Chinese government inflating money supply at 18% a year

More Q & A with Gary North. Interestingly, North believes that there will be a recession in China shortly after the 2008 Olympic Games, due to the fact that the government is inflating the money supply at about 18% per year.

North writes: "At some point, [the current inflation rate] is going to create shortages of goods, rising commodity prices, and rising wages. The government will be forced tell the central bank to lower the rate of monetary inflation. There will be a bust."

The full question is excerpted below…

Age: 18; occupation: student; location: Hong Kong; family annual income: US$50K; family net worth: about US$1.5M.

When the price of gold reaches 800 an ounce, should my dad sell half of the gold that he bought in 1983 and buy foreign currencies (eg AUD, CAD, EUR)?

That depends on what percentage of his net worth is in gold. If it is over 25%, he should sell enough gold to return to 25%. He should do that now. He has an opportunity to diversify. If he has less than 25%, then he should sit tight until he has a plan of action for those currencies. What will he do with foreign currencies? He must decide what his long-term goals are for his money.

If I were in Hong Kong, I would bide my time. I would position myself to buy assets in China in the recession that will inevitably come. The Chinese central bank is expanding the money supply at about 18% per annum. This is very high. At some point, this is going to create shortages of goods, rising commodity prices, and rising wages. The government will be forced tell the central bank to lower the rate of monetary inflation. There will be a bust.

My guess: This will be shortly after the 2008 Olympics.

He should do what he can now to identify industries that will be available for purchase on the Chinese stock market. He should regard his foreign currencies as "holding actions" until a year into the Chinese recession. The Red Guards created havoc 40 years ago. Red ink will do
it again.

He might buy real estate in the recession phase. The problem will be to collect the rent. If he doesn't want to be a landlord, maybe he has a family connection that will enable him to participate safely in a joint venture.

Any currency that is sent back to China by off-shore Chinese is an eligible currency for investment in China. When it comes time to sell currencies to buy yuan, there will be a market for them. Make sure this is in liquid short-term instruments.