Three Fundamental Principles of Globalization

Why is it that laws, like misfortunes, always seem to come in threes? Kepler devised three laws of planetary motion. In classical physics, there are three laws of thermodynamics (though that's sort of cheating, given that there's a 'zeroeth law' and a tentative fourth law). As he was cutting the grass over a wonderfully warm and sunny weekend, Macro Man got to thinking about an issue near and dear to his heart: globalization. And what he thought about was drilling down to devise some fundamental principles, or axioms, of globalization, from which all other conclusions can be deduced. The following is what he came up with:

1) There are more new entrants to the global economy than there are residents of rich industrialized nations. This is hardly controversial, as the populations of both China and India exceed a billion people: more than the European Union, United States, and Japan combined. The scale of where these people are coming from is staggering: one analyst that Macro Man spoke to last week noted that 400 million people in India still don't have access to full electrification.

2) That which the new entrants buy will tend to rise relative to that which the new entrants sell. For much of this decade, this axiom was misinterpreted as "the price of manufactured goods will be flat to lower forever," thanks to the apparently limitless supply of labor in places like China. However, the sheer size of the new entrants means that when they start buying something (oil, rice, copper, Treasury bonds, EUR/USD) with intent, the price goes up. Ultimately, this means that the wedge between headline and core measures of inflation will not only remain in place, but probably intensify.

However, this does not mean that there will be no inflation in goods and services that the new entrants sell- merely that it will be lower than amongst those things that they buy. After all, the minimum cost for a good made in China is the cost of the raw materials (which is rising), the cost of clothing/feeding/sheltering the employees who assemble it (which is rising), and the cost of shipping it to its final destination (which is rising.) Even the cost of haircuts in Shanghai depends on how much it costs the barber to light his shop and feed his family.

In any event, the empirical data certainly suggests that while the change in the price of manufactured goods remains lower than that of commodities, these prices changes are now firmly positive.

3) Resources are finite. Oil. Food. Water. None of these grow on trees (OK, OK, some food does), and all are in demand by the new entrants to the global economy. And this demand is only going to increase as the new entrants become less poor in aggregate.

The implications, when combined with axioms one and two, are incredibly bullish for commodity prices over long periods of time. This is hardly a revelation, and indeed there are probably some pink flamingos as a result. For Macro Man, the more interesting impact of this axiom is the competition for resources. To date, the competition has been conducted along a set of agreed rules and codes of conduct. Call it the economic equivalent of 19th century warfare, with its fancy uniforms and official declarations and treaties.

Many of the new entrants were not part of that system and show little sign of wishing to join it. So the competition for resources will be more like the type of warfare that evolved in the second half of the 20th century: unconventional conflict wherein practitioners of traditional methods find themselves at a disadvantage against highly-motivated opponents employing guerrilla tactics. China's investments into Africa are an example of this: they draw opprobrium from the West (no stranger itself to supporting morally bankrupt regimes!), but help maintain the Chinese growth engine.

If these axioms are correct, then the world economy (and indeed the world, via the environment) is undergoing a tectonic shift. While it's easy to extrapolate the trends of the past few years into the future, as Friday's discussion highlighted, the true test comes under duress. If, in a few years' time, we can look at these three points and still call them axioms, then be prepared to change the way you live your life, for the world in the 21st century will be very different from the one that people of Macro Man's vintage grew up in.

Comments

[richjoy]

Very interesting...and makes me wonder what Macro Man might accomplish if he had a larger lawn to cut!

By whatever theory, I have bought into the global increase in demand for commodities of kinds (including materials).

Unfortunately, this also means a prolonged period of rising inflation.

Thus I'm hedging against it by investing in commodity and materials stocks; and I don't think I can be so wrong that they will not be at least GOOD investments.

[notsosmart]

the standard of living for most u.s. citizens will go down as the standard of china's & india's etc. rises. i think this is just starting to dawn on some folks here.

[alphameister]

Excellent article. The possible implications are quite troubling. The Democrats are already pointing us in the direction of trade wars such as devastated world economies in the Thirties. My investments are concentrated in energy and fast-growing foreign economies because I agree with your lawn-cutting macro insights. Let us hope that governments do not kill the geese that lay the golden eggs.