation Problem to Be Imported into the U.S.?

Friday, March 15th, 2013
By for Profit Confidential

China’s Consumer Price Index (CPI), a measure of inflation, increased 3.2% in February from a year earlier. In January, inflation in the Chinese economy was running at two percent. (Source: Wall Street Journal, March 13, 2013.)

The governor of the Bank of China, Zhou Xiaochuan, said, “The central bank has been paying high attention to inflation and we will stabilize inflation expectations via monetary policies.” He added, “February CPI was slightly higher than expectations, suggesting that we need to keep vigilant on inflation.” (Source: “China Central Ban Warns on Inflation, Pledges Reform,” Reuters, March 13, 2013.)

Just like the Federal Reserve, the Bank of China has been using its easy monetary policy tactics to rev up the economy. In 2012, the Chinese economy grew at a rate of 7.8%—much slower than what it has done in past.

Inflation, while not visible now according to the official statistics, will eventually take a toll on the U.S. economy, courtesy of our loose monetary policy. Just look at how much paper money has been printed in the past four years and where our economy is today—three rounds of quantitative easing and a continued $85.0-billion-a-month printing program, plus all the stimulus packages.

In January of 2012, the M2 money supply (a measure of money in circulation), was $9.72 trillion. By January of 2013, it had increased to $10.44 trillion. (Source: Federal Reserve, March 7, 2013.)

Easy monetary policy builds up inflationary pressures—the longer these policies stay in place, the higher the inflation is going to be. Once the inflation strengthens here in the U.S., prices will increase significantly for already “fragile” consumers.

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Let’s never forget: consumer spending in the U.S. economy makes up about 70% of gross domestic product (GDP). If inflation increases, the U.S. consumers will simply spend less, thus depressing economic growth.

Right now, the official inflation numbers say we don’t have inflation in the U.S.; but we do have bleak consumer spending, falling real incomes, stagnant consumer savings, and millions of Americans on food stamps. Imagine what will happen when inflation does hit!

Where the Market Stands; Where It’s Headed:

It’s actually ridiculous.

The government needs money to pay its bills, because it doesn’t have enough money coming in. The government issues T-bills to get the money it needs to cover its deficit, and the Federal Reserve prints paper money and gives it to the government as it buys the T-bills.

Through the creation of even more money, the Federal Reserve takes mortgage-backed securities off the books of big American banks; these same banks get real cash in return for their illiquid mortgage-backed securities. And what do the banks do with the newly printed cash? Well, I don’t see banks lending more to businesses and consumers. But I do see them starting to buy back their stock, pushing the stock market higher.

How can all this end nicely?

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. WCI Communities, the largest U.S. luxury home builder at the time, filed for Chapter 11 protection on August 4, 2008.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles