Deglobalization, inflation, and you

On Oct. 28, 2007, I wrote a column titled, “The Downside of Protectionism.” 

“During the Roaring 20s, the world economy benefited from that great era of globalization and free trade. Then, as now, global trade made a lot of people uncomfortable. And in both cases, politicians responded to public sentiment in exactly the wrong way, by attempting to stop or slow foreign competition. There is some danger that they could do it again.” 

That was literally a couple of weeks before the beginning of what became known as the “Great Recession.”

On the eve of the Great Depression, Congress passed the Smoot-Hawley Tariff Act of 1930 to “protect” American business from “unfair” foreign competition. Other countries retaliated in kind, levying tariffs of their own on American products. As a result, the Great Depression got a whole lot greater as global trade shriveled and died. Considering this glaring example of what not to do when it comes to trade, you would think that policymakers would not repeat such a mistake. They might.

I wrote in 2007, “The backlash from globalization is already growing. The bottom line is this…the recent surge in protectionist sentiment is just one more parallel to the Roaring 20s. The implications for the next decade, just as the decisions in the 1920s affected the 1930s, are equally negative. We have all the ingredients in place to make the same mistakes we made then. Let’s hope we learned our lessons and are smarter about it this time.”

In April 2017, I wrote another column titled, “Is Globalization Dead?”  In it, I wrote, “Here we are, almost 10 years later, and it appears that what I wrote then was eerily predictive.” 

If we had to describe the last 50 years of economic history in one word, “globalization” would be high on the list. Thousands of small, independent economies around the world are fused into one nearly seamless economy. The things we use every day—food, clothing, vehicles, furniture, electronic devices, and even the materials that compose our homes—now come from far and wide. We don’t even notice. International trade over vast distances is now so normal that we forget it wasn’t always so. Looking at where we are now, what a difference six years have made since 2017.

Globalization entered a new phase in the 1960s. I was born in 1947, so the explosion of the global economy has been a major part of my lifetime. The baby boomers may be the first globalized generation. If I reach 100, I suspect I will see children of a deglobalized generation.

Just as a pendulum swings to extremes in each direction, I think we are seeing the same with globalization. It may have peaked on one side in 2008 and is now heading in the other direction. Not that it will go that way and stay there, but it will continue on its path of finding equilibrium in a complex world. Humanity spent the last 50 years globalizing. I think historians will mark the 2008 financial crisis as the turning point.

The great globalization boom of the previous half-century—which brought us cheap goods, cheap energy, and cheap labor—met an unceremonious death this past year. The COVID-19 pandemic, the Russian invasion of Ukraine, and a lot of reckless government policies formed a perfect storm to thrust us into a new financial era. Navigating this new era will be full of challenges but equally full of opportunity for shrewd investors who know how to read the writing before it hits the wall.

While deglobalization will create a drastic change in what we’re all used to, it isn’t all bad. By necessity, it will spur a massive boom in robotics, artificial intelligence, automation, and smart logistics: essentially everything that involves getting more production out of fewer workers. It will make our country less dependent on countries that don’t particularly like us and reduce our risk of industrial espionage. It will also accelerate the return of the term “Made in America.”  

But we won’t get there overnight. And it’ll be a strange experience getting there.

No one alive today is old enough to remember the last period of deglobalization after World War I. It snowballed into the late 1920s and—along with a host of other bad policy decisions along the way—culminated in the Great Depression and the rise of European fascism.  There’s no telling what we’ll see this time, but history tells us to prepare for hard times and expect the unexpected. Odds are, you can already feel the strangeness around you and the notion that things are changing, and you’re not sure what comes next.

You are not alone. Most Americans feel this way. In fact, Consumer Sentiment, which measures how confident people feel about their financial well-being, is at its lowest point in history. The Federal Reserve isn’t exactly helping on the confidence front. When the most powerful central bank in the world is trying to drive unemployment UP and asset prices (i.e. your retirement) DOWN, that’s not the sort of thing to make you feel very secure!

The Fed has its reasons. They, like all of us, are unhappy with the stubbornly high inflation rates we’ve seen all year. They’re willing to engineer a recession in order to kill it. But here’s the problem: They’ll only be partly successful. You can break inflation down into two component parts. There’s demand-pull inflation, which is when you have too many buyers bidding prices up.  Higher interest rates tend to dampen this, and this is where the Fed will have some degree of success.

But then there’s the other part: cost-push inflation. This is when prices rise because of a sudden unexpected scarcity that drives up costs. The oil embargo of the 1970s is a good example, as was COVID-19. This is a big part of the deglobalization trend we’re dealing with today. This type of inflation is a lot harder to kill because interest rates won’t make a dent in it. It requires massive investment in technology and infrastructure—things that can actually make inflation worse in the short term!

What this all means is there will be major winners and major losers as this all plays out. Hang on, because it’s going to take a while. We’ll be here to help guide you along the way. Thanks for reading.