When will China’s hyperinflation come?

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Source: Mi LAN investment (wechat id:mikuangtouzi) author: Zhong Hao

Although we feel that the prices of fruits and vegetables around us continue to rise, we can objectively say that the CPI growth of 2.1% year-on-year in May is basically reliable.

When we chat at ordinary times, we can casually complain about the rising prices, which is a topic for discussion.

However, this “feeling” must not be used as a basis for real investment.

Roast belongs to roast, and research belongs to research.

Compared with 8.7% in the United States, 8.6% in Europe, 60.7% in Argentina, or 191% in Zimbabwe, we can objectively say that the current inflation level in China cannot be considered high.

Although I believe that China’s inflation rate will continue to rise in the coming year, it happens to sit on a seesaw with Europe and the United States.

So is it possible for China to have hyperinflation?

This is a question recently asked by a friend.

This is a good question.

Because the vast majority of people actually do not understand the mechanism of inflation, that is to say, excessive currency issuance – this is all right nonsense.

There are many ways to print money, and different ways have different consequences.

What will cause “hyperinflation”, what will cause temporary inflation but then deflation, and what looks serious but actually has no impact.

Have different logic.

We are going to talk about it today.

one

As we know, many big V and Brick Companies in China have basically zero understanding of economy.

Do you still remember that from the end of 2020 to the beginning of 2021, many VCs pointed out that China was about to usher in a sharp inflation, because they saw a very fierce rise in the prices of bulk commodity raw materials.

They said that this would transmit to consumer goods, leading to “imported inflation”.

At that time, Wang Shi was the most influential. This was his microblog in March 2021:

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He predicted that China would have serious imported inflation.

As a result, he was beaten in the face.

It has been a year and a half since March 2021. With the rise of raw materials (PPI), China’s consumer goods (CPI) has never been tepid.

At the end of 2021, I issued a document, “PPI burst, is Datong inflation coming?”

Cost promotion does not exist, which is a manifestation of ignorance of basic principles.

PPI will not push up CPI, but CPI will pull down PPI.

China’s CPI will rise, but it is not a sharp rise, nor is it for the reason he said.

Now seven months have passed, and it has been verified one by one.

Imported inflation is not so easy, because the exchange rate will resist;

Cost promotion is not so easy, because consumers do not buy it.

Why are the bricklayers wrong?

Their understanding of the internal mechanism of inflation is almost zero.

two

What will cause hyperinflation, what will cause temporary inflation but then deflation, and what looks serious but actually has no impact.

And, under no circumstances will excess money cause inflation.

First, let’s imagine a relatively pure economy:

There is no government, no central bank, no violent robbery and other disturbances of order. Money is primitive gold and silver, and other aspects are basically the same as we are now.

Why should we conceive such an ideal economy? Just like envisioning an infinitely smooth block in physics, it is a thinking tool for understanding the truth.

Even in such an ideal economy, there is no central bank and no “money printing machine”, inflation will still occur.

The reason is that——

The economy will fluctuate periodically.

The essence of cyclical fluctuations is the shock between over investment and liquidation. Inflation will naturally occur in the process from downturn to prosperity. This is because in the previous downturn, the excess capacity has been cleared and the price decline has ended. Under the low base, prices are bound to rise with the recovery of demand.

The meaning of demand recovery is that the money that everyone saved in the early stage because of risk aversion and frugality finally has consumption power because prices have fallen to a certain extent.

As the profits of enterprises improved, they began to expand production, and more and more of those stored money entered the production field. In the cycle of “investment production ? income increase ? demand increase ? reinvestment production”, the mining volume and circulation speed of gold and silver currency are increasing.

Because the recovery of demand precedes production, prices will rise;

And because the number of goods produced soon increased, the rise was very moderate.

This positive feedback has reached the peak of prosperity – when the excessive expansion of production (not only the expansion of exponential volume, but also the improvement of quality) finally exceeded the “purchasing power demand”, the downward reversal began: if the purchasing power was not reached, the commodity price fell, and deflation occurred.

Falling below the factory cost, the number of bankrupt factories increases, which is the period of economic downturn.

In order to avoid risks, people have reduced investment and stored up money. Until there are enough bankrupt factories, and the output of the surviving factories just reaches a balance with the demand, prices will stop falling again. This is another cycle.

Taking this ideal economy as an example, we want to say that inflation and deflation are endogenous and inevitable. It is not necessarily the result of the central bank issuing more money.

three

What about the modern central bank commercial banking system?

