UPCOMING: 2015 International Council Meeting in Lima, Peru on October 10, 4:00-7:00pm Local Time.

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Views from the Members: Private Sector Perspective on the Global Economy

This section offers individual Members to share their perspective with the broader Committee membership. Views expressed below are from individual Members and do not reflect any viewpoint of the Bretton Woods Committee.

Murat Koprulu, Head of Emerging Markets at Mariner Investment Group and Bretton Woods Committee member, discusses the implications of China’s recent currency devaluation on global markets, their bid to acquire SDR status, and the U.S. Fed’s proposal to increase interest rates.

The question of the moment seems to be why is what is happening to China currently looming so large for the global economy as well as global financial markets and the U.S. Federal Reserve. My global macro view has been propounded elsewhere (e.g. Bloomberg) since February of this year that global disinflationary forces have been gathering force despite $12 Trillion in global central bank monetary stimulus since September 2008.

When one couples a disinflationary background with global total debt levels significantly higher today than in 2008 pre-Global Financial Crisis (GFC), one has a deadly cocktail in one’s hand. As any graduate economics student knows very well, the Irving Fisher thesis articulated in 1933 at the height of the Great Depression is that rising debts coupled with disinflationary trends equal financial Armageddon. Falling prices mean costs of debt burdens rise as real interest rates rise. That naturally leads to defaults, bankruptcies, and lower economic activity which begets even more falling prices – therein lies the disaster.

This ungodly picture exists presently in all the G20 countries of the world (funny enough, I am, today as I write this, at the front-end of the G20 meetings occurring in a pivotal emerging market this year, Turkey), including of course the United States and China. In the U.S. we see catastrophic signs of the debilitating aspects of the debt-disinflation spiral in one particular industry (we will shortly see it in more industries), the shale oil industry, with the massive financial stress induced by rapidly falling WTI oil prices. And a corollary of that stress is the recessionary winds that are in place in 14 states of the U.S. encompassed by the Federal Reserve Districts of Dallas, Kansas City, and Minneapolis, whose recent PMI manufacturing reports are all entering various phases of deep contraction.

And in China, unfortunately, we see more pervasive debilitating effects of an unprecedented 34 consecutive months of factory-gate outright deflation coupled with the fastest rise in total debt among the G20 countries since the GFC. The other side of that coin is the rapid deceleration of the Chinese economy, which is partly induced by the debt-disinflation spiral, and partly by the natural end to a long-in-the-tooth global business cycle of almost 80 months. When all of that is occurring in the second largest economy in the world with the second largest population in the world, one has a recipe for The Second Global Financial Crisis, 2015 – 2016.

Meanwhile, uncharacteristically, the Federal Reserve speaks out of both sides of its mouth, engendering confusion and derision, not to mention outright contempt, by professional investors. They say the U.S. economy is solid, but they don’t really mean it. They say U.S. is mostly immune to global conditions, but they think really not. They have a horrible 5-year post-GFC track record of forecasting anything, not growth, not inflation, not even where they think their own rates will be in 6 months.

Thus, to obsess over whether or when the Federal Reserve will raise rates is a fool’s errand. The real obsession we should have is what will happen when, not if, the debilitating forces I have outlined above start to shake the global financial markets much more violently than what has been the first shot in this war during the month of August with massive global equity markets damage. The first counter-shot has already been fired by the European Central Bank (ECB), with a panicked signal that their monetary stimulus plan needs serious adjustment. When will we hear from the Federal Reserve to that effect?

Click here to listen to additional analysis from Murat Koprulu on Bloomberg Radio.

Member's Corner

Member Spotlight:
The Bretton Woods Committee would like to congratulate two members on their recent achievements:

David Munro, Chief Executive, Corporate Investment Banking, Standard Chartered and Bretton Woods Committee Member

Standard Chartered took home 21 accolades at the annual EMEA Finance Achievement Awards across the capital markets and project finance categories. EMEA Finance is a leading bi-monthly global industry publication that reports on the major financial events initiated and influenced by the international financial industry active in Europe, Middle East, and Africa (the EMEA region). Click here to read more.

Bill Rhodes, CEO, William R. Rhodes Global Advisors; Senior Advisor, Citi; Bretton Woods Committee Advisory Council Member

Latin Trade Group honored William R. Rhodes with the BRAVO Legacy Award, an award honoring those individuals who have had a lasting and transformative impact on the region. His lifelong dedication to the region and decision-making ability have assisted in the overall development of the region and its integration into the global economy. To read more, click here.