Globalization is No Longer a Force for Good

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Yesterday, we were full of doubts…

But today, we’re not so sure…

Ah, that’s the trouble with growing older. You lose your dreams and youth. You lose your bearings too. We had lunch in the House of Lords yesterday, with our old friend Lord Rees-Mogg, who turns 80 next month. But more on that in a moment…let’s first turn to the financial news.

Today’s big headline concerns Fed chief Ben Bernanke. According the Financial Times , he broke with long standing tradition in order to express himself on the dollar yesterday. Alas, the fall of the greenback has “contributed to the unwelcome rise in import prices and consumer-price inflation,” he said to an international banker’s forum.

The headman at the Fed may want a stronger dollar…or a weaker one; it’s usually not his place to say so. That’s what the Treasury Secretary is for. Henry Paulson, of course, says the same thing; the United States wants a strong dollar. But nobody believes him. Investors seemed to take Mr. Bernanke more seriously.

Stock market investors sold shares and drove the Dow down 101 points. Over in the oil market, the black goo sank $3.45. And gold, too, was sold on the news…it sank $11 to $885.

But let’s think about this. What could the Fed do to protect the dollar? Easy…it could raise interest rates. But if the Fed wanted to protect the dollar, why has it waited so long? The greenback has lost about half its value since 2000, why didn’t it try to protect it sooner?

Ah, dear reader…the plot has become a bit confused. Let’s see if we can remember it.

In the 15-year period known as the “Great Moderation” central banks could increase their supplies of money 2, 3, 5 times as fast as GDP growth. Normally, this would cause inflation. But it didn’t, because globalized markets…along with a few other key trends…we’re holding consumer prices down. So, the inflationary money went into asset bubbles…dotcoms, houses, and the financial industry.

But after the housing/finance bubble popped last year, consumer prices rose – even while the world economy softened. All of a sudden, the world seemed to be spinning in the wrong direction. Instead of holding down prices in the United States and Europe, China was increasing them. China’s domestic inflation is running at more than 8%. And she’s exporting her inflation to the rest of the world. Import prices from China into the United States are now rising at 4% per year…after falling about 1% each year during most of the 21st century. As for imports from the rest of Asia, they were falling in price as recently as the first half of ’07. Now, they’re going up by 4.3% per year.

And even as demand for basic commodities slows in the developed world, demand from the emerging markets makes them more expensive. Ai yi yi…globalization is no longer a force for good…but a force for evil! Now, earnings and housing prices fall in the United States, for example – while Americans are forced to compete with Asians for food, fuel and jobs too.

House prices in America are still falling. Foreclosures continue to rise – especially in places such as Las Vegas, which has the distinction of being the “mortgage fraud capital of the world.” And now comes word that people are not only abandoning their houses – but their pets too. Yes, the Society for the Prevention of Cruelty to Animals says that owners are leaving their dogs and cats behind. And pet food banks, operated by the SPCA, are said to have people lined up down the block to get free food for their pets.

Meanwhile, Winnebago says it has had to put its Iowa plant in neutral. The company makes luxury land barges, which have been a big hit with Americans for many years, allowing retirees to take to the open road whenever the mood strikes them. Problem is, motor homes are expensive to buy…and now, with gasoline over $4 a gallon, extremely expensive to operate. In real terms, gasoline is higher than it has ever been in the United States…considerably higher than the $3 it hit (in today’s money) in 1981.

On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts. But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report , has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ‘shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3’ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

Of course, we can’t tell you what the name of the firm is here – but Dan will in his new special report…along with advice on how to pile up as much as 200% gains, as this firm pays the piper for its massive mistakes. Click on the link below:

Money-Tripling Gains on the Next Wave of Wipeouts and Write-downs Ahead

The feds’ response to this situation – so far – has been to cut rates, bail out financial firms, and hand out money (rebate checks). This inflation (along with robust demand from the emerging markets) has made itself felt, mainly, where the feds didn’t want it – in oil, gold and commodity prices.

But now, commodities are looking toppy. Oil seems to be slipping. Gold too. And the feds are talking about reversing direction – raising rates in order to protect the dollar!

Has something important changed? Well, yes…and no. More tomorrow…

*** Hillary seems to have come to the end of the road.

“Clinton’s White House dream draws to an end,” says the Guardian .

Too bad. She was such a wonderful reminder of what politics is all about – empty, fraudulent, jingoistic, ready to say anything to anybody if she thought it would get her back in the White House.

But it is an historic moment for America, says the press. Rather than choose a white woman to represent them, the Democrats have chosen a black man. You’d think history would have better things to talk about.

