The Globalization Boom and Bust Cycle

As we debate and react to an endless series of micro trends, there has been a turning away of attention from the macro. This is dangerous, to say the least. It is potentially crippling if the macro trends are in flux - and they are. Globalization is going nowhere fast on the policy front. Our recent globalization boom (globoom) is at risk of becoming a globalization bust (globust). Public support has become strident opposition. Discomfort and reaction define the positions of many politicians toward international interdependence. All of this as we come to rely ever more on imports, exports, capital flows and global investment. International financial markets, business press pundits and anti-globalization activists seem to be the only people who have not taken note.

The World Trade Organization [WTO] has been working on the Doha round of trade negotiations since November 2001 with agricultural and service meetings taking place since early 2000. There has been no real progress in nearly a decade! In late July 2008, to almost no attention, the latest round of negotiations failed in rising tides of acrimony. Feared shortages and rising prices - despite recent reversals - in basic materials, agricultural commodities and energy have created a patchwork of protection measures, export restrictions, hoarding efforts and accusations. Thus, the most integrated global markets for basic production inputs have swerved away from the market-led globalization path that defined the last 25+ years. Brazil has announced a $1 billion action to be brought against the US for agricultural subsidies - cotton specifically.

This seems to be the most significant development to emerge from the latest failed round of trade talks. In the place of rational policy toward conservation and alternative energy sourcing, leading American politicians denounce foreign energy suppliers. These are not the sounds that the globalization juggernaut makes as it plows inevitably forward.

Agricultural commodities and energy inputs are increasingly sought after, guarded and generative of accusation and tension. Large state and private firms are racing all over the globe to secure materials and resources as resource nationalism and antipathy to competitors grows.

This is neither sustainable nor desirable. Western financial institutions, long in the vanguard of globalization struggles, are reeling. Financial firms will not and cannot push greater integration. The seriousness of the economic issues in the US, and the growing sense of emerging Asia’s dominance, have shifted economic leadership. Few seem to understand that it is the same global economy, with the same weaknesses and strengths. All we have seen so far is an inversion of leadership and laggardship. We have seen a shift in momentum and growth, not a change in the structure of the global economy. Ultimatley, this will put the lie to decoupling.

The Anglo-American model surged with its perceived advantages over more managed enterprise economies in the wake of the Asian financial crisis exactly 10 years ago. Currency, banking, real estate and macro performance swoons struck Thailand, Indonesia, South Korea, Russia and beyond, buoying the deregulationist sub strain of the globalization movement.

The next 9 years were defined by great gains for financial institutions as borders were crossed, loanable funds shuffled from savers to spenders, and products innovated. The age of free market globalization was pushed and defined by finance. The one year old Anglo-American crisis of banking, real estate, dollar values and confidence is drifting toward a reversal of the effects of the Asian financial crisis. Globally, policy makers and the public are moving away from unrestrained policies and market freedoms espoused across previous decades. The financials that led the charge are in wounded retreat.

The free market, the multinational led globalization of the 1990s, is wilting in the heat of write downs, losses and solvency issues. American and English policy makers have employed the public purse and followed a more interventionist response to recent developments. Greater regulation and restriction are increasingly discussed as voters trend toward favoring increased government action and restriction heading into the 2008 US Presidential election.

The resiliency - thus far - of emerging market growth calls into question the de-regulationist model, just as the Asian financial crisis weakened the developmental state model prevalent in East Asia. The rise of China - her recent and under acknowledged issues notwithstanding - is placing increased pressure on late 20^th century globalization. Supporters strain under her exports, currency policy and thirst for raw materials. China’s multi hundreds of billions in dollar assets and dependence on imported raw materials and exported final goods looks poised to damage growth. As Olympic zeal wanes, it will become clear that importing expensive raw materials to produce vast exports for recessionary and protectionistic EU and US markets is not the greatest, fastest, surest route to growth. If this is not well managed, it will deal another major blow to globalization.

We risk missing the forest fire for the ailing tress. If the momentum toward increasing globalization slams into a wall of resistance made up of rising protectionism, resource nationalism, costly energy and public sentiment, there will be a far greater and more profound shift in the fortunes of regions, sectors and firms.

Disclosure: Author holds positions in FXP and SKF

Comments

[quetzalcoatl:]

The more mortal blows that are dealt to globalization the better. Free trade does not exist. Globalization is little more than the exportation of American jobs and the importation of cheap, shoddy goods.

2008 Aug 07 07:13 AM

[CLH:]

Those countries that put up iron curtains around themselves (reject globalization) will soon starve as did the USSR.

2008 Aug 07 07:45 AM

[buyitcheap:]

The more free trade that exists the better our economies will be, it is up to each of us to equip him/herself to compete in it. (and for governments across the board to stop subsidizing favored industries.)

