China inflation rate forecast for 2011: ‘Nightmarish’

The publisher of the respected Wellington Letter and one of the few prognosticators who foresaw the 2008 housing collage is now warning that China is on the verge of a ‘nightmarish’ rise in inflation rates in 2011.

Financial Sense had a startling interview last week with Bert Dohmen of Dohmen Capital. Dohmen – the publisher of the respected Wellington Letter and one of the few prognosticators who foresaw the 2008 housing collage – is now warning that China is on the edge of an economic precipice.

“No one can predict in advance when it will start unraveling,” Dohmen tells Jim Puplava in his radio show The Big Picture. “China and all of Asia right now has an inflation problem, and China supposedly is just above 5 percent, but realistically inflation in China is possibly 10 to 20 percent – much too high. Housing has become unaffordable for the average person. Food is now becoming unaffordable for the average person, as is clothing because of the big rise in cotton prices, and it’s going to get only worse with the floods in Australia.”

Dohmen goes on to argue that the Chinese government allowed inflation to run rampant, in part because party functionaries stood to profit on rising real estate prices. Now that inflation has climbed to an unsustainable rate, the country needs to tighten the reins on its currency, and that will eventually grind the economy in China to a halt.

“The first phase (of a collapse) is always when the government tries to raise interest rates,” Dohmen says. “They’ve been doing that very gradually, but higher interest rates produce higher inflation. The only point where the high interest rates actually start causing a decline in inflation is when the economy starts caving in because of the excessive rates, and so that means you first have to see the economy starting to implode. Only then will the inflation rate decline, and when that happens, it will unleash a tsunami in the financial world basically around the globe.”

Dohman offers a number of reasons why he sees an impending collapse in the Chinese economy:

  • China’s money supply is expanding too rapidly. In fact, it’s been growing at about a 40 percent annual rate over the last two years. “That is so excessive,” Dohmen says. “They have a flood of excessive money and excessive credit. We had the same thing in 2006 and 2007, and that’s what caused this big implosion when it finally stopped, and China’s going to see the same thing. There’s no soft landing from this.”
  • The demand for electricity and power usage has been declining in China. “Electrical consumption has been going down now for about the last eight months in China. That means that the economy is slowing very, very fast.”
  • China’s trade surplus is tumbling. “The trade surplus in China actually dropped by 50 percent in the last months of last year,” Dohmen says. “They’re exporting less, so that means their customers are buying less. Their customers are Europe and the U.S. primarily. This is incredible. That shows you the economy is slowing.”

Dohmen offers more reasons why he foresees major problems in China in the show (which I highly recommend), and he’s also penned an article titled “China’s coming inflation nightmare” in his latest edition of the Wellington Letter. You can read an except here.

If nothing else, Dohmen’s warnings should give us pause before buying shares in speculative Chinese stocks – in particular shares that are related to the real estate and export markets in China.

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