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World Economic Forum: US turns the inflationary heat on China and Germany

The two countries will not be able to sustain their export-led growth policies while inflation is boosted by QE II. Beyond that, the reduction of US deficits will further undermine Chinese and German exports, writes Charles Dumas of Lombard Street Research.

IN THE LAST months of 2010 there were yet more big shifts in the position and prospects of the US, China and Germany: advantage the US, with potential (self-imposed) pain for China and Germany. The big change is that the US has woken up – possibly aggressively so – after having rested on its economic laurels for the dozen or so years up to 2007. Then, the surplus countries pursued their various high-savings strategies that boiled down to export-led growth, Japan with its soft peg trotting along behind China and Germany with their fixed-exchange-rate policies. US citizens looked only at the immediate result – cheap goods to buy and cheap money to buy them with – and thought it would be rude to refuse. The resultant dangerous run-up of global imbalances and US private-sector debt was ignored. Until it hit us all over the head from behind. Now the US is confronted with multi-year private-sector deleverage that threatens deflation. A huge increase in government debt is all but inevitable. US policies to deal with this are a big threat to Chinese growth in both the short and medium term. In the short term, US measures are sharply worsening China’s already dangerous home-grown inflation.

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