Saturday, February 07, 2009

Winds Of Change

Some of the most powerful influencers of human history are counter intuitive. Prior to the world war II, it was a norm for the victors of a war to impose excessively harsh and punitive measures on the vanquished. But this fuelled greater hatred, and further wars. It is now commonly acknowledged that part of what precipitated the second world war was the humiliating treatment meted out to Germany after the world war I. The Germans were hurting, and Hitler effectively channeled their anger to build probably the most frightening war machinery ever seen in human history. Ultimately, the world had to unite under the Allies to defeat the Axis powers, but not before it had paid an excessively steep price. But what fundamentally separates World War II from most of the other big wars in history is the treatment of the losers. After the war, the Allies, and the US specifically, spent billions of dollars rehabilitating Germany and Japan. The result was that Japan and Germany quickly emerged as important global players, and to this day remain economic powerhouses. And this switch in thinking was brought to us by a man whose teachings are in vogue again in a world crippled by the global financial crisis... John Maynard Keynes.

Globalization, and the concept of free trade, are similarly counter intuitive when thought about in narrow terms. After all, how can purchasing widget x from a far corner of the globe at the expense of a widget manufacturer in your neighborhood benefit your local economy? But this limited view does not quite follow the argument to its logical conclusion. The argument continues something like this: You purchase the widgets from a manufacturer in a far corner of the world because he is a more efficient manufacturer of widgets than your local widget manufactuer. Loss of business drives your local widget manufacturer to evolve to being a provider of service y, which he discovers he is really good at. What this little example illustrates is that globalization and the competition it enables drives efficiencies and everybody is better off.

Between 2002 and 2007, the the global economy grew at the fastest rate in history, thanks in no small part to increased global trade. So, what does this growth really mean in human terms? Again, examples to the rescue: China's supercharged economic growth over the past decade and half,facilitated by its emergence as the world's manufacturing hub, has helped pull hundreds of millions of people out of poverty. The rapid growth of the export oriented IT products and services industry in India has helped create millions of new middle class consumers, which in turn has boosted the broader economy by creating opportunities for the provision of services to this new class of consumers. None of this would have been possible if not for increased globalization and lowering of trade barriers. But all that might be about to change...

One of my professors at B-school once made a prediction that looks more and more likely with each passing day. He said that he believed 2007 represented the pinnacle of globalization and free trade, and that we would be moving towards an era of increasing protectionism and greater resistance to free trade in the form of trade barriers and tariffs. I think we are already seeing the first signs of these unwelcome winds of change, with the Obama administration's attempt to slip in a "Made in America" clause as part of conditions in its proposed stimulus package. Fierce global backlash forced the US to back off and water down the clause, but the trend is quite clear. When the economic engine is humming nicely and unemployment is almost non-existent, it is easy to sing praises of the benefits of globalization. What is infinitely more difficult is sticking by the philosophy when your growth is negative, unemployment near double digits and your constituents are baying for blood. The way the global economic future evolves will be largely determined by how the world reacts to the current financial crisis. Let's just hope policymakers in our world have the foresight to see beyond the current crisis, and don't steer us into a closed and insular future...

12 Comments:

At 1:32 PM , Blogger tapsearcher said...

President Roosevelt said he would not let the dollar sign stand in his way. He cranked up our industrial complex through the Lend Lease Act which provided goods to the allies without worrying about being paid.

Our most popular ezine article is Lend Lease was real Free Trade and not chop liver as in the Globalist World.
See http://ezinearticles.com/?expert=Ray_Tapajna

Then the war came and ended with the U.S. having most awesome industrial might in history.

Then the U.S. came with the Marshall Plan to duplicate this success story by ramping up local value added economies in Europe and Asia.

Then, Free Trade came with a new definition of trade. Free Trade is primarily about making production portable ready to be moved from place to place for the sake of cheaper and cheaper labor.

This caused a massive deflation in a major economic value that drives the Free Enterprise system. That value was the value of workers and labor. Soon a vast working poor class was created in the U.S. and the hidden underclass grew in proportion.

The value of workers and labor are a tangible asset and acts as a money standard. With this value radically discounted, the value of paper money was impacted. The economic and financial crisis followed.

The only thing that works is local value added economies and not economies based on making money on money instead of making things.

And Federal Reserve Chairman confirmed this when he told Congress during the last stimulas package the best way to stimulate the economy is to buy "domestically produced goods".

This has proved to be an impossible task and the current economic crisis followed.
It shows the Great Depression was not caused by protectionism but by a money crisis as we are having today.

