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March 24, 2005



This is a really good post. It's worth remembering all the "Japan Will Buy Everything" hysteria from the 80s, when we hear of the unfailable Middle Kingdom.

Two things to keep in mind:

It is impossible to have too much capital, too much infrastructure, or too much supply. There is no "economic overreach." What 1930s economics called "overcapacity," for instance, would have been meager by the 1960s. It is possible to have misdirected capital or infrastructure, however, especially if it is misdirected into fixed or long-term projects. When combined with China's corruption, misdirection of resources into fixed projects is dangerous.

Second, The Economist is confused about inflation

"A study by economists at America's Federal Reserve estimates that cheaper imports from China have lowered inflation in America by an annual average of 0.1-0.3 percentage points in recent years. Another study by Dresdner Kleinwort Wasserstein, which allows for the price-reducing effects of Chinese competition on all producers, reckons that China may have brought down America's inflation rate by almost a full percentage point."

That's possible, but that's not what Economist means. Inflation occurs when money supply expands faster than economic growth. A decrease in inflation would mean that less real wealth is transfered from creditors to borrowers, but that's not at all what the newspaper means. "The China Price" has succeeded in reducing the real price of goods. It's not just some trick that stuff costs less dollars with China than without -- it actually reflects that it is easier to make those goods.

-Dan tdaxp

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