As I outlined in the kleptocracy post Chinese households save an absurdly large proportion of their income in bank deposits with regulated interest rates earning about 1 percent nominal.
This is an observable fact. The reasons for it (I blamed the One Child Policy and deliberate financial oppression) are less observable - but the fact of these enormous savings is not in doubt.
Inflation is also highly observable in China. Whether you believe the official statistics or not does not matter. Inflation causes observable political disturbance and many companies are complaining about cost pressure.
There is no doubt that inflation rates in China have been above the regulated bank interest rate and that situation has been persistent.
Simple observable fact: one of the biggest savings pools in the world and possibly the largest incremental savings pool in the world (Chinese middle and lower classes) have saved (and are clearly prepared to save) at observable and high negative real interest rates.
My speculation: if there were full capital mobility the market clearing real interest rate for riskless assets globally would be negative because of that large pool of savers prepared to save at negative real rates.
If this is true then we should not be at all surprised by gilts in the UK at 1.5 percent and inflation at 3 percent. There is no reason at all to think the market clearing real interest rate has to be positive - indeed given the nature of the incremental savings pool in the world there is a reason to think the reverse. Indeed it is just an extension of what Bernanke observed when he talked about an excess of global savings...
Unfortunately you cannot produce negative real returns on riskless assets unless you allow some inflation.
Central bankers however do not see it that way. Mario Draghi (European Central Bank) still thinks inflation is an ill to be avoided - rather than necessary for market clearance. Mario Draghi is anti-market - and anti-market clearing. He is not the only offender.
I have a follow up post to begin to explore investment and social implications.
Friday, July 6, 2012
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