Friday, February 1

The law of unintended consequences in China

China has a controlled economy. Well, some bits. Well, it tries. Now look at the current situation and the law of un-intended consequences flow through.

The basic problem?

Not sufficient power being generated by the power plants.

Why aren't they generating power?

Well, because power prices are controlled.

Why are power prices controlled?

Because general overall prices are going through the roof in China and the communist controllers do not want inflation to go rampant. They have to keep the great unwashed herd quiet. And there is nothing like inflation to get people excited. So control prices.

But whose prices are not controlled?


So what's happening to the coal price?

Its going through the roof and becoming very expensive. I quote: "Global coal prices, in the meantime, have soared in recent months, by 50-60 per cent, with the largest rise occurring in recent weeks because of the Australian floods."

So why is that important?

Well, most of the power generators in China use coal to generate power. And if the final product - power - is price controlled and the inputs are not, then this happens: I quote: "Against this background, power companies have been refusing to pay the prices they negotiated with the coal companies earlier this year. And the longer the delay in honouring these contracts, the higher the asking price for coal."

So, no coal, no power. Welcome to a controlled economy. What happens to inflation?

Well, that's still going to go through the roof. I quote: Snow battering central China has dealt an "extremely serious" blow to winter crops, a top agriculture official warned Thursday, raising the likelihood that future shortages would exaggerate already surging food prices.

See here for what happens when food prices are too high. This is becoming a serious world problem.

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