Brexit, Trump, Globalization, And The Great Depression

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Summary

Nationalistic political parties around the globe are gaining traction with an angry aging middle class.

As support for economic migrants and emerging economies weakens in the populace of the rich world, economic growth as a whole will struggle.

Rich western economies no longer have the demographics to drive domestic growth without the world's emerging economies.

As a result of demographics, nationalism and protectionism, the world could be headed for another great recession if policy decisions do not begin to reflect a globalized world.

The rhetoric around the world has increasingly moved towards nationalism, xenophobia, and a fear of globalization. This is a concern that investors (NYSEARCA:SPY) must pay attention to. It was inevitable that the blockbuster growth seen through the 20th century and the early 21st century were unlucky to continue unheeded. What was also inevitable is that the people of rich western countries would be turning around and looking for someone to blame for growth stagnation. As has happened before, and is going on now, the easy targets are foreigners, globalization, and foreign investment.

Never Ending Growth

To have the idea our democratic and capitalist system can deliver never ending growth is to believe in an impossibility. To push for growth in emerging markets and open borders, both of which increase the prosperity of the world as a whole, but not expect a distribution of the world's wealth is also an impossibility.

Emerging Economies And Economic Migrants

Had it not been for emerging markets in Eastern Europe, Asia, South America and Africa, the stagnation we are now experiencing would have begun decades ago. Despite the benefits, it is far too easy for politicians to drum up anger towards economic migrants; the vast majority of whom benefit the society as a whole. As population growth from natural means has plummeted, migration has been required to stem a population decline. An aging baby-boomer population means that, without immigration, the number of working-age citizens supporting retirees would decline. This decrease is heavily taxing on the welfare systems such as pensions and healthcare that so many depend upon.

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Source: OECD Migration Policy Debates

Brexit

With Brexit comes greater financial instability. It is likely that Scotland will separate to join the EU, and rising nationalism in France could result in another EU power exiting. That would leave Germany alone to hold together a bevy of weaker economies. However, the result could very well be a more unified Europe. Trade terms for Britain and the EU are unlikely to change; I also doubt that the payments for membership fees that the UKIP pointed towards are going to change - the UK will need to pay for access to the single market.

However, the rhetoric that drove the UK to separate is misguided. The population that voted for Brexit is overwhelmingly the older aged population, with the young population voting overwhelmingly to stay. The older the population, the more likely people are to remember "the good old days" when economic growth was guaranteed. However, that growth was very dependent on an ever rising workforce and population. They now see stymied growth and stagnating wages as a result of immigration and poor political choices, while much of the reason for the change has to do with laws of diminishing returns in productivity, a cessation of population growth, and increasingly dire demographics.

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Source: FT.com

The Death Of Globalization

Countries around the world are fighting back against globalization. Many countries' nationalistic leaders want to erect tariffs to protect local industries, and Trump's plans to eject the migrants that work on the nation's farms and low-cost labor sites will be a disaster for the economy. Immigrant workers often do jobs that many local citizens would not, and data shows that immigrants often choose occupations that do not overlap with the domestic workforce.

However, the important thing to understand is how history has played out in the past. As the Great Depression hit in the first half of the century, countries around the world began to erect import tariffs. This results in a tit for tat game with the application of more duties by each state, each year. As a result, economic trade grinds to a halt, and the virtuous cycle that causes economic growth reverses.

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Sources: TheFilter (left) and Washington State University (Right)

The Great Depression was caused as much by an overabundance of goods as it was by import tariffs. An excess of products available for import saw prices decline and resulted in a squeeze on domestic producers. Those producers were run close to, or out of, business, and this led to protectionist trade policies, anger, and eventually the growth of tariffs. A sudden change in the supply dynamic for every country meant that there was a sudden price shift, reducing demand.

The mirroring of these events now could spark a similar outcome. Throughout the Great Depression, racial discrimination was widespread.

"In some Northern cities, whites called for blacks to be fired from any jobs as long as there were whites out of work." - Library Of Congress

It is hard not to see a corollary to today.

"They're taking our jobs. They're taking our manufacturing jobs. They're taking our money. They're killing us." - Donald Trump on Mexico

Investor Takeaway

The growth in nationalism and xenophobia is a grave concern for investors. I will continue to watch the change in trade terms over the next few years for early signs of a dangerous shift towards protectionist policies. Protectionist policies will always undermine global growth and the economic well-being of everyone.

To be sure, there is a place for some policies, but widespread application of tariffs is a recipe for growth destruction. They could also be a precursor to the next great recession or at best a decade of deflation. Investors should tread with caution.

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