Free Trade has had more than twenty years of testing and it has failed. Protectionism never lasted even a fraction of that number.

See http://www.bizarrepolitics.com/ben-says-buy-usa
http:/www.tapsearch-global.blogspot and note - Rush Limbaugh could have saved the world.
and for mobile user friendly summary of more articles see http://tapsearchnewsmobile.filetap.com and
http:/tapsmobileworld.filetap.com

 
At 11:38 AM , Blogger Vin said...

AFAI can understand, the current economic crisis is neither the result of Free trade nor lack of protectionism.

Correct?

 
At 6:43 PM , Blogger tapsearcher said...

Putting the term protectionism against the term Free Trade is like putting a mouse against a elephant. I do not recall in my long work history a long period of protectionism with Free Trade now having more than twenty years of failures.

The current economic crisis is directly related to Free Trade. Our economy based on making money on money instead of making things is burning out. The devaluation of labor and workers have impacted the money products.

The economic crisis is a money crisis first just as it has been throughout history.

However, Bush's tax cuts and then the first stimulus package did not work because any extra money spent at the retail level or end user stage, quickly fanned out to the places where the products were made and the money did not stay in our country to grow our economy.
See http://tapsearch.com/clinton

 
At 10:01 PM , Blogger Pushuka said...

@Vin: The reason for the current crisis is insatiable greed, plain and simple. Of course, it is a different matter that the whole process was facilitated by a global market for exotic instruments constructed on patently unsustainable loans. So, as you mention correctly, the trouble is not with Free Trade or protectionism, but with human behavior, which can only be remedied by better regulation and foresight.

 
At 10:12 PM , Blogger Pushuka said...

@tapsearcher: The reason the first stimulus package did not take hold is because people did not spending the money the Govt. handed out to them, and banks are not extending credit into the economy despite the Govt's efforts... not because the money is seeping out of the US in exports...

 
At 8:20 AM , Blogger tapsearcher said...

People used the stimulus money in many ways. Some used it to pay the taxes on their homes so they could stay in them a bit longer. Many tried to pay down their debts. Reportedly 48 percent of all small business owners maxed out their credit cards trying to keep afloat due to unfair competition from abroad. Those who were not greedy got hit the hardest.

However, the bottom line is this.
In local value added economies, like the one that won World War 2 and sustained prosperity for years, adds values and margins from raw product up through several levels to the end user or retail level.

When the production of the things we use and eat were sent somewhere else, all these added values were knocked out of the picture.

The Free Market actually knocked out the Free Enterprise system.
And Federal Res Chairman Ben Bernanke said it all when he told Congress during the first stimulus package debate that the best way to stimulate the economy is to buy "domestically produced goods".

Bush's tax cuts went to those who had money to spend and all the money they spent at retail did not stay in this country to grow our economy but quickly fanned out to the places where the products are made and the many added values in between were lost too.

U.S enterprises that took years to built were ravaged overnight. We need to stop thinking about the big picture and think about the thousands who lost their small businesses and farms overnight. For the most part, they were not into greed but only into making a living.

http://www.bizarrepolitics.com/free-traders-protectionism-myths

 
At 7:55 AM , Blogger Balaji Raghavan said...

Boy oh boy! I have to get into this discussion. I have one word for the argument about free trade =>
"serendipity".

The unintended consequence that bothers the developed world so much is "competition". And it is this competition that is leading to yet another unintended consequence that bothers everyone,both the developing and the developed: "protectionism".

However as Pushuka pointed out, the reason for the current crisis is greed. Madoff, Stanford, unscrupulous investment bankers, naive investors, corrupt administration, etc all
driven by covetousness! And as long as there is greed --it has been around even before the serpent slithered down the tree in Eden and it will be there till the sun burns out-- there
will be more bull runs and even more bubbles that burst !

Given the choice among being ripped off by self important balding leaders in their Dachas, immigrants and lazy citizens living off your taxes, and the occasional greedy capitalist who makes his/her(?) appearance once every century, I'd choose the capitalist anyday!

 
At 8:26 AM , Blogger tapsearcher said...

We have always had greed but it was never globalized before. Human nature is on trial now since globalism combines all the "isms" of the past and present. It is the worst possible merger. When we centralize anything, all the bad that once was divided are let loose in an universal fashion.

