More evidence of Chinese inflation

This morning it was announced that the city of Beijing in China is raising its minimum wage by 21% (!).  Ostensibly the reason is because of inflationary pressures.  That is, prices are so high that people cannot afford to buy the essential staples of their life.  That kind of concern can only exist if you have a massive difference between the haves and have nots in a society.  Rhetorical question: how can a “communist” society survive these kinds of imbalances?  Now does it make more sense that I am predicting that the Chinese economic bubble will burst and that there will be social protests?

Separately, raising wages is a short-term solution to a long-term problem; a short-term solution that will make the long-term reckoning much more severe.  To deal with inflation by putting more money in people’s pockets (raising wages) you put more money supply into an economy with a fixed number of goods.  This will lead to higher prices and more inflation – duh!

The Chinese are not stupid, so why would they do this?  When a nation shifts its focus to the short-term from the long-term it usually means that there is a crisis developing or already present.

By the way, this crisis, whatever stage it is at, makes the Chinese vulnerable on the “fixed yuan to dollar” exchange rate front.  I would expect governments around the word, including Barack Obama, to choose a moment when they will start hitting China hard.  The punches will be thrown to get the Chinese to allow the Yuan to appreciate.  This, afterall, is the source of most of the Chinese inflation, asset bubble, and widening income gap.

It’s going to be an interesting 2011 in China.

Jason