Inflation and the Chinese Domino Effect

Societe Generale released a report entitled "The China Domino as Fallen" in which analysts describe three main points:

• Domestic inflation: China is switching to a consumer driven economy which means more domestic demand. Supply remains constant, so prices rise.

• China exports inflation:  Chinese demand for oil and steel has pushed prices up in those marketsand made other commodities rise as well.

• China demand shock: The country's long-term economic re-balancing will result in a permanent increase in global demand. Supply is sticky, and it will take time for it to catch up, thus limiting the world's ability to cope with this rise in demand. 

My take on these points are:

• Domestic Inflation: China is switching to a consumer driven economy which means more domestic demand and supply will rise because of it.  Prices, while they may go up, will be pushed back with more production to meet these demands.  As far as China is concerned, their domestic inflation would be more tied to a failing dollar (which the yuan is locked onto) than an inflationary mark due to demand.

• China Exports Inflation:  China's entrance into the higher demand category when it comes to oil and steel is only natural for a developing country. In a global market, more demand means higher prices for limited commodities.  As the prices are driven higher, smaller countries will get squeezed and those who cannot afford to pay the higher prices will fall out and then prices will trend back down so they can buy.  In essence, as "Emerging Economies" grow and stabilize, prices for everything globally will go up.  Standards of living increase as wages increase as prices increase.  If your dollar is only worth a dime in 10 years then shouldn't you be making $10 to $1 in the next decade for your own production as well?

• China Demand Shock: "The country's long-term economic re-balancing will result in a permanent increase in global demand. Supply is sticky, and it will take time for it to catch up, thus limiting the world's ability to cope with this rise in demand."  I DO NOT agree with this.  The world and global markets will be able to cope with the rise in demand just fine.  As higher demand is what the world needs.  The question becomes, where is the offsetting production to pay for the new demand? If there is simply continued money printing and credit use to pay for the demand, while fine for the short term, it needs to be reinvested and thus creating more production or supply to meet the demand.  China will be able to keep up with itself as it grows.  We need to be looking there to help pump some of our own capital in so when the rise, our capital also grows.  

That's my take, what's yours?