From Mr Ice Age, Albert Edwards at Societe Generale via The Guardian:
The City of London’s most vocal “bear” has warned that the world is heading for a financial crisis as severe as the crash of 2008-09 and prompt the collapse of the eurozone.
Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them.
“Developments in the global economy will push the US back into recession,” Edwards told an investment conference in London. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”
…“Can it get any worse? Of course it can…Emerging market currencies are still in freefall. The US corporate sector is being crushed by the appreciation of the dollar.”
The Soc Gen strategist said the US economy was in far worse shape than the country’s central bank, the US Federal Reserve, realised. “We have seen massive credit expansion in the US. This is not for real economic activity, it is borrowing to finance share buy backs.”
Edwards attacked what he said was the “incredible conceit” of central bankers, who had failed to learn the lessons of the housing bubble that led to the financial crisis and slump of 2008-09.
“They didn’t understand the system then and they don’t understand how they are screwing up again. Deflation is upon us and the central banks can’t see it.”
Edwards said the dollar had risen by as much as the Japanese yen had in the 1990s, an upwards move that pushed Japan into deflation and caused solvency problems for the Asian country’s banks. He added that a sign of the crisis to come was the collapse in demand for credit in China.
“That happens when people lose confidence that policy makers know what they are doing. This is what is going to happen in Europe and the US.”
Europe has shown tentative signs of recovery in the past year, but Edwards said the efforts of the European Central Bank to push the euro lower and growth higher would come to nothing in the event of a fresh downturn. “If the global economy goes back into recession, it is curtains for the eurozone.” Countries such as France, Spain and Italy would not accept the rising unemployment that would be associated with another recession. “What a disaster the euro has been: it is a doomsday machine in favour of the German economy.”
There is no bear quite like our Albert. But there is foundation for this as we see in the evolving Mining GFC. We already know a wave of deflation is headed West as EM currencies crash. Deflating commodities will combine with Europe’s export dependency – which has never been higher under its Teutonic overlords – to make that even worse. Add the guerrilla war emanating from ISIS that is driving the rise of European separatist political parties and you have a perfect cocktail for euro weakness that in turn drives up the US dollar feeding back into the entire deflationary cycle.