Capitalism turns into raw capitalism and in an anything goes free market environment, the free enterprise system is thrashed. ( I don't think we really ever had protectionism to any great extent in history. - perhaps we would have been better off if we did.The free enterprise system is a fragile one and needs protection. )

See http://www.therationale.com/human-nature-on-trial

The money crisis is actually a human nature crisis. On top we have people like the Clintons, the Bush family and vast transnational corporation doing their thing. Then we have consumers killing a clerk rushing into a sale at Christmas time at Walmart.

 
At 6:22 PM , Blogger Pushuka said...

@Bala: Totally agree with you on that. Having seen successive Governments bumble their way through ill-conceived, populist policies I think capitalism and free trade, for all their limitations are preferable to a protectionist environment orchestrated by a Government. You will have the occasional and periodic excesses caused by the greed of a few, but you won't be condemned to a lifetime of poverty...

@tapsearcher: Both of us seem to agree on the disease, but differ in the medicine we prescribe. Fair enough. Let me share with you the story of India since 1947, when Britain formally ceded control over the country. For most of our history since, India has been governed by one party. Their election slogan has always been "Garibi Hatao".. plainly put, "Let's eradicate poverty". To that end they have persisted with opportunistic and populist policies.. trade barriers and tariffs on imports, floor support for commodities etc. This served the party well in the elections, but the common man, whom these policies were supposed to protect, remained abjectly poor for over half a century. Paradoxically, it was only after the country, on the verge of bankruptcy, was forced to open its doors to global markets.. and global competition.. in the early '90s that the stock of the common man started to improve. So, I for one place my faith in trade and capitalism. Erecting trade barriers might look attractive, but I doubt it is really the solution..

 
At 8:17 PM , Blogger tapsearcher said...

When the only varible in so called free trade is the cost of labor.
This is something new in history. Trade in the past was mainly about trading products and not the value of labor.
If we make factories and production portable ready to be moved from place to place for the sake of cheaper labor costs, the process will be endless because there will always be populations that will work for less for the sake of survival.
This process should not even carry the term "Free Trade" or Trade. It is something else.
As water always seeks its lowest level, whatever you want to call this process, will always seek it lowest costs.
I do not know that much about India.
Thomas Friedman thinks he does and tells about states in India that use their own methods of protectionism to guard their own individual enterprises. He says that this is being smashed by using immigration to wittle away the protectionism. Friedman uses his own semantics and connotations for terms like protectionism.
There is a difference when populations want to protect free enterprise against those who would manipulate and sell under costs to grap control of markets.
This I do known. Only local value added economies work that add as much value as possible in a given region from raw products up through several levels to retail.
If this is all chopped up with parts all over the globe, the real tangible values are too. This makes a mess out of any economy.
The Marshall Plan worked differently. The U.S. duplicated successful enterprises in Europe and Asia after World War 2. They restored local value added economies and did not fragment them all over the planet.
Globalist Free Traders like Thomas Friedman and Alan Greenspan dismiss the Marshall Plan as being revelant but it is. It could have changed the world if it was continued.

The Free Enterprise system is a simple process. An owner makes or grows something and adds a margin on everything for the sake of making a decent living for himself and the workers who work with him.

Once these fair margins are attacked by big money manipulations, it is no longer the Free Enterprise system. Big money will sacrifice margins on individual items - sell under costs - and do not care about the real tangible value of workers and labor. This is what the global economic crisis is all about. It ties in also with overproduction with supply becoming over demand.

 
At 1:44 AM , Blogger bala said...

@tapsearcher: Btw Excellent post in http://www.therationale.com/human-nature-on-trial

But holding free trade and globalization as the most important cause of the current economic crisis and trying to address the crisis through protectionist regulations can have only one impact: An excruciatingly slow and painful withdrawal from the crisis.

Lets analyze some of the incidents in isolation: Was the housing bubble in different parts of the world caused by globalization ? Was the sub prime mortgage crisis/Fannie and Freddie caused by globalization ? Apparently not. The problem was not caused by talented and deserving individuals losing their jobs to undeserving third world countries. It was caused by thoughtless lending. Was the collapse of AIG or the credit crisis caused by globalization ? I have one word for it : Derivates. Were the ponzi schemes and ripoffs caused by globalization ? The list goes on...

Now I would imagine that if the wealth had not spread(at least to the small extent that it has) the impact of the crisis would have been worse! Imagine many many more billions of dollars lost to Madoff,Stanford, etc. Imagine the whole world (including American taxpayers & retired pensioners)
bankrolling the extravagant lifestyles of some of the most greedy crooks that mankind has ever produced. How can these crooks ever sleep at night!
Last I heard Ramalinga Raju, the Indian counterpart of Madoff, after successfully ripping off thousands of investors was enjoying preferential
treatment in a prison in contrast to the experience handed out to common criminals! Go justice! Not only have they blind-folded you they have stabbed you in the back as well!