*** The older you get, the more doubtful you become. If you’ve had your eyes open you’ve seen countless plans, predictions, and programs go awry. Plan A is almost always replaced by Plan B…and then Plan C. And you’ve discovered that the people who are most sure about things are those who turn out to be the biggest numbskulls.

“I don’t know,” said our old friend Lord Rees-Mogg over lunch yesterday. “I think when you get older your mental faculties change, so you’re not as quick or as smart in some ways, but smarter in others.”

We were about to ask: ‘In what ways do you get smarter?” But the subject changed to the pudding. The dining hall in the House of Lords has to be one of the best restaurants in London. We recommend the calves liver.

Our old friend is celebrating his 80th birthday this year.

“Age may not be a great advantage when you are mountain climbing,” he went on. “But it helps when you are investing. Because you’ve seen so much more than young investors. And you tend not to get too excited. Your emotional reactions are more moderate. Tempered by time and experience. You’re not as like to make big mistakes because of an excess of enthusiasm.”

Lord Rees-Mogg may be right; but we’d rather be younger anyway.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Would that be CitiGroup?

    Hans Blix
    June 5, 2008
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  2. Gosh, pet food banks sure is a sad thing. And it sure is a sign of the times. When we read old books now from the great depression in the 1930’s, we look at pictures of people lining up for food for themselves and their families. Now there is a breadline for dogs. When people in the future read old books about our depression, and they see photos of breadlines for dogs, I reckon they will say “What kind of losers were some of those people, who spent every cent they had and more on designer label crap, and four wheel drives, and then they couldn’t feed their dogs”

    Reply
  3. Ps- I feel sorry for all those poor baby boomers who spent all their money on big luxury boats so they could spent their retirement cruisung around in luxury, who will now have to spend their retirement “floating” instaed of cruising. FLoating on the spot that is, due to high petrol prices. Oh yeah, and then they will have to pay parking fees. Poor things

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  4. Bread line for dogs? It ain’t that bad YET! Wait till you hear of people eating their pets! (I lived in Asia 40 years ago, and I’ve seen lots of it.)

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  5. Oh wow, that would be bad

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  6. give me a clue. Is the loser investment bank Lehman or Citi?

    Mireille
    June 7, 2008
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  7. I don’t agree that globalization is an “evil force”. Actually for developing countries like India and China, globalization provides an opportunity for economic growth. Also a competitive market ensures customer satisfaction. I would like to get your views on our corporate blog on globalization (mahindrauniverse.com).

    Reply
  8. Globalisation (aka greater free trade) has accelerated in parallel with the rise of the Internet. Together they shift value between classes and countries on a frightening scale. Never before in history have so few controlled so much power over so many.

    I hear romantic talk of globalisation as “creating wealth for the world’s poor” … I beg to differ. Much more frequently, it shifts wealth to people who can arbitrage between pricing in different markets. That is, buy cheap in one market, and sell it for more in another. Such as cheaper unregulated labour in China, displaces Aussie workers. This is not genuinely “creating” anything, other than to enrich one at the massive cost of others.

    It looks to me like we are exporting our middle class to Asia, while importing their poverty classes; meanwhile our rich Masters of capital manipulate markets to corral an ever increasing portion of the wealth. Who is looking after the “community of common purpose” that such cancerous behavior hollows out?

    I’d vote for seriously rolling back the boundaries on global trade – it is more important to me that I live in a community that cares about one another, and provides the jobs and an endowment for the next generation, just we received. I can live with a lower rate of growth in my stock portfolio or lower salary increases for the sake of stronger harmony (and happiness) at home!

    The fact remains: once above $50,000 in annual income, people are no happier. But if we struggle, everything falls apart and we turn on one another. Look no further than South Africa and Brazil, for the horrible effects of grossly inequitable wealth spread and poor employment prospects.

    Could this be us in 10 years?

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  9. It’s really nice to hear talking about Lord Rees-Mogg. The Great Reckoning, and The Sovereign Individual, or two of my favourite non-fiction books. I imagine as you get older you calm down a lot, and move from intelligence and smarts, to wisdom. It’s something I’m looking forward to in old age.

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  10. The current arrangement of nations and global financial/economic structures is in the process of being put forward as the reason for the problems which almost certainly will escalate in the coming years (stagflation, resource constraints, conflict, etc).

    The solution you ask? A new international order (global governmnent or similar) will be proposed. TADA. Guess who will control it? The despots that control todays world. All these crisis are either fake or by design.

