VIDEO: CNBC's Smead Predicts 'Necessary' Chinese Hard Landing and Gold Plunge

Hard Landing Necessary for China ... Bill Smead, CEO & CIO, Smead Capital Management, explains why a hard landing needs to take place in China in order for country's economy to be successful in the long-term. – CNBC

Dominant Social Theme: Look, "they" need to cleanse the oven!

Free-Market Analysis: Bill Smead, CEO and CIO of Smead Capital Management, appeared on CNBC with an absolute barn-burner of an interview. He predicted a hard but necessary landing for China in the near future and indicated that commodity prices – including gold and silver presumably – should be lowered by China's collapse.

And make no mistake about it. As we've been discussing in the last umpteen articles on China, a Chinese hard-landing is a BIG DEAL. It certainly WILL affect the world.

What's interesting about Smead's prognostications is that he sees lower commodity prices as buoying countries like Italy and the US. Lower prices, he figures, will help stimulate growth. While China is going down, the US will be continuing to rise.

We would argue that a Chinese collapse of the kind that Smead is talking about is going to do a lot more damage to the West than he seems to see. We've tried to point out that Europe is in chaos and we don't believe that the US EVER recovered. The numbers are nothing but phony.

We can't see how adding a depressed China into the mix is going to aid the world's larger economy. But, again, Smead is surprisingly upbeat.

He points out that the US – in building what today must be considered a world-wide economic empire – went through recessions, depressions and downturns for several centuries.

He reminds that the railroads that were built in the US in the 1870s at the height of a post-Civil War monetary bubble didn't begin to get used until the 1890s and beyond. In between there was a massive depression.

China, he tells us, has to "clean the oven." Economies are "like ovens and if they're not cleaned, then the cakes and pies" start to taste like the considerably spicier food that the oven is also being used for.

"It has to be done," he points out, "if they want to be a great economy."

Our question, of course, would be who is "they"? Is "they" the Chinese landmass? Or is it the ChiComs? Or 400 million increasingly angry rural farmers? 

Do the Chinese in aggregate even SEEK a "great economy"? And what does that constitute anyway? A great economy the way that the US and Europe have "great" economies? They're not so great, last we looked.

Smead seems to be assuming a lot in using that "great economy" quote. In fact, it seems kinda  ... facile. And facile is how we'd characterize much of the rest of the interview.

He's convinced, for instance, that commodity prices wil go down hard during a Chinese hard landing. But as we point out on a regular basis, the world − at least the West − is in a bear-equity business cycle. Gold and silver tend to do well in such cycles from what we can tell. The 2000s are a virtual replay of the 1970s "on steroids."

So we don't expect a full recovery until the business cycle has entirely run its course. Such cycles are remarkably impervious to positive or negative price pressure. That's because the business cycle is symptomatic of something larger.

The business cycle, within an Austrian free-market perspective, is generated when fiat-money, monopoly overprinting so distorts the larger economy that industry grinds to a halt. Credit freezes as banks no longer know what counterparties are solvent. Businesses refuse to hire.

Sound familiar? That's what's going on now, in our view. We're involved in the down-cycle of a classic Austrian bubble and until the failed companies and facilities are purged, US and European industry won't find a way to rebound.

See ... it's not just a supply and demand issue. The entire dollar-reserve system failed in 2008, and since then its been propped up by something like US$50 trillion courtesy of the Federal Reserve and other central banks.

The whole system is sick-unto-death, and thus we take a decidedly less optimistic position about a Chinese hard-landing. We can't see it as doing anything but putting further stress on a world economy that has never recovered from the original crisis.

In fact, a Chinese takedown could create a truly global depression, in our view, on the magnitude from which the world suffered in the 1930s. The power elites that we write about regularly may be wishing for such an occurrence, as it might provide a pretext for offering a true world currency, and world government besides.

No matter how you analyze it, we think Mr. Smead ought to be careful of what he is wishing for. Of course, we agree with him when it comes to China's collapse. But we'd be surprised if China rebounds any more quickly than Europe or the US. 

No, Smead seems to us to be quite the optimist. And China's not an oven ...

You can see the video in full by clicking here:

(http://video.cnbc.com/gallery/?video=3000071815)