February 12, 2012

Hugh Hendry Explains How We Could Be Entering The Mother Of All Depressions

You know the old drill – China and Asia produce, the US consumes.  They cycle their greenbacks back over this way, finance our debt, we buy more of their stuff, and the beat goes on. This model officially stopped with the launch of QE2, Hendry says, as the US officially started rejecting the globalization that had made the global economy hum (perhaps largely at the expense of US employment and manufacturing).
With QE2, dollars were printed and exported – along with inflation – to Asia.
This led to the countries in Asia – and Europe, too – raising rates to combat inflation.
The result, he says, is that global economic growth has essentially ground to a halt.

So what’s next? A crash, of course.

Europe’s Debt Spiraling Out of Control.

Hendry pulled up a chart of US and Europe non-financial debt to GDP, illustrating that Europe’s debt has been spiraling out of control ever since the formation of the European Union. Participant nations, he puts it, received initial “ALT-A” rates – nice low German interest rates – for signing on.  But the fixed exchange rate that the euro imposes on the peripheral nations started the time bomb ticking. Hendry, in fact, is very down on fixed exchange rates, and believes the euro and the dollar/renminbi peg are at the heart of global economic insecurity today.

He believes the recent referendum in Greece could be a very significant event,
likening it to a 1931 mutiny in England that forced the Brits off the gold standard.
He things the Greek referendum could be the trigger to disengage from their fixed exchanged rate (and cited everyone’s lack of anticipation for the referendum as a classic example of irony in finance).

Source: CFA Society of Sacramento. This post originally appeared at ZeroHedge.