From natural metal money to legal paper money. In the power thinking of many people, whether inflation depends entirely on the central bank, which is a god like existence.

But this is not true.

Let’s first look at how the central bank issues money.

Fundamentally speaking, there is only one way for the central bank to issue base money:

Purchase assets (or actively expand assets out of thin air, such as unsecured refinancing).

What assets? This asset can be various bonds, credit of commercial banks, gold or dollars, or even stocks – the Bank of Japan often buys stocks directly.

If it is to buy medium and long-term bonds (whether treasury bonds or corporate bonds); If it is through short-term mortgage to “buy” the assets of commercial banks, it is called MLF (spicy powder); If you buy dollars, it is called foreign exchange.

Anyway, every time the central bank buys an asset, the corresponding amount of base currency will increase. Otherwise, what will it buy.

However, there are essential differences between these different distribution methods.

This difference directly leads to different consequences affecting inflation.

Let’s first look at the most typical way in China:

The central bank releases the base currency to commercial banks through MLF, and then commercial banks increase loans to enterprises.

What does the enterprise do after getting the money? Its main purpose must be “production”.

The key is here: more money, more goods can be produced. Therefore, the central bank will not cause long-term and additional inflation (but the time difference will cause fluctuations) by printing money through this “debt asset for production”.

Moreover, when the economy is down and the market is depressed, commercial banks will be reluctant to lend because they are afraid of bad debts; Enterprises are also unwilling to lend because they dare not expand production.

In other words, it is not easy for the central bank to release water at this time.

The other way is different.

What if the central bank went to the market to buy gold, dollars, or stocks on a large scale?

Yes, these money are released without producing corresponding goods, and they all go directly to the consumer end, so it is bound to cause inflation.

What if the central bank purchases treasury bonds on a large scale, that is, the government directly uses the central bank as a cash machine?

It depends on what the government does with the money.

Because the behavior mode of the government is different from that of the enterprise: the enterprise must use the money for production (if it is used for consumption, it will not be able to repay the debt), but the government is different.

If he took the money to invest in infrastructure or state-owned enterprises, it would be OK. If it is used for consumption, it will not only make more money in the market, but also make less goods in the market, which will certainly cause inflation.

In particular, if it is used in war, it will cause——

Hyperinflation.

four

Let’s go back to Venezuela mentioned by Wang Shi above.

Venezuela has been a typical hyperinflation country in the past few years. In 2019, the inflation rate reached a figure that ordinary people dare not think of – 7000%.

Such a high inflation figure is absolutely impossible to achieve by printing money in the form of “debt assets for production” – no matter how you cut interest rates or how you encourage loans.

Europe and the United States are examples: a few years ago, it was impossible to reduce interest rates to negative. Europe has been suffering from low inflation. After the direct epidemic, large-scale money pouring inflation began.

How did Venezuela do it?

Due to the large-scale “nationalization” campaign carried out by the former leaders, foreign-funded enterprises and private enterprises were confiscated, and the productivity fell sharply. After the losses of state-owned enterprises, the central bank fills the hole – the government issues money to finance the deficits of state-owned enterprises.

This is the first and main reason.

The second reason is that the government’s “public expenditure” is too large.

The third reason is the high control over foreign trade and foreign exchange.

Due to space reasons, I won’t talk about it here. I’ll explain it in detail in my course later.

Fortunately, Venezuela finally gave up this practice of suicide:

Opening up the market will no longer cover the losses of state-owned enterprises. Lower tariffs and abandon the previous strategy of controlling exchange rates. Soon, Venezuela’s inflation rate fell to single digits and has remained below 10% since September last year.

Therefore, to see whether there will be hyperinflation, the key depends on the way money is printed.

What are the ways of printing money in China?

Objectively speaking, we have been very restrained in the past few years, and most of them are “debt assets for production purposes”. It was not until this year that the scale of infrastructure construction was increased. Premier Li repeatedly stressed that flood irrigation should not be carried out, and he really did it.

In the future, we should focus on:

The process of state-owned enterprise reform is military expenditure, whether the government is living in a tight life, infrastructure, and how much it costs to fill the holes in state-owned enterprises.

According to the route we have seen so far, hyperinflation is unlikely to occur in China.

However, with the increase of infrastructure construction, inflation will continue to rise in the next year, which is a high probability event.

In the future, when you see the big V’s alarmist talk about “big inflation”, you need to think more.

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