I recently suggested it was possible to have high unemployment and inflation at the same time. Zimbabwe experienced unemployment above 90 percent while hyperinflation took over.

The basis for this is rather simple: demand for basic necessities, such as water and food, remain relatively constant irrespective of income.

The extraordinary unemployment was a reflection of lower production and reduced supplies of necessities. Demand exceeded supply, which placed upward pressure on prices. The low level of income was used primarily to purchase these items and virtually nothing else.

During the 1920s, Germany experienced hyperinflation where food expenditures represented more than 90 percent of income, while housing expenditures were close to 1 percent.

How does this relate to China?

China seems to be experiencing diverging forces in different sectors as well.

Residential housing in Beijing costs nearly 27 times average income, an unsustainable condition. The current income levels cannot easily support these prices.

In addition to decreased demand, a huge supply of available space exists (14 year supply of commercial space at the current absorption rate). Both factors suggest a large decrease in real-estate prices (deflationary, if you will).

Moreover, there is an excess supply of educated labor coming to market without commensurate demand for these services (e.g., finance, accounting, computer programming). This year, nearly 6 million students will graduate university looking for work (10 years ago this figure was less than 1 million). This suggests a decrease in wages for the more educated (deflationary).

The opposite is true for lower-skilled labor. The rural, peasant class has been migrating into industrialized areas to produced export commodities demanded by the United States and others around the world (e.g., rare-earth elements for renewable-energy technologies, such as wind turbines).

Their wage rate has increased 80 percent during the past six years (inflationary).

Currently, the Chinese spend nearly 50 percent of their income on food (compared with 13 percent in the United States). Agriculture products (such as eggs, grain, and cooking oil) have increased substantially. A supply shortage is occurring, partially due to hoarding, which reflects uncertain domestic policy and economic conditions.

Inflationary pressures for food products have been exacerbated by the 55 percent increase in money supply during the past two years. An increase in currency fuels demand for these essential commodities (inflationary).

The money supply has grown with the influx of foreign-currency reserves from exports. Government policy to limit appreciation of the Yuan (China’s currency) has enabled foreign countries, like the United States, to more easily afford their exports (if the yuan appreciates, the same dollar buys less of it).

China is experiencing economic disequilibrium in different sectors. Inflationary pressures exist for essential agriculture commodities and low-skilled, export-driven labor. Deflationary pressures exist for real-estate assets and high-skilled labor. These severe resource dislocations may require many years to equilibrate.

The United States may have more strategic negotiating potential than it currently recognizes, both economically and geopolitically.