Brad Setser interprets Andy Xie

Brad Setser has a post discussing the comments made by Andy Xie that Chinese prices won't converge to US levels so much as US prices are likely to fall to Chinese levels, which I had also linked to in an earlier post.

Brad Setser does not quite agree with Xie that China will get to set US price levels because he thinks that the Federal Reserve has the tools -- that is, the printing press -- to generate inflation. Others who added comments point out that China's labour supply is not quite infinite, that productivity gains must have some impact on China's wage levels, and that the US can always resort to protectionism.

All these objections are true, of course. But they take Xie too literally in the first place.

A realistic takeaway from Xie's article is not that US prices will actually fall to where Chinese prices are now. Rather, it is that China will have a bigger influence than other emerging economies have had in previous decades, and that the deflationary forces that it is unleashing globally must be treated with greater respect than seems to be the case at the moment.

Xie is an iconoclast. He likes to paint his scenarios in stark and extreme terms. Such descriptions are seldom realistic. But they are often helpful in shaking up existing mindsets. And they do make interesting reading.

If you don't have enough of Xie, you can read his latest commentaries entitled " The Liquidity Conundrum" and "The NPC - Marginal Changes".