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Saturday, February 22, 2014
Jim Rickards on China - Major Change there could Lead to Major Change Everywhere
As usual Jim Rickards brings a perspective you won't find in the mainstream media. This time its an article on why the growth story in China is overstated and how that will lead to a financial crisis/panic in China similar to what the US experienced in 2007-2008. Here is the article link. Below are some quotes including why he thinks this will actually boost gold buying in China even more.
"Amid weaker U.S. growth and volatility in capital markets, China stands out as a beacon in the minds of many investors. It is widely assumed that China will continue to grow at about 7% without interruption and will, in time, surpass the United States as the largest economic power in the world.
This China growth story is one that investors take for granted. But investors are in for a rude awakening when they realize how much of the China story is false and how quickly it may come unraveled."
"If reported GDP (in China) were adjusted for wasted investment, actual growth in China would be seen to be much lower today. If the costs of massive air pollution and other environmental degradation were also deducted, real growth would be even lower."
"Because of capital controls, Chinese citizens are not able to invest in foreign assets such as U.S. or Canadian stocks and bonds. The only investments available to most Chinese other than low-rate bank deposits are gold, real estate and so-called “wealth management products.” These wealth management products are offered by banks but are not guaranteed by them."
"The banks promise high returns on these products, which resemble the notorious collateralized debt obligations popular in the U.S. before the Panic of 2008. Actual performance on the wealth management products is below the promised returns in many cases. Banks cover this up by selling new products and using the proceeds to pay off the old ones. This is exactly how a Ponzi scheme operates."
"Eventually some event such as a project failure or admitted fraud will start a panic in which investors demand that the banks redeem their wealth management products all at once."
"A run on the banks will commence that only government intervention and bailouts can contain. The result will be a general collapse in Chinese asset values for real estate, stocks and bonds as investors hoard cash, buy gold and move to the sidelines."
my added comments: China is already importing huge amounts of gold now. Some goes to the public and some to its official reserves (Rickards says later this year China will announce it has more than 4,000 tons now). If Rickards crisis scenario unfolds, gold buying will explode even higher as he explains because of the capital controls in China that limit where people can put savings. This would of course be major change that could lead to major change around the world, which is what we keep an eye on here.