Deep Thinking about Deep Recession II: Globalization

Global financial shifts

These postings are about the current “deep” “recession.” As CNN reported yesterday, “the U.S. economy suffered its largest drop in 26 years during the fourth quarter.The nation’s gross domestic product, the broadest measure of economic activity, fell at an annual rate of 6.3% during the final three months of 2008” (see original story on Worldwide, similar, and worse, is being repeated. And the pain isn’t likely to end yet.

In this post, I’ll briefly discuss the first of three critically important factors that make this global recession different from past recessions, Globalization, which I defined loosely as continental shifts in capital flows.

The evidence is everywhere. Foreign investors own 45% of U.S. Treasuries, with Asian investors alone holding more than 30%. U.S. stocks made up 69% of the world market capitalization in 1970; today they make up 42%. And Western Europeans and North Americans are increasingly hiring programmers and designers from Asia and Eastern Europe. These include hiring “virtual personal assistants” on other continents to screen phone calls, pay bills, and even handle customers. One example is that the website hired two India-based reporters last year. Their assignment? To cover Pasadena city council meetings that are broadcast over the Web. Information tech and globalization obviously are intertwined in different ways such as these, although I discuss them separately for the sake of intelligibility. I’ll deal with infotech in my next post. So let’s turn to globalization.

Continental shifts in capital flows acknowledges that a lot of the productive labor has shifted to Asia, in particular, China and India (Thomas Freidman’s The World is Flat book has publicized this well-known trend). These major flows of capital — not only monetary, but human capital, the kind that creates innovations and brands, and even social capital — have been shifting radically for well over a decade with relatively little corresponding reaction at the level of markets and currency. If that’s true, then the shifts we have already seen might be moderate compared to the ones to come.

In other words, if North American car companies can’t build cars that global consumers want to drive and buy, then propping them up artificially only means that they’re going to come down harder when they do, eventually, fall. The United States and much of Western Europe is dependent upon a number of industries that are being similarly propped up. The market is beginning to reflect that. And, even as companies in these countries survive but find themselves with growing liabilities, they’re going to be spending much more of their capital servicing their increasing their debt rather than making investments in brands and innovation that will pay off into the future. If currency rates continue to decline, those foreign debts become harder and harder to service, for governments as well as companies.

On the ground level of consumers and consumption these shifts in capital manifest as unemployment and general belt-tightening. People lose their jobs in the Rust Belt, the support services that serve them fold, housing prices drop, tourism recedes, and so on. Government artificially stoking spending only works if the spending can be directed into areas that are going to create lasting jobs and redistribute capital away from its current configuration — the configuration that is at least partially causing these shifts.

That’s trend #1. Trend #2 is Informationalization, which I’ll talk about in the next post.

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