At issue is the bedrock belief that globalization lifts all boats,
making us all richer by allowing the flowering of individual
countries’ comparative advantage.
That some classes of people - low-skilled workers in the West, for
example - have not done well out of globalization should by now be
The big question is whether this is a transitional problem, a
distributional one or something closer to a permanent condition.
One person who has thought interestingly about these issues is
Stephen Jen, a hedge fund manager at SLJ Macro Partners. Jen argues,
picking up on points made by economist Paul Samuelson a decade ago,
that lagged effects of globalization may be behind some of the
peculiarities in both markets and economics we now observe.
“Traditional economists have been puzzled by the disappointing
recovery in developed market employment and capital expenditure.
Globalization, we believe, could help explain both puzzles,” Jen and
colleague Fatih Yilmaz wrote in a recent letter to clients.
While this is far from mainstream economics, it is worth considering
this line of thinking, and the potential implications for financial
One idea is that globalization, by introducing large new supplies of
labor from emerging markets, has changed the relative supply and
demand relationship between labor and capital. That helps to explain
increasing wealth and income gaps and also wage growth suppression
in the developed economies.
A supporting idea is that globalization is contributing to the
so-called secular stagnation that developed market economies seem to
find themselves in. With capital in demand and labor in plentiful
supply in emerging markets, money, in the form of investment, flows
to where it gets better returns. Developed markets as a whole have
had strongly negative net foreign direct investment for decades, and
even the U.S. has seen negative figures since the financial crisis.
That lack of capex in developed markets is, in part, a factor
underlying both slow growth and poor job creation. Combine this with
demographic headwinds, and you may have lower potential growth.
That, of course, is not how central banks see things, at least thus
far. The result, and implication, is that the policy and growth mix
we’ve seen - very low rates, very low growth and very low inflation
- are perhaps a feature rather than a bug.
What this has meant for asset prices so far is that riskier
investments have been very well supported by emergency policies
which far outlast the emergency.
The puzzling inability of the economy to grow strongly, create jobs
and drive wages higher is met by policy makers with low rates and
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“For the financial markets, rather perversely, as long as policy
makers see the great financial crisis as an exogenous demand shock
(like an earthquake), the low inflation and the still lethargic
labor markets should allow the developed market central banks to
persist with their extreme policies,” Jen and Yilmaz write.
“In turn, financial repression ought to keep asset prices supported,
all else equal.”
Much depends on how central banks read the evidence around secular
stagnation, and how their thinking evolves.
If central banks continue down the path they are now on, using asset
markets as a means to stimulate growth which may not be all that
responsive, you’d expect asset prices to remain high, and debt
markets particularly to be welcoming places for borrowers.
That might seems like good news for investors, but it does raise the
probability of financial overheating and instability. The market
goes too far, too fast and eventually we find ourselves in another
crisis akin to 2008.
More interesting, if not more likely, is what happens if the views
of policy makers evolve more towards Jen’s. If central bankers start
to believe that low growth is here to stay, then monetary policy
will need to be normalized, if only to give some leeway in advance
of the next crisis or cyclical downturn.
That might prove good for the economy, in that it could encourage
structural reform, but would be decidedly bad for asset prices.
The globalization debate won’t be ended in the next year, but the
one about when interest rates rise may well be.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
email@example.com and find more columns at http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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