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China’s Deflation Meets US Inflation: Impacts on Global Economy and Bitcoin




  • Core Inflation: Excluding volatile food and energy prices, China’s core inflation rose to 0.8% in July from 0.4% in June, marking its highest level since January.
  • Economic Concerns: July’s data shows a troubling scenario for China as its economic revival wanes. This is attributed to multiple issues:
  1. Decreased exports.
  2. Skyrocketing youth unemployment rates.
  3. A stagnant housing market.
  4. A decline in prices across multiple sectors, including essential commodities such as steel, coal, vegetables, and home appliances.
  • Deflation Worries: The predominant concern is the cementing expectation of declining prices. Such an environment could:
  1. Reduce demand.
  2. Exacerbate debt burdens.
  3. Potentially ensnare the economy in a challenging cycle, making traditional stimulus measures ineffective.
  • International Perspective: This stands in contrast to the global trajectory where many nations are confronting inflationary pressures, especially post-easing of Covid-19 restrictions.
  • Expert Insights: “The reality looks increasingly grim,” stated Eswar Prasad, a distinguished economist from Cornell University. He further warned of the risks of the government downplaying the economic challenges, suggesting that this could intensify the economy’s downward trajectory.

Federal Reserve’s Balance Sheet Expansion

  • Massive Expansion: Between December 2019 and April 2022, the US Federal Reserve swelled its assets by $5 trillion.
  • Impact on S&P 500: This expansion coincided with a 38% slump in the S&P 500 index. Furthermore, the Federal Reserve’s balance sheet surpassed $8.9 trillion as the stock market index achieved its pinnacle at 4,800 points.
  • US Treasury’s Deficit Dilemma: Marcel Pechman, a Cointelegraph analyst, underscores the significant deficit of the US Treasury Department. The government’s expenditure outpaces its revenues from taxes, leading to the necessity of rolling over some of the debt rather than allowing it to mature. This predicament might prevent the Federal Reserve from further reducing its balance sheet, a strategy previously successful in curbing inflation.

US-China Economic Dynamics: A Divorce in Play?

  • Opposing Economic States: While the US grapples with inflation, China confronts deflation. These polar opposite economic situations are intriguing given the extensive interdependence in the global economy.
  • July Economic Data:
  1. US: Inflation stands at 3.2%, with core inflation at 4.7%.
  2. China: Retail sales increased by a mere 2.5%, and industrial production rose by 3.7% YoY, both missing expectations. Real estate investment plummeted by 8.5% YoY as of July.
  • Decoupling Discourse: Discussions regarding the US’s economic separation from China have been ongoing. The unique scenario where the economic trajectories of these superpowers move in opposing directions is rare, symbolizing a genuine decoupling rather than mere ‘de-risking’.
  • GDP Growth Rates: Both nations are poised for a 3% GDP growth this year. This rate, while acceptable for the US, is lower for China, an emerging economy.
  • Possible Way Forward for China: One way for China to navigate out of deflation could be through currency devaluation, promoting growth via exports. However, with the strained US-China relations, the efficacy of this strategy remains uncertain.

Looking Ahead

The dynamics between the US and Chinese economies over the forthcoming months and years will be pivotal. This decoupling could have significant repercussions on global markets. As always, the role of the EU in this framework cannot be overlooked. Economic and political elements will increasingly become intertwined, with the world closely watching the unfolding narrative.