Unwinding Globalization

JP Morgan Chase has just purchased Bear Stearns at $2 a share, an investment bank which was valued at $150 a year last year. Equity and capital markets are poised for a volatile week. The US Fed is set to make another rate cut, a desperation move, on Tuesday. This is likely to push the US dollar into free-fall, and set the stage for inflation in the US and later worldwide. More and more companies and individuals will choose to distance themselves from the US dollar.

Some time ago, I talked about why globalization, at least in its current form, would fail. Globalization has been oversold, especially in the US, where it was seen as leading to some growing kumbaya world where everyone just got along. That is not happening, and will not happen.

There is a strange resemblance between the way globalization was sold and the way real-estate was sold up until last year in the US. Up until 2007, Americans were told that real-estate prices would never go down, they only leveled off in bad times. When the bad times passed, then real-estate prices would climb again. Globalization was sold the same way.

It didn’t matter if American factories were relocated to China because Americans would find something else to do which would add greater value-added. Guess what? Americans haven’t found where that new value-added is, which in turn is leading to higher unemployment, and a generally angry population. We will see how their anger is channeled when the November elections come up.

In the meantime, Chinese government policy, through its VAT policy, encourages local governments to set up factories which waste energy to make products with very little value-added which Americans have bought on credit. Calling this real growth is just a fantasy, to use polite language.

This is why inflation is already flowing through the Chinese economy, first with food prices, and is now working its way through the system. It is likely that the situation will become much worse, and will soon hit the Shanghai and Shenzhen bourses.

The _real_ globalization where value is _really_ created is about enabling people to work productively in different regions with little or no damage to the environment, and enabling them to use their skills in a productive manner without having to travel great distances which previously took a lot of time. But that is not simple to explain, is it?

The business valuation models for these new productivity tools do not yet exist. Ironically, the valuation models for hocus-pocus subprime-mortgages did exist. It’s just that they got turned upside-down in a short time.

So what have all the risk consultants been measuring lately? I’d say that they’ve been out to lunch. That’s why, in these times, the Chinese approach to measuring risk makes more sense.

One Response to “Unwinding Globalization”

  1. Alex says:

    Exporting without the need for oil? Two Words: Call Centres

    All that’s needed is a reasonably educated population, a building that looks nice enough to impress the resident company (even though it may be capable of standing for only 10 years), and an aggressive sales pitch by the overseeing Software Park authority.

    I believe the greatest problem outsourcing, and consuming in general faces: advertising. Convincing people they ‘really need’ a $1 plastic brush for cleaning dusk off the keyboard that conveniently hangs next to the monitor via an advanced yet free suction hook. I fail to see the value.

    A banking crisis every now and again perhaps should be welcomed. It reintroduces risk into people’s mindset in a very distinct way. I believe the tools do exist, Prospect Theory being an example of a measure of risk that doesn’t have 15 standard-deviation events twice a week. Yet a bank that pursues a more conservative strategy is destined to suffer shareholder wrath.

    What we need to do is remember “this time it probably isn’t different”, “beware people thinking and acting in herds” and “no, I don’t need that plastic brush for my keyboard”. And environmentally positive policies, yes.

    Sane monetary policy over the long term, not for fire fighting.