Hendry: Why the Fed Is My Friend and Buffett Is Wrong

I promised Squawk viewers that I would get Hugh’s final answer and here it is. My question was: Why is Quantitative Easing the right strategy for the Fed and the Bank of England and will it work?

Geoff Cutmore
CNBC Anchor

This was Hugh's answer:

"When I think of QE I think about the quantitative theory of insanity. This is an idea from the British writer Will Self who says there is a fixed portion of sanity in the world at any one time. So as one group becomes more sane, another group becomes more insane.

In our case, as the Fed and the BOE have become more sane by printing money the so called gurus like Soros and Buffett suffer a deficit of sanity. They are saying the actions of these central banks will lead to inflation. I contest that.

The central banks are replacing the dollars and pounds destroyed in unprecedented amounts by the recession. I am a friend of the central banks – they understand the history of the 1930s and are trying to prevent us returning there.

This destruction of dollars and pounds is creating a scarcity of money. We are losing dollars and pounds from the system.

Perhaps the real question is whether the central banks should be even more aggressive. The Fed is creating $2 trillion, but maybe they should be creating $10 trillion. I don’t think 2 is the right number.

Based on the Taylor rule on employment and inflation, the Fed's own forecasters think interest rates should be at minus 5. That would imply a level of money creation at $10 trillion. 

The private sector has got it wrong. The private sector is refusing to spend and that is going to have the effect of making money even more scarce. That will push us closer to depression.

That is why I say the central banks are our friends; they are trying to help the economy recover while the likes of Buffett are arguing against these actions. I think he is wrong."

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