It seems that China is in a boom that may go bust.  I was talking to people about this years ago.  I remember 4 or 5 years ago hearing some people say that China may go into a recession after the 2008 Olympics.

China has a reported price inflation rate above 6% right now.  I would not be surprised if that number were understated significantly.  Of course, this is price inflation.  Monetary inflation in China has been much higher in the last several years.

I am hearing more people today talk about the possibility that China is “overheated”.  This is absolutely true, but I just want to be clear on something.  The only reason that China is “overheated” is because of the previous monetary inflation.  There is absolutely nothing wrong if an economy grows 8 or 10 percent per year, as long as it is not part of an artificial boom.  In a free market economy with stable money, a huge growth rate of 8 or 10 percent does not mean that things have to slow down or go bust.  If the growth is built on real savings and investment, then the growth is real.

Unfortunately for China, much of its growth has been artificial.  There is no doubt that the Chinese people are far better off now than they were 3 decades ago or even 1 decade ago.  Some of this growth is real due to the semi-liberalization of the economy by the communist rulers.  However, as I mentioned, China has had significant monetary inflation over the last several years.

The Austrian Business Cycle Theory applies to China just as it would apply anywhere else.  The easy money policies of the Chinese central bank have created an artificial boom that is misallocating resources. This is why we see these new cities being built that are practically empty.  If China keeps increasing its rate of monetary inflation, then eventually they will go to hyperinflation.  The more likely scenario is that the Chinese central bank will slow down monetary inflation and there will be a severe correction.

For anyone who studies and understands Austrian free market economics, there should be little doubt that there will be a bust in China.  It will be China’s first major recession, since this is the first time that China has had any kind of significant economy.

The interesting thing to learn from the Chinese boom is just how long it has been able to continue.  Again, there were people five years ago predicting a bust.  While Austrian economics can help us in predicting that a bust will occur, it is almost useless as to the timing.

Remember this lesson when the price of gold goes through the roof.  A bubble can last a lot longer than people think.  When the day comes that it does go bust, be prepared and step out of the way the best you can.