Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter | Zero Hedge

The answer rests in the dominance of neo-mercantilism as the most successful economic orthodoxy of our time. For those new to this, the text book definition will suffice. Neo-mercantilism is a policy regime borrowed from 19th century Kaiser Germany. It encourages exports, discourages imports, controls capital movement, and centralises currency decisions in the hands of a central government (to reduce reliance on flighty foreign capital). The point is to increase the level of foreign reserves held by the sovereign government, allowing for an accommodating domestic monetary policy. It also looks like it works — you can make a good case for it being responsible for the superior growth rates seen across Asia since the 1980s. However it comes with what I think is about to be a major problem. It has made domestic monetary policy in most Asian countries very pro-cyclical and we haven\’t really yet tested this pro-cyclicality to the downside. What happens when the rest of the world becomes unwilling to raise its indebtedness further in order to buy Asian-produced products and facilitate Asian growth? And what if that is about where we are right now?

via Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter | Zero Hedge.

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