Hugh Hendry on His Latest Financial Outlook

From Zero Hedge:

Why China is Not 19th Century America

While many economic observers have drawn an analogy between China's ongoing industrialization and that of America’s, Hendry sees a critical difference.
In the US, he says, capital has always been allocated where it could achieve the highest return. In the 19th century, when America was the economic upstart on the block, it was also on the gold standard. Which is very important, according to Hendry, because it allotted entrepreneurs one – and only one – chance to succeed. It was not a time of bailouts and multiple bankruptcies!

China is different, he believes, because it is industrializing with a fiat currency. Thus they fall into the trap of misallocating capital – building bridges to nowhere, towers for nobody, and so on. China’s goal is similar to that of 1980’s Japan in his opinion – full employment, rather than maximizing return on capital. A critical, and even fatal, difference, in his mind.

The New Model for the Global Economy

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.

http://www.zerohedge.com/news/hugh-hendry-channels-irony-and-paradox-his-latest-financial-outlook