Tuesday, June 30, 2009

High Inflation

I was discussing college loan rates with a friend yesterday. He told me that not only has our loan provider thrown a 5.5-pt swing at us from last year to this year, but what's worse - they could potentially skyrocket with inflation if we keep them variable, which would suggest assuming a fixed rate instead of the current variable.

That got me thinking about the high inflation eras of the past and instead of wondering why this might happen, or what circumstances might cause such an environment, I would like to focus on the rumblings that I have been hearing from colleagues discussing the negative impact this could have on China.

First of all, China's monetary and foreign currency authorities are much savvier than we are giving them credit for, and I think that years ago they understood the feasibility of this type of predicament. And while I do believe the the problem is very big, it is still not a devastating blow to either the economy in China or the US-China relationship.

But here is where it could get very interesting. Although pension funds have always aggressively chosen to invest in primarily fixed-income assets, I tend to think that a sovereign wealth fund like the one China has can be slightly more aggressive than other such organizations and hence be in a position to purchase AA and above-rated bonds if they were to climb to 10+%.

Oh wait, this just in - our ratings agencies have no credibility either and China surely will not trust them any time soon.


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