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Home > Macroeconomic Issues Viewpoints > Deleveraging, Deflation, and Rebalancing in the Global Economy

Macroeconomic Issues Viewpoints

Deleveraging, Deflation, and Rebalancing in the Global Economy

by Paul Brain and Laurie Carroll


Paul Brain is investment leader of the fixed-income team at Newton Investment Management. He joined Newton in 2004, and manages a range of global bond funds. He is also the lead manager of Newton’s global dynamic bond strategy. Paul is chairman of the bond/foreign exchange strategy group and is a member of the macro strategy group and the investment committee. He has held a number of senior fixed-income positions within the industry and has acquired a wide breadth of knowledge and experience in managing fixed-income portfolios. As head of retail fixed income at Investec (formerly Guinness Flight), Paul led the team that won the International Money Marketing “Fixed Interest Manager of the Year” award in 2000.

Laurie Carroll is executive vice president and the global short-duration strategist for BNY Mellon Cash Investment Strategies (CIS), a division of the Dreyfus Corporation. Carroll is responsible for the global strategic direction and product development for the short-duration products of CIS. She is an active member of CIS’s fiduciary risk committee and has over 29 years of industry experience. Her career at BNY Mellon spans 24 years, during which she has held positions of increasing responsibility for a number of company affiliates. Most recently, she served as managing director of short-duration, index, and stable value strategies for Standish Mellon Asset Management, a BNY Mellon company. Carroll has an MBA from the University of Pittsburgh and a BA from Seton Hill University. She is a member of the board of trustees of Seton Hill University.

As global short-durations strategist, you have an eye to what is likely to happen over anything from a month to a year. That gives you a very keen sense of near-term trouble for developed and developing markets. How do you view the strength of the current recovery from the global crash of 2008?

Laurie Carroll: It seems as if every week brings some fresh piece of drama. I do not think we have been in a period where we have been flooded so continuously with mixed economic news, with market commentators oscillating between fears of a double-dip recession and signs of growth. What is certain is that we are still very much in the repair phase of the financial services sectors in the United Kingdom, the eurozone, and the United States, and that the re-regulation of the sector still has a long way to run.

Basically, one has to go back to the savings and loan crisis in the United States to find anything similar to the current position. That crisis was confined to the United States and ran through the 1980s and early 1990s. It took banks a very long time then to repair their balance sheets, and that tells us that this time round it is likely to take many banks a number of years to get back to where they were. At the same time, through the savings and loan crisis there was not the same appetite on a global scale for regulatory change that we are now seeing.

Already we are seeing real contradictions emerging from different regulators. The Securities and Exchange Commission (SEC) in the United States is producing regulations that are asking money markets to move to shorter-duration issues. At the same time we have emerging banking regulations asking the banks to go for longer-duration issues and to buy more government securities. The idea is that if banks issue longer-dated paper, they will not be so much at risk of coming to the market for refunding when the market is not willing or able to satisfy that funding requirement. All of this makes the short-duration space—and, indeed, every part of the financial market—very interesting indeed.

On top of all this we have pressure on the ratings agencies to rethink their methodologies after the mistakes made in rating residential mortgage-backed securitizations. So there are an awful lot of things going on simultaneously, all of which have some bearing on prices going up and down.

One result of this is that there is a degree of cloudiness about what portion of any price movement is being determined by the market reacting to actual or potential regulatory moves, and what portion of the price bears on the inflation/deflation debate.

This is particularly unhelpful to anyone who is trying to develop strategies to deal with either inflation or deflation. The key point here, of course, is that the defense against inflation is very different from the defense against deflation. If you had been devising strategies to protect a portfolio from inflationary trends over the last year, it is very likely that those strategies would have been losing rather than winning strategies since we have undoubtedly seen more deflation than inflation over the course of the last 12 months.

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Further reading


  • Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. New York: Penguin, 2009.
  • Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Picador, 2007.
  • Gladwell, Malcolm. Outliers: The Story of Success. New York: Little, Brown, 2008.
  • Reinhard, Carmen M., and Kenneth S. Rogoff. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2009.
  • Sorkin, Andrew Ross. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—And Themselves. New York: Penguin, 2009.
  • Tett, Gillian. Fool’s Gold: The Inside Story of J. P. Morgan and How Wall St Greed Corrupted Its Bold Dream and Created a Financial Catastrophe. New York: Free Press, 2010.

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