Dealing with the end of US Hegemony

I suspect that the problem is that the world is looking at a new set of conditions, in a way that we have never had to confront them in the past; The USA which until recently was the dominant economic entity is being overshadowed by the emerging economies; yes the US economy is still three times as large as that of China ($15 trillion vs. $5 trillion), but what is important is the rate of change, zero growth Vs. 10%, and the dynamic of resources which for the first time are considered a store of wealth (Chinese pig farmers and their copper plates).

For America the story is asset deflation, you cannot have internally generated inflation when credit is contracting at an annual rate of 5% per annum, by definition asset prices have to fall, as the required leverage has to fall to meet the bankers' maximum asset exposure. Banks have been asked to reduce leverage, and as a whole have done so (it helps that they've not had to realize their portfolio losses, but I digress).

Europe is essentially in the same boat, with a bigger time bomb in the form of Eastern and Central Europe; Austria is the first, but you can bet that German and French banks will face similar problems soon. As European banks reel under the write-offs and balance sheet contraction requirements you will see asset deflation becoming a growing problem in Europe too.

The BRIC countries are the new unknown, and this is where inflation may arise, as their economy grow (assuming that the Chinese debt fuel growth can continue for 18 to 24 months) their demand for hard assets (oil, copper, Aluminum, Gold) will continue to rise, and create resource price inflation on a global scale. Too many "dollars" chasing too few resources. You could then see a situation in the U.S. where the economy is growing very slowly, but where prices begin to rise, driven by the cost of "global" resources (e.g. Oil at $200).

By the way this could easily lead to an American "W" situation. Where does Canada sit in all this (because at the end of the day that's the important part of the picture), it is complex, the resource side of the economy will grow dramatically, but manufacturing will suffer because of the export orientated nature of the Canadian economy. One bright aspect is that the Canadian banks have virtually no exposure to Europe or the U.S. and low leverage.

Call me captain gloomy, but Hypo Group nationalization is a huge deal, people forget the role of Credianstalt played in the 1930's depression. Although the challenges we face are different they are not dissimilar; History doesn't repeat itself, but it often rhymes