Are You Ready? – Global Turmoil and Debt Affecting Growth

We are truly living in amazing times.

Today, it’s easier than ever to access information, acquire knowledge and share your own voice. It’s all at your fingertips.

At the same time, the world has gotten smaller.

Travelling and communicating is easier and faster than ever. We have access to larger markets and to a wider pool of products.

There is no denying that globalisation and access to technology have brought plenty of advantages.

At the same time though, people aren’t happy.

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It’s interesting though. The most visible protests are happening at one of the most globalised cities in the world: Hong Kong. Hong Kong is quite a symbol for globalisation, a financial centre acting as a gate between the east and the west.

Hong Kong protest have been going on for months now, and started after the government tried to pass a bill that would allow extradition to mainland China. The bill is now off the table, but protests are still ongoing.

This has already had an impact on tourism. But as the South China Morning Post reported this week, the effects are starting to trickle down:

From property and aviation giant Swire Pacific to the owner of the Hong Kong Economic Times newspaper, companies are warning the months-long unrest that has gripped Hong Kong in its worst ever political crisis has weighed heavily on their bottom lines in the third quarter and could cut into their results for the year.

The city’s economy fell into a technical recession in the third quarter after more than five months of street protests that have been marked by increasingly violent confrontations between police and more radical demonstrators, including a tense stand-off between authorities and protesters at Hong Kong’s Polytechnic University in the past week.

Luxury retailers, hotels and other tourism-related businesses have reported lower sales and bookings as tourists have shunned Hong Kong in droves in recent months. But the effects from the slowing economy appear to be spreading to a broader range of companies.

Problem is, this is also happening in the middle of a US and China trade war and escalating tensions.

Only last week, markets were cheering the mere possibility of a trade deal. Now this is looking less likely, as US Congress released a bill this week supporting the Hong Kong protests.

So far, Hong Kong has been sheltered from US tariffs imposed to China, but the new bill could change this.

Needless to say, things are heating up.

At the same time, traders have been betting that the Hong Kong Monetary Authority (HKMA) will have to step in at some point to defend the Hong Kong dollar peg to the US dollar.

You see, the Hong Kong dollar has been pegged to the US dollar since the 1980s, and the HKMA is required to keep the exchange rate between 7.75 and 7.85 US dollars. This is a move to bring in stability to the exchange rate. If the currency moves outside this band, the HKMA will need to step in by using their reserves.

But, if things deteriorate or we see huge speculation, this could put pressure on the peg. It’s a lesson Argentina learned the hard way in 2001.

I mean, don’t get me wrong. Hong Kong is a world leading financial centre, with a lot of reserves.

But this is a careful confidence game.

As soon as people think there could be a devaluation, people will flock out of the Hong Kong dollar and into the US dollars, which then makes the problem worse.

With much less press, there is social and political conflict in Latin America. Chile, Bolivia, Ecuador, Argentina, Brazil, Colombia…much of the region is in turmoil. And this will affect their respective economies.

Anyway, the reason why I bring all this up is that in 2008, developing nations fared quite well during the crisis. 2008 was mostly a developed world crisis.

The chart below shows GDP based on PPP as a share of the world for advanced economies (blue line) and the emerging and developing economies (red line).

The Rum Rebellion 23-11-19

Source: International Monetary Fund

[Click to open in a new window]

In 2007 developing and emerging economies took over advanced economies. They now represent close to 60% of the world’s GDP while advanced economies have reduced their share from 63% in the 1980s to 40% today.

While much of the growth is coming from the developing and emerging world, we are starting to see more turmoil, that could affect that economic  growth, and a lot more debt.

In the developed, world, central banks are slashing rates to keep things going. They have printed a lot of money.

And while in 2008 developed economies engaged in quantitative easing and low interest rates as temporary measures, the truth is that their recent plan to normalise didn’t work. The unconventional stimulus has become the new normal.

At the same time, we are reaching a peak in globalisation.

This time, both the developed and developing sectors could run into trouble.


Selva Freigedo Signature
Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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