    James Bond
    June 15, 2008
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  11. …a general motors truck factory is closing in my locacality…they gave the workers “the boot”…but hold on a minute…they want to unbolt the machinery from the floor and liquidate the place…no..no…please don’t go…..they’re raping the land….the industrial landscape…better to pay general motors 10 cents on the dollar for the useless crap…and then open a truck factory museum…

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  12. Yeah, so long as its genuinely free trade, then maybe it helps all countries concerned. But consider? can i own a 100% business interest in Thailand, Malaysia, Indonesia? yet as a foreigner can i own 100% of an australian business?
    What are the import duties of asian countries, compared to australian countries?
    Real free trade can only work where all countries concerned have just that real free trade (like singapore or HK), otherwise one country ends up directly or indirectly subsidising another country. And in the long term this never works out.

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  13. I agree (largely) with Rici.

    Australia does have some comparative advantages for the delivery of manufactured products cheap labour is is not one of them. However, the advantage of cheap labour in some countries (such as China) may soon be cancelled out by the high cost of transporting raw materials to their factories (fuel costs) and paying high spot prices, taxes and duties along the way. Its much more cost effective to ship the finished (or semi finished product). In addition the costs of production (wages, taxes, environmental considerations etc.) are starting to accellerate in China and India (as happened in developed countries over the past 50 to 100 years).

    Coffee Addict
    June 17, 2008
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  14. So with all this globalisation going on, perhaps if we can hold out a little longer (say 7-10yrs?!?), we should see China/India etc align more with current western countries in terms of labour costs/product prices etc. Would this not then result in less imports into Australia, increased reliance on our own resources (labour/goods & services), due to the increased (more balanced) costs in those countries as compared to Australia. This would result in improved local employment (question further impact on inflation?), and balancing of exports/imports. In such a world, we would obviously need to ensure the existing ‘free trade’ barriers are equitable between nations.

    Clearly, a global economic evolution is occurring, and the change is occurring exponentially each year…

    So what happens when oil supply dives, and demand goes through the roof, what then for all of us?

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  15. Brad. Your conclusions about global economic realignment finish what I was trying to say.

    Actually I am starting to think less and less about oil. The popular press is quoting reports which say that Australian’s are very quick to find ways to reduce consumption.

    Most of the existing car fleet’s guzzlers can be converted to LPG if need be —- and fitters are already overwhelmed by demand. CNG is abundant and can be used if oil becomes less available though the performance loss is significant if the engine is not designed to use it. As city fleets (from Sydney to Kathmandu) quickly turn to electric propulsion expect the price of crude to drop in response. We are at the beginning of a 10 year cycle (pun not originally intended).

    Coffee Addict
    June 19, 2008
    Reply
  16. Folks,
    This is all very simple. Those that love globilization are obviously rewarded by it.. those that despise it are punished by it.
    So, I put the question to the entire blog audience. Who really profits the most? Surely you know that without a twitch of an eye.
    Likewise you know who is at the wrong end of the deal.
    I wish Americans would actually think from time to time instead of being social and envirometal exestentialist. Think about it, globilization is the brainchild of the neo_capitalist . It is certain that all the trade agreements the last 15 years are set on dismantelling the American working class. Why pay an American wage when you can get an Asian wage for 10 cents on the dollar , no unions, no benefits etc: Or better yet a hispanic wage and they will work in your country. Civil liberties and human rights are rather a dreadful enemy in the neo-con /neo-capitalist philosophy.
    In short.. no one wins but the *&^% that pushed globilization down our throat to begin with. Mark my words, the globilist have an agenda, and American working class are the target. It is SOOOO obvious, but how can one convince The cattle herds and flocks of sheep that have their minds made up about the obvious good Of globilization? Its kinda like Global warming, the U.N. will do its utmost to frame the event in the most dire expectations so that they can mandate laws to prevent such a catastrophic event. Get it, they want the power to impose international laws an inch at a time, until they have your guns to!Who needs a national government when we have an international one. How exestential :)Now go have heart surgery with confidence in your new sociallistic, communistic. neo_capitallistic world you get to ride on. Note, riding is all you can do, driving is only for the elite, which also have a diffrent choice of doctors than we have. Unfortunately, we are wittnessing the stuff that wars are made of as history has never let us down on repeatting itself.Dont think for a minute that we are too far advanced for such an event.

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  17. The analogy of globalization as compared with the rise and dominance of Internet culture really highlights the essential of its structure – i.e peer-to-peer integration. Each participating entity has a vastly greater span of interactivity and interoperability with other participants. However the drawback of interconnectivity is contagion or the ‘ripple’ effect. The credit crisis would not have been implementable without the enabling momentum of international finance. One facet to note in particular is the fact that globalization, just as in any other social relationship, can be exploited and become subject to abuse where there is information asymmetry. I’m inclined to believe that adverse selection on the part of certain institutional investors (the informed) is the primary culprit behind price inflation in commodities. Current prices are an engineered rendition of the future expectation of scarcity which has been grossly exaggerated by those in the know. People on the upside of asymmetric noesis are convoluting the true state of affairs.

    Reply

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