The keyword 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 through a “kamikaze mission,” as I call it, talking about raising rates all year. The economy 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…
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