copied in its entirety...

from the Winterwatch comment board:

Bondbubble wrote:

Below is an interesting link to Chinese monetary policy
thinking:http://www.smh.com.au/news/business/inflation-in-china-builds-up-steam/2007/09/23/1190486137178.html
Essentially, the Chinese (and the rest of the world) prefer inflation(and
hoping that this will translate into wage increase for all in Chindia and
hencepush the cost of exports and hope this will balance the trade for China).
As an economist mentions, this will create more Brazil Americans in China, India, etc. Also, notice that, the view seems to allude that, because Japan and Taipei choseto deflate the inflation in the early 1990s, they got hit very badly and those nations thatdid not choose to deflate that much in the 1990s (as in US) prospered and benefited fromJapanese deflation i.e could create more credit easily!! For this reason, every nation now wants to avoid arresting the inflationary tendencies. May be China is hoping, US will crap first which will lower the demand world wide and they can pump credit merrrily after the US deflation….
When would the game end? Hayek says, the higher order production
fails as the lower order production (closer to consumption) consumes most of what higher order production needs at any cost!! This is why CBs fight
inflation!! Not because USD/Yuan is losing value or there is some social unrest. Let me explain this concept and we are seeing this in spades right now: The main industrial beneficiary of lower interest rates in all countries including US is exports!! So I would watch for these exports in all nations creating shortages in individual nations. For example, US would start exporting more grains (China seems to be avoiding importation of grains for now) and hence consume more farm equipment and fertilizers/oil. Note that, in the US, nitrogenous fertilizers are completely outsourced in the last 3-4 years because it uses natural gas and natural gas has more than doubled in price. For this reason, you should be seeing lot of slack in natural gas usage (not mentioned in the media). So, US is importing more and more nitrogenous fertilizers and this is causing fertilizer to raise everywhere in the world!! i.e Inspite of outsourcing nitrogenous fertilizer (higher order goods industry being killed in US), net Natural gas
consumption continues to increase because of lower order industry (for heating homes etc)!!! I dont deny that Natural gases are used in higher order goods (like in electricity going to machine tool making etc) - but you want to watch for the lower order goods manufacturing consuming the Natural gas (like houses consuming electricity!!).
Another classis example of the lower order industry killing higer order industry:You are already seeing that there are about 20% less rigs in the Gulf of Mexico than 2 years ago - inspite of oil price spike!! Why? the mainstream media does not mention that - oil exploration demands lot of
steel (drill bits has to be continously replaced etc). And when Katrina hit the gulf, the insurance companies saw their payment soar and hence when the renewal for insurance came up, they spiked it - as they probably watched the steel prices etc soaring!! Inspite of rising oil prices, the Gulf of MExico rigs can NOT afford the insurance premiums!! So, they are increasing the rig count inland - where the insurance is low!!
Similar thing is happening in Canadian oil sands!! Few years ago, oil sands were claimed to solve the world oil problem at $60/barrel!! Today oil is at $80 but you have stopped hearing oil sands!! Why? Look out for farm equipment industry now demanding more steel and competing with oil companies (and other higher order goods industries)!!!
So, I would say, watch for higher order industries dying (like oil refiners are having low margins inspite of gas price at more than double the amount in 5 years!!) and lower order industry (like car companies in Chindia, unused toy ports build for the Chinese politicians to “play”) cannibalising the higher order industry!!!
This is what creates the shortages!!! This is what CBs will fight!! Any increased money makes lower order guys thrive at the expense of higher order guys!!
Another happening: All the states avoided electricty price spike by cutting down on new plant development and avoiding maintanence!! Now the consumption industry (like malls and houses) are taking so much energy,
States have reached the limit where they have to build new plants ALL in ONE shot (as opposed to doing it gradually over the years). The fast printing of money has created faster demand than the State officials past calculation!! Hence, AZ which has 50% of the cost than CA for electricity (9cents vs 16 cents) - is now being forced to supply to CA and increasing demand in AZ. They expect the cost to double in AZ (and the price hikes are coming into GA etc). But nobody expects CA electricity prices to fall just because it is being sourced from cheaper AZ!!! Obviosly all these excess capacity are being built for a deflationary bust. But while they build, they will consume more steel, copper - killing the higher order industry!!!
Hayek says production is complex. You only mentioned one of the aspect of iron ore price increase - because China is building toy ports. But there is another aspect which you completely overlooked. The Brazil folks who mine iron ore, collect their salary in real and just to support the current production (and not expansion), iron prices have to increase in USD (as Real appreciates). On top of that, the miners have to increase production (to meet the increased demand). I dont think the miners are going to
make lot of profit in Real terms (but in USD, certainly yes). This should push for more increase in ore price or shortages of iron ore…. I would bet that shortages are what makes Fed to raise rates!!

BRILLIANT! This will be a comment to study, reread, ponder, and understand.