Lets not forget that the prosperity and growth of the current decade was only made possible because of globalization
of businesses and trade. Globalization that resulted in a market that spanned the globe. I admit that the developing nations in isolation do not have
the buying power of say U.S.A or Japan but when combined, they do constitute a significantly large market.
See: http://dataservice.eea.europa.eu/atlas/viewdata/viewpub.asp?id=1550. The right pill for this disease -- borrowing a phrase -- is not protectionism, it is accountability and regulation; stimuli and bailouts; and above all the healing touch of time.

Corporations and business will evolve and learn to function responsibly in a Global economy. They will eventually learn to address the value ( as @tapsearcher points out ) of labor that has been lost, or I would put it transferred to the developing world. Having learnt a lesson from the crisis of 2008, they will learn to not only blindly outsource work but also to create jobs in both developed and developing countries. They will learn to develop products for different markets and consumer segments: At least Japan already had when i worked there for a couple of years, however they haven't mastered outsourcing yet!. However the greatest threat to the economy in the future is not free trade and globalization but is instead human nature and its shortcomings. Protectionism will limit the healing and recovery process, and make the recovery more drawn out and painful. A brief survey of mankind's actions over the past few centuries recommends that we dig in for the long haul.

 
At 8:24 AM , Blogger tapsearcher said...

The current economic crisis was directly caused by Globalization and Free Trade. There were headlines across the country in the 1990s about record breaking foreclosures related to bankruptcy.

More than a million workers in the computer industry lost their jobs during the late 1980s and all of the 1990s.

We witnessed about a 1000 computer dealers and system houses close down in just three states surrounding us. Our own 1000 customer and prospect list dwindled to virtually zero, has companies closed down due to Globalization and Free Trade.

Ten years ago, there were articles in the newspapers about 47 percent of all small business owners maxing out their credit cards to keep their businesses going.

Another article reported that one third of all workers who were 55 or more years old who lost their jobs, never found another one. A bulletin in a Church read - success is reaching Social Security age without having to declare bankruptcy.

There were many of articles about the need for emergency food breaking all records. The prison population broke all records.

In the first wave of assaults by Free Trade competition, more than 400,000 auto workers lost their jobs in the late 1980s and more than 700,000 lost their jobs related to steel production.

By 1992, in the pre NAFTA and GATT days, more than 2000 U.S. factories were moved to Mexico. After NAFTA was passed in 1993-94, this number doubled to more than 4000 factories.

In the late 1980s and all of the 1990s, the U.S. suffered the most massive dislocation of jobs in its history. This happened while President Clinton was proclaiming prosperity

There was a stimulus package in 1994-95 but it went to a foreign country. President Clinton rushed 20 billion dollars to Mexico to save the peso and their economy. He sent more money to them through the international money fund too.
This was a warning about what was to come. It forecasted the economic storms of today.

Of all things, a second stimulus package came via the Y2k crisis.
Alan Greenspan talks about the billions spent on fixing the problem. Billions if not trillions poured into the economy, as governments and companies spent billions to fix the problem.

The Y2k crisis was caused by more than a million workers losing their jobs in the computer industry and there were not enough left in the industry to perform proper systems housekeeping. Many companies spent money they did not have on the problem and subsequently went out of business.

This also hid the scams of all the Dot Com companies that were enjoying success who were manipulating stock values, but this played out with the fall of most of these companies and the stock market crashed in 2000.

I have records of the massive job cuts and company closing down in just 1998. The numbers are massive. 250,000 lost their jobs in the high tech industries alone.

The unemployment rate in the USA is a sham. There is no way to compare it with the unemployment reporting from the past. Only 37 percent of all workers in the U.S. qualify for unemployment insurance. They are able to work at one job long enough or make enough money to qualify. This means there that more than 60 percent of all American workers are missing in action or living in some kind of economic limbo.

Hurricane Katrina in New Orleans exposed a massive underclass living in a silent depression. The same could be easily applied to most cities in America.

A vast working poor class replaced the middle class in the USA. It was the middle class that was supporting the consumerism -Free Trade and imports need in order to function right.

Eventually, the working poor found it difficult to afford even the cheaper imports.

The U.S government and Free Trader Globalists hid all of these dynamics by concentrating on making money on money instead of making things. It was a house of cards and it tumbled. Its impact caused a domino affect across the globe.

 

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