The U.S. Wants Inflation, China Doesn't

The most important dynamic in the financial world today is that of the monetary policies between China and the U.S. This relationship can be summated in six words:

The U.S. wants inflation, China DOESN’T.

China has now hiked interest rates three times in the last four months. It’s also raised reserve requirements at several of its banks. And it is rumored to be planning a 30% real estate market crash.

China is a country controlled by a small sliver of rich bureaucrats. They can only remain in power so long as the Chinese economy continues to grow and unemployment is contained. This is why China pumped some $580+ billion (nearly 14% its GDP at the time) into its economy.

This policy was further exacerbated by the U.S. Federal Reserve’s money printing. All told, the Fed has pumped TRILLIONS of dollars into Wall Street. And Wall Street has done what it does best (aside from paying bonuses): funneled this money into risk assets to generate returns.

Which has resulted in agricultural commodities EXPLODING higher in price:

What you’re looking at is a 65% increase in the ENTIRE Agricultural Sector in a little over seven months’ time. In the U.S., where food is so processed it’s barely food anymore, this has resulted in significantly higher food prices.

However, in emerging market economies (most notably the Middle East, India, and China), where hundreds of millions of people live off $2 per day or even less, the increase in food prices has resulted in outright starvation and riots.

This is going to be making things VERY difficult for the Chinese government. Social unrest has already unseated several regimes in the Middle East.

And the same formula that created those situations (tons of poor, repressed folks no longer able to afford food) exists today in China as well.

With that in mind, expect the relationship between the U.S. and China to deteriorate in the coming months. The flirtation underlying trade tensions (steel and tires) we’ve already seen will erupt into full-scale trade wars. We could very well even see an actual physical war the way things are heading.

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About the Author: Graham Summers focuses on helping investors to avoid surprises, lock in profiles, and retire securely with as little worry as possible. He has researched and analyzed over 1,000 companies worldwide after starting career as a research analyst at one of the largest financial research firms in Baltimore, MD.

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