Michael Pettis is a must-read for me. He has been based in China for a very long time, deals at the highest levels of finance society there, and really knows his stuff. This is an interview he did on China and deflation. It is so counterintuitive that lowering interest rates can actually be deflationary in China. Plus other great insights.

“It turns out, however, that under certain conditions lower interest rates and depreciating currencies may actually exacerbate deflationary pressure. Unfortunately these conditions probably apply to China and Japan. For some reason people are often shocked when I say this, even though you would have thought they would have wanted some explanation for why the roughly 35% depreciation of the yen during the last three years has not unleashed inflation, and has been accompanied by weaker, not stronger, consumption. Or again it should have been at the very least intriguing that during the last decade in China we have seen extraordinarily rapid monetary expansion but we have never suffered runaway CPI inflation, and in fact inflation we have seen has been caused by food shortages, not by monetary policy.”