The World Wobbles

By Todd Harrison  JUN 17, 2009 9:25 AM

Exploring the other side of globalization


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

“War’s going on across the sea, street soldiers killing the elderly. What ever happened to unity? It’s like that, and that’s the way it is.” --

In my (controversial) January column, "How realistic is a North American Currency," we offered:

"As governments take on more risk—as they price assets on behalf of the market and transfer debt from private to public—the common denominator, or release valve, becomes the currency.

If our economic condition is allowed to take medicine in the form of debt destruction, the greenback will appreciate and asset classes, as a whole, will deflate. If we continue to inject drugs that mask symptoms rather than address the disease, the likelihood of a seismic readjustment increases in kind."

It continues,

"I've long contended that much like the Internet prophecy proved true—but not before the tech crash—so too would globalization, albeit not without painful yet necessary debt destruction.

To get through this, we need to go through this. If we’re not allowed to go through it, foreigners will seek alternative avenues. Remember, for holders of dollar-denominated assets, seeds of discontent have been sowing under the surface for years with the greenback off 30% since 2002. More likely than not, global leaders will watch how our new administration attempts to tackle the financial crisis before taking drastic steps. They understand codependent risk exists as a function of the derivatives that interweave our financial infrastructure. If they could disassociate from our economic ecosystem without inflicting massive damage on themselves, they would have done so long ago.

If forward policy attempts to induce more debt rather than allowing savings and obligations to align, we must respect the potential for a system shock—such as a two-tier currency—to gain traction if, and likely after, the dollar meaningfully debases from current levels.

If this dynamic plays out—I sincerely hope that it doesn't—the global balance of powers would fragment into four primary regions: North America, Europe, Asia and the Middle East. In such a scenario, ramifications would manifest through social unrest and geopolitical conflict.

This particular path isn’t something one would wish for but the cumulative imbalances that steadily built in our finance-based economy must be resolved one way or another. Therein lies the critical crossroads we together face as our wary world attempts to find its way."

Why am I quoting myself? You mean, other than being a narcissist?

I draw your attention to those thoughts as a context for two recent data points. First, the saber rattling in Russia and second, the "Buy China" policy that is part of its new stimulus program.

There are two sides to every trade and the "other side" of globalization is protectionism, isolationism and, potentially, every man (or country) for themselves. This isn't a thought for the day as much as an evolving dynamic worth watching as it will set the stage for future generations.

Food for thought as we together find our way.


No positions in stocks mentioned.