When will US interest rates finally rise? When China's transition is on solid ground

An extremely politically incorrect fact of life, especially in a US election season, is that our economy is already to a large extent dictated by what happens in China: the simple fact that the Fed can't raise interest rates until the deflationary threat from China eases is a testimony to how our destiny is now so much more intimately tied to the communist empire than either our politicians or the general public have the capacity to understand or admit, means that the coming year until we elect the 45th president in November 2016 promises to be rhetorically very bumpy in Sino-US relations.

Fed Chairwoman Janet Yellen apparently keeps getting mixed signals about the economy from fundamental data, which isn't surprising given the same kind of mixed signals of strength versus softness in China's economy, as well: the official manufacturing PMI was still in contraction territory in for the month of October, a fortnight after official 3Q GDP growth topped expectations at 6.9 percent.

So long as China's transition isn't on firmly solid ground, the huge sword of Damocles that hangs over it - and the entire global economy - is a massive devaluation of the yuan (at least 10 percent). As I have previously noted, I think the real market-driven devaluation would be 30 percent or more if capital were truly allowed to flow freely in and out of China and the economy hit a real rough patch.

Such an outcome would be a death-knell for global GDP growth...it would also push back any Fed rate hike here by two to three full years.

The global economy relies increasingly on a communist-Leninist dictatorship to stabilize its prices, asset values, and growth prospects. Ironically, for all its evangelism of the virtues of free markets and trade, the West actually needs a very strictly regulated Chinese economy for at least several more years, because it's no more prepared for the wholesale deregulation of the Chinese system than it is for the total collapse of Assad's regime in Syria.

That doesn't mean Russia and China have much leverage over the West, either: if anything, in the grand scheme of things, they have even less.

This is truly a time when the big powers must act very cautiously and prudently and only in pursuit of their core interests; any excess adventurism based on hubris or an undue sense of victimization will be punished ruthlessly and efficiently.