Chinese Inflation

from Paul Krugman's blog:

Chinese inflation is getting headlines, as it should. But it's worth bearing in mind that this is essentially a real problem, not a monetary problem.

Think of it in terms of the loanable funds model (which misses some issues, but gets at the essence, I think). Imagine a world in which capital flows equalize interest rates between the North (advanced economies) and the South (emerging economies); savings schedules slope up, investment demand down. Now imagine a financial crisis in the North that reduces investment demand while increasing desired savings. In effect, this creates a new global savings glut, this time originating in advanced economies rather than in the decisions of China etc. to accumulate reserves. What markets "want" to do is send capital South. But because the doctrine of immaculate transfer is false, this requires a rise in the relative price of goods and services in the South.

This could happen three ways: currency appreciation; inflation in the South; deflation in the North.

...

http://krugman.blogs.nytimes.com/2011/04/18/revenge-of-the-global-savings-glut-wonkish/