Who Will Bail Out China?

04/06/2011 12:18 pm EST

Focus: GLOBAL

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Everyone knows China has been financing much of the US debt in recent years, but what happens when China's own money-supply issues come to roost? In this exclusive interview with MoneyShow.com, Mark Skousen explains.

China just raised their interest rate trying to slow their economy, but should we be worried with US-China relations?

Well, I think that they're trying to aggravate the relationship. There's a lot of things that China is doing to kind of flex their muscles diplomatically, militarily and economically.

Just take the economics. They're raising their interest rates because they have to, because they're so inflating the money supply. They're increasing the money supply 26% a year, which is highly inflationary, and that's going to create a bubble.

We just went through the boom-bust cycle due to easy money and it ended very badly. What is going to happen in the case of China when they see a collapse in their economy—because they've grown too fast and it's somewhat artificial?

Yeah, there's genuine prosperity there, and they are developing economically, but too much money chasing those goods is going to cause inflation. They're going to have to stop, and that's going to cause a crash in China—and then who's going to bail out China?

We are vulnerable. We are facing huge deficits. What's going to happen when China does this, too? So I'm very concerned about it.

It's the year of the rabbit this year—and that's China: its power in economics, and diplomacy, and militarily. The military is growing very rapidly. Look at how much in the international seas they want to control. They're taking the whole China Sea and they say this is ours. So they're acting very aggressive against their neighbors, and I think against the United States.

Look what they're doing on these "rare earths." I don't know if you've been following that or not.

[There are 17 strategic minerals that are considered rare earths, with exotic names like cerium, lanthanum and ytterbium. They’re used in batteries, magnets, electronics and military equipment. Most rare earth elements aren’t technically rare but are difficult to extract and purify—Editor.]

They are cornering this market. They control 97% of the production, and the processing plant is in China, and of course it causes a lot of pollution and so forth. That's why we've shut them down in the United States.

Now we have to rebuild all this and prices have gone through the roof and so forth. All because China is artificially creating this shortage of rare earths.

Why are they doing that? Well, I think it's because they want to prove that they are in control. I don't know where this is going to lead, or what kind of economic, political, or military war would develop out of it, but I think it's a very dangerous situation.

We have to tread very carefully, because they're the third largest trading partner behind Canada and Mexico.

Well they are, and they've always bought our debt. We're the elephant in the room and where else are they going to go? Well, a lot of people say they're going to sell their debt and go somewhere else.

They can buy gold, and they are buying a lot of gold. They're buying euros and other currencies and so on.

The interesting thing is and now they're trading their currency internationally. The yuan is trading internationally, and so other countries are now adopting it as their reserve, but it's years away from anyone adopting a currency of Communist regime as a fundamental reserve currency, in my opinion. It's just getting started.

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