World heading toward end of globalization

“A “grave recession” in the world economy may lie ahead, with a profusion of new barriers to trade and capital flows, if the Group of 20 major economies (G20) fail to come up with solutions to the present crisis. The G20 will probably begin to suffer “progressive fragmentation” at its Nov. 11-12 summit in Seoul, because it is based on “unsustainable coalitions” and there are insurmountable conflicts between members, according to Fernando Cardim, a professor at the Federal University of Rio de Janeiro.”

Problem seems to be that all of a sudden protecting your property, family or even country and countrymen/women has become to other countries a bad word. The US. nor Canada nor any other country should be dependent for their survival on another country. However, when our parents allowed without fighting all the other countries in the world a say in how our countries are run we lost that ability. Many pundits, analysts, economist have debated at length about this. Free trade does not imply fair trade. If you take a look at what eliminating trade barriers have done to less developed nations, you would be appalled.

When you really look at it, what is truly made in Canada/US these days? According to our own rules and regulations, a product can be considered made in Canada/US if 51% of the costs associated with it are within Canada/US.

The IMF has gone to great lengths to ensure that the value of a nation’s currency is devalued so that the resources of that nation can be purchased very cheap. For example, pineapples from Brazil are traded using US dollars however, the conversion from the Brazilian currency makes that pineapple worth only 5 cents US. Now we in Canada/US can by it for 7 cents based on our currency exchange. So we buy all these pineapples from Brazil and then make pineapple juice. The cost of processing the pineapple costs 8 cents. Not surprisingly after this, “produced and made in Canada/US” can legally be attached to that pineapple juice. That very same juice can be sold for $3.00.

However the farmer back in Brazil gets less than 1 penny of the value of that pineapple and his family farm was seconded by a corporation which means he can only grow pineapples, not food for his family. This goes for all products from US corporate controlled, ie IMF supported, countries. We need to take a step back from this free trade system and look towards fair trade.

Carlos Tadheu de Freitas, chief economist for the National Trade Federation and former head of Brazil’s Central Bank, said nothing but “hot air” would come out of the Seoul summit. He forecast a period of global “stagflation”, with stagnation or deceleration of economic activity in emerging countries that had previously been growing, aggravated by inflation.“After three decades of globalization, the worldwide system of production of goods and services is integrated, and it would be seriously disrupted if an epidemic of protectionism blocks the flow of trade and investment,” said Mariano Laplane, head of the University of Campinas’ Institute of Economics. 

The US is increasingly relying on other nations to provide basic and important goods and services that keep our nation running. Actual production of the goods, services, and knowledge that consumers, businesses, and the military rely on are done by other nations in increasing levels. We are becoming a nation of owners, managers, and marketers that no longer know how to work the front lines. “Real work” is not being done in the US anymore. Corporate bosses bicker in boardrooms over whether blow-dryers should be beige or translucent instead of invent, improve, or manufacture blow-dryers. 

Aside from the economic risks of losing access to the front-line “economic soldiers” to other nations, there are less training paths in which future managers and marketers can learn their trade. How can a US manager of software development learn how to manage software developers without ever having the chance to be a software developer? Software development will no longer happen in the US frequently enough to cultivate future managers. Can we have generals who never experienced live battle? Are we going to have to start sending manager jobs overseas also because we lack the experience at home?

An alarming number of experienced technicians are fed up with a dwindling demand for their skills, and are preparing to move out of tech and into fields such as interior decorating, massage therapy, landscape architecture, herbal consultant, lawyer, etc. Although these are fine careers, they don’t really provide the kind of expertise that is going to keep US a forward-moving economic power. We are handing over our economic keys to other countries, and they will drive away with more modern workforces and industries.

Comparing this ‘recession’ to the 1982 recession

1980 had a rally and it crashed down to 1982 which was the bottom of the DOW. The problem with 1982 is compared to 89 82 was start of meaningful bull market but 2009 is the same thing as the 1929 massacre where the Dow dropped substantial amount and recovered 50% just like in 2009 and then it went into a C decline, A down, B recovery, C decline that ended up wiping out 89% of the DOW’s market cap. So, in 1982 the P?E multiple which is price of stock multiplied by earnings, was 8 times in 1982 and is 26 time sin 20009. Bull markets do not start with PE of 26. Dividend yields were 6 percent in 1982 and now in 2009 they were 2 percent.

US debt and inflation being transferred to rest of the world

In seeking to solve its own crisis, the United States is transferring the cost to the rest of the world. The policy adopted by the Fed between 1979 and 1981, when it gradually raised interest rates to more than 20 percent a year to tame inflation, plunged a large part of the world into a crisis which cost indebted countries one or two “lost decades.”

Today, the situation is different: the goal is to overcome recession and devalue the dollar to increase exports, to the detriment of trading partners. But “emerging countries nowadays have means to defend themselves,” Laplane said.

Brazil, for instance, has acquired massive foreign exchange reserves of close to 300 billion dollars, paying a high price for keeping them because of its high basic interest rate, at present 10.75 percent. Unable to stem the appreciation of the local currency, the real, against the dollar, it raised taxes on inflows of foreign capital, from two percent to six percent.