China - More Problems with Fiat Currency and a Government that wants Inflation!

I've been thinking about China's M2 money supply problem (read here and here) for quite some time.  The following graph illustrates the current trend (borrowed from Also Sprach Analyst):

This is the result of a fiat currency and a government that wants inflation, as posted before (here).  Exacerbated by distorted incentives and poor capital allocation by policy banks (here).  It is too easy and tempting to hit that printing press, they just can't help themselves!

How is it healthy an economy half the size of U.S. is 40%+ higher in M2 money supply, with the gap widening by the day?  It is no wonder cost of living in 2nd tier cities in China is comparable to the U.S. according to a survey (here).  Let's not forget the income of an average Chinese family is not comparable to the U.S.

Keep this going and you have high inflation (translating to increasing cost of living, real estate prices and lost of manufacturing competitiveness), a currency with unsustainable value and social instability.  Turn off the spigot and you have banking system and real estate collapse and...social instability as well.  That is between a rock and a hard place.