2008 Aug 07 07:56 AM

[john s. gordon:]

high transportation costs (high fuel prices) will act to reduce the rate of sprawl of globalization. more finished goods will be produced closer to the point of use.

there has been no free trade, only managed trade to aid the exploiters of workers existing under slavery conditions in underdeveloped countries to the benefit of the big new york banks.
> jack

2008 Aug 07 07:59 AM

[neeb??:]

So be it. The only groups of people who were 'benefitting' from this scenario were pushing this stuff under the guise of efficiency and, as Quetzlcoatl mentions no 'free trade'. Malaysia dealt with their currency issues in their own way in spite of all the noise about how this was against what certain globalists thought should be done...oooops

2008 Aug 07 09:20 AM

[Cicero:]

"The Anglo-American model surged with its perceived advantages over more managed enterprise economies"? "The free market, multinational led globalization of the 1990s?"

The author misses the macro trend completely. We have lived under a corporatocracy, and not in a free market, for decades. This NY Times article details the bipartisan corruption that allowed Fannie and Freddie to enjoy huge advantages over their truly private competitors: www.nytimes.com/2008/0...

Read Bernanke’s explanation of the malinvestment Congress created with Fannie and Freddie and how this collusion set the stage for today’s problems in his March 2007 speech here: www.federalreserve.gov...

Read this Barrons story to understand how they figure the taxpayer losses as a result of the current mess could end up at 2 TRILLION dollars (subscription required for most Barrons articles): online.barrons.com/art...

Congress colludes with the private bankers at the Federal Reserve, who create fiat money out of nothing and loan it to our gov't. They flood the market with money and credit, inflating the supply and driving down the value of the dollar. This is the major source of inflation. This easy credit creates prolific malinvestment and the long chain of bubbles we have endured. The profits are huge and private; the losses are much more socialized. The facts are right on the Federal Reserve website and in the NY Times and in Barrons, who called for the abolition of the Fed two weeks ago. That’s the new macro trend we need – a return to Constitutional government, with the Fed the first creature of Congress to be taken out and shot!

The NY Times article “The Nixon Recovery” of 2/4/04 admits the Fed is independent and that they print or don't print money to sway elections, causing the runaway inflation of the 70's. (link: query.nytimes.com/gst/... )

The NY Times, article, “The Education of Ben Bernanke” reiterates that the Fed manipulated that election for Nixon, creating the massive double digit inflation of the 70’s and fixing that mess by raising rates and creating the “brutal recession” that followed. We learn that idle builders (my father was a carpenter) “were so enraged that some sent him two-by-fours in the mail.” It admits the Fed is created the housing bubble by pumping easy money in an effort to stem the damage of the dot.com bubble (that they fueled with easy money). It notes the Fed “…has vast powers over the economy” with its “…control over the supply of money” and that “only the…Fed can create new money.” It notes the Fed ignored warnings (of people like Ron Paul) and “the speculative lending continued.” (link: www.nytimes.com/2008/0... )

Bernanke admits Fed caused depression in the conclusion of this 2002 Speech here on Fed Website: www.federalreserve.gov...

Bernanke admits creating money from nothing in a speech on 11/21/02 on the Fed’s website: www.federalreserve.gov.../ (4th paragraph under heading “Curing Deflation”).

This Barrons cover story blames the long chain of bubbles on the Fed: online.barrons.com/pub...

This Barrons article calls for the abolition of the Fed: online.barrons.com/art...

2008 Aug 07 10:50 AM

[User 29690:]

Globalization - useless !!! Chinease workers are paid 50 cents/hr,
Mexico $1/hr. No medical , no envirnmental control, hardly any labor law to follow. Labors in those countries are treated like animals. Companies in those countries give bribes and make their own law.
Can USA complete in globalization race ? No way !!! USA workers can compete if the playing condition is even.

2008 Aug 07 12:49 PM

[lnc:]

The collapse of the financials led by the sub-prime issues was a
correction that had to happen. It is further exposing the shaky and
unsupportable base the financials were built on. Unfortunately they were so intertwined in the global economy that their fall had ramifications throughout the world. Much of what we see today is a reaction to that. The fundamentals always rule in the end.
falling confidence and

2008 Aug 07 05:57 PM

[jjason:]

WHAT FREE TRADE?????

OPEC is a cartel, a MONOPOLY. They set the price they want. Everyone else who is not in OPEC goes along with it.

Then, along comes Senator Phil Gramm, in 1999 ( I think ) and we then get SPECULATION GALORE IN COMMODITY FUTURES TRADING because of a bill that Phil Gramm put into legislation that Bill Clinton signed.

The SPECULATORS RUN UP COMMODITY PRICES AND YOU PEOPLE DON'T DO ANYTHING ABOUT IT.

Go To:

www.stopoilspeculation.../

AND SIGN THE PETITION to help bring oil prices down.

2008 Aug 08 08:52 AM