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Blowing Up

Inflation had seemed virtually extinct in America. So much so that there were worries of deflation not so long ago. But was it all an illusion? In fact, much of the pricing pressure on manufactured goods have been exported to other countries, especially in Asia. Normally, all the importing by the US and the ensuing trade deficits lead to higher interest rates and/or devalued dollars, which brings things back into equilibrium. However, Asian governments have subsidized the US buying binge by buying up dollars (in the form of Treasury bonds) to keep their own currencies and goods relatively cheap, in order to keep their own factories running full-bore.

Any significant drop-off in Asia's seemingly insatiable appetite for the greenback would trigger a rise in interest rates that could slow U.S. growth and depress a job market only now showing its first signs of recovery. "Right now, it is Asians who are helping keep U.S. interest rates low," summed up Kenneth Courtis, Asia vice chairman for American investment firm Goldman, Sachs & Co.

Why would this ever end? After all, it's a win-win for Asian workers who get jobs, and US consumers who can buy more cheap stuff. Unfortunately, the real world intervenes. In the end, you still need raw materials to make all this stuff, and artificially supported consumer demand will cause inflation in commodities prices. Well, guess what?

As managers of businesses across China opened booths here on Thursday at the nation's biggest trade fair, the common refrain was that prices of everything from rice to steel were rising sharply, and that prices of exports to the United States, Europe and elsewhere would have to follow.

All the dollars flowing into the Chinese market is swelling the bank vaults with cash that in turn are lent to increasingly speculative or shady deals. It makes for great headlines, as the economy is expected to grow by 9% this year, but how much of that will come crashing down when the bad loans come due? Guanxi will beat out economic common sense every time.

To make matters worse, China's banks are widely described as very corrupt and vulnerable to political pressures to lend money to well-connected borrowers who are unlikely to repay their debts.

Of course, all this worry could be plain old xenophobia. A while ago we were worrying about China causing global deflation, now the danger is bubble inflation. They're all just actors playing out in front of a persistent background of domestic economic worries.

With fears of deflation dissipating, Mr. Roach at Morgan Stanley has taken to a more upbeat view of China's influence on the world: "We ought to be thanking the Chinese," he wrote last month.

But Americans probably won't