What's Behind Our Economic Problems, Market Volatility?

by: Michael James McDonald

I have long held that America’s growing economic problems stem from the same source -globalization. Composite world trade acts like a force on countries; a force that affects each country in a different way. America's major problems - high unemployment, the trade deficit, high public debt - all trace back to it.

The two articles written last year – Why Nine Percent is Now Full Employment and Why a Dollar Decline and World Crisis is a Rational Expectation - explained this viewpoint. I think this perspective helps to explain why heroic efforts by the Fed, Congress and the President to fix things have gone nowhere. Basically, they aren't addressing the real problem. Globalization is also the main reason for the increase in market volatility around the world.

Americans must understand that nine percent unemployment is now full employment in America. All the products and services Americans want, need and can afford, are being made, either here or overseas. There just isn't anything left for this 9% to do that some American or foreigner isn't already doing.

We seem to forget that high unemployment in developed countries was mentioned as a major end product of globalization twenty years ago. Now that it's finally here, no one acknowledges this connection. The fact that unemployment is resistant to all efforts to bring it down should tell people that something is fundamentally different this time. If our leaders really want to try to fix it, then they must do something that changes America at the global level. Doing or stimulating things only in America will continue to do nothing.

We now have a crisis in Europe, where Greece, a little economy of 10 million people, threatens to default on its debts, triggering a possible European banking crisis with potential negative ramifications for not only America but China as well.
The European crisis also points to the expanding power of the global economic system to affect all countries and also highlights the inadequacies of the banking system that now exists to service it. To me this is the reason for the extreme market volatility we've been seeing. It's becoming clear to investors that there is no point of control to monitor and prevent systemic breakdowns of the global financial system. This is a scary thing.

We must remember that no one designed or regulates the global economy. What is becoming obvious is that the existing banking system is not powerful enough to handle the huge global capital flows that come out of it. Until a new banking system is engineered with global circuit breakers and a central point of control, I believe we will have, every few years, a new financial crisis; a new crisis that looks different but which always traces back to the same problem.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.