What are chances of China collapse, global crash?

China's currency devaluation took Albert Edwards a step closer to realizing his doomsday prediction: deflation spreading from Asia to the U.S. and Europe and sending economies crashing.

Tumbling emerging-market currencies will now accelerate their declines, curbing import costs in developed nations and triggering a broad drop in prices that will undermine economic growth, according to Edwards, the top-ranked global strategist at Societe Generale SA.

"Make no mistake, this is the start of something big, something ugly," Edwards wrote in a report on Wednesday.

Edwards has long maintained a view he refers to as the Ice Age, when deflation will eventually cover the earth. China's surprise change to its currency regime this week takes investors one step closer to this outcome, Edwards said. It will eventually result in an emergency of similar magnitude to the collapse of Lehman Brothers Holdings Inc. in 2008 and the ensuing global financial crisis, he said.

"We expect the acceleration of emerging market devaluations to send waves of deflation to the west to overwhelm already struggling corporate profitability and take us back into outright recession," he wrote.

Renowned for his prescient warning in the late 1990s of an impending Asian crisis, he's also been telling investors to reduce their holdings in equities for almost 20 years. At the end of 2012 he said the New Year would bring nothing but disappointment, just before U.S. stocks proceeded to soar 30 percent.

China Move

The world's second-biggest economy shocked markets this week by depreciating its currency by the most in two decades, with the goal of aligning the yuan more closely to the market rate. China's decision to make its goods cheaper for the rest of the world to buy also makes it more difficult for wages and consumer prices to increase globally.

The yuan fell on Thursday in a third day of losses since Tuesday's devaluation as the central bank's reference rate dropped 1.1 percent.

Inflation expectations for the U.S. tumbled this week to the lowest since January. The gap between yields on U.S. five- year notes and similar-dated Treasury Inflation Protected Securities shrank to show traders expect annual consumer-price growth to average 1.27 percent through 2020.

"The key thing here is that Tuesday's devaluation is not just a one-off - - you will see persistent weakness" from here on, Edwards wrote. "This move will transform perceptions about the resilience of the U.S. economy."