when a factory in China exports toys to America they receive US dollars in payment – they then take those American $$ to their local bank and exchange them for yuan because the local grocery store in China doesn’t sell milk in US dollars, it sells milk in yuan
now the local banks all over China send those US dollars to the Chinese central bank and exchange them for yuan (because the local banks don’t operate in US dollars, they operate in yuan)
note that by exporting goods to America and receiving payment in US dollars the demand for the yuan within China has increased – both the toy seller and the local bank have new demand for yuan because of the exports – if the supply of yuan remains fixed, the value of the yuan will increase (econ 101 – more demand with fixed supply means increased value)
the Chinese don’t want the yuan to rise in value so they increase the supply of it – the central bank prints enough yuan to buy up the new US dollars that have entered the country – increasing the supply of yuan available within China creates inflation as more money chases a fixed supply of goods and services
this monetary process has several results:
– US dollars pile up in the Chinese central bank
– the supply of yuan increases within China
– inflation occurs within China
the process described above is occurring in most of the nations that trade with the US – 18 out of 20 major central banks have been inflating their currency at double-digit rates for the last decade or so
the world is starting to suffer from the inflation in prices that is caused by this global monetary debasement – on monday, wheat prices jumped by $4.00 per bushel – that is nearly a 25% increase in one day – I’m sitting here this morning looking at charts of gold at $963.10, oil at $101.04, silver at $19.28 – tell me those prices don’t reflect massive inflation
as far as the inflation / deflation debate – I like the Kondratiev cycle theory because it describes how inflation (whether ‘hyper’ or not) results in deflation – according to the K cycle theory, we will experience inflation in commodities as asset prices deflate (kinda like what’s happening right now) – put me firmly in the ‘deflationista’ camp
