Jim Rickards, author of The Death of Money: The Coming Collapse of the International Monetary System, explains why the Communist Party of China was unable to keep control of their limited free market, the American roots of China's economic crisis and why there are no free "markets left in the world."
JIM RICKARDS: The key word there is "mimic." The Communist Party [of China] thought they could finesse and control it, but it is turning out markets have a mind of their own. But the "Empire" will strike back, they have an enormous arsenal of tools they can use to try to fight this bubble.
In the end, all bubbles burst, I expect this will go down about 70% or 80% before it runs its course, but bubbles never go down in a straight line...
This could take multiple years and there could be rallies in the meantime. They need to cut interest rates, cut reserve requirements and cheapen the Yuan, sell their reserves and use that to prop up their markets. There is a lot they can do, but this is just going to grind lower...
I expect China will do something, they are probably debating it right now... They do have room, unlike the U.S., because we should have raised rates when we could have back in 2010, China still has room to cut rates, and they've got $3.5 trillion in reserves, that is a lot of dry powder.
However, this has implications, it has what the IMF calls "spillover effects."
If they have to sell their reserves to raise funds to bail out their market, what are they selling? [U.S.] Treasuries. That puts upward pressure on U.S. interest rates, now the trend in interest rates is probably down because of deflation, but in the short run, this is going to make the dollar even stronger and make deflation worse.
By the way, everything that is going on in China sort of started with the Fed. They went though a "kamikaze mission," as I call it, talking about raising rates all year. The eocnomy was visibly slowing, deflation had the upper hand, why on Earth is Janet Yellen talking about raising rates?
But as long as China was pegged, our deflation became their deflation. It was killing them so they broke the peg, but then the markets are crashing, so all these things are connected. It is not that China causes our problems, the problems actually started here, went to China, and now they are coming back...
FOX BUSINESS HOST: Only three percent on China's stocks were allowed to trade during their market day, so 97% of Chinese trade wa suspended. In other words, risk couldn't be cleared...
RICKARDS: What it means is... it went down eight percent with almost no trading, imagine what it would have done if the trading had been free.
I'm as guilty as anyone of using the word markets, there are no markets left in the world. the last time the U.S. markets represented fundaments was March 2009 at the lows.
FOX BUSINESS HOST: That's a great quote, "there are no markets left in the world," meanign there is always a government manipulating the so-caled market.
RICKARDS: I don't know why we throw stones at the Chinese, we're just as bad. Look at the Chinese, what are they doing? Cutting wages, cheapening their currency, printing money, propping up markets. It sounds like the United States.