Deglobalization: Chinese State owned firms to sever ties with US consulting firms

Geopolitical strains have begun to spillover into the economic realm.

The Chinese government orders her state owned companies to cut ties with US consulting firms

From Reuters:

China has told its state-owned enterprises to sever links with American consulting firms just days after the United States charged five Chinese military officers with hacking U.S. companies, the Financial Times reported on Sunday.

China's action, which targets companies like McKinsey & Company and The Boston Consulting Group (BCG), stems from fears the firms are providing trade secrets to the U.S. government, the FT reported, citing unnamed sources close to senior Chinese leaders.

These are seeds of protectionism. If there will be more tit-for-tat responses, protectionist policies will spread and swell to cover many economic areas. This implies deglobalization or a potential significant slowdown of global trade and finance or capital flows. Importantly, protectionism increases the risk of a military showdown. 

Very bullish no?

Quote of the Day: 42.4% increase in the price of being poor

Perhaps the most striking example is the World Bank, which is now considering a massive revision to how they define ‘poverty’.

The global poverty line used to be defined as living on $1/day or less. Then they had to increase that to $1.25 in 2008, since, even for the world’s most impoverished, one dollar wasn’t such a big sum anymore.

Now the World Bank is looking at increasing that poverty line even further, to $1.78. That’s a 42.4% increase.

All of this is because new economic data from Centre for Global Development and the Brookings Institution showed that the number of people living on less than $1.25 has halved.

It’s not because there are that many fewer poor people in the world. It’s that you can’t even be poor anymore on $1.25/day.

Thanks to all the money printing that has taken place around the world, it takes a much greater sum these days… just to be impoverished.

Not that there’s any inflation.

This is from Simon Black at the Sovereign Man.

Oh with increasing risks of protectionism as world powers square off over territorial borders which has now spilled over to the economic front (so far with limited scope of sanctions), more regulations and mandates, higher taxes and the deepening global bubbles, which will result to a combo of stagflation and bubble busts, global poverty levels will rise again.

More Wall of Worry: Rising Accounts of Protectionism

Another area to be concerned with is the reemergence of protectionism.

Writes the Wall Street Journal Blog,

As worries rise about an economic slowdown, major nations around the world are ramping up measures to protect their economies from trade threats.

Global Trade Alert, an independent monitoring group, says in a new report today that at least 110 new protectionist measures were implemented around the world since the Group of 20 advanced and developing economies met in France last November. Of those 110, 89 were by G-20 members, who meet again next week in Mexico.

Protectionist measures such as export restrictions and higher tariffs spiked after the 2008 financial crisis but didn’t subside afterward. Since then, nations have been pursuing stealthier measures — “murky protectionism” — to circumvent international trade rules, the group says.

The latest updated tally names the 27-member European Union as the leading culprit since November 2008, with 302 discriminatory measures, followed by Russia and Argentina with about half that number each. China ranked at the top of a list of “number of trading partners affected” — with 193, or nearly all of them, followed by the European Union at 187.

Bailout policies are a form of protectionism. And they protect certain domestic politically privileged interest groups at the expense of the consumer.

It has been the G-20 or developed nations (mostly the EU) that has initiated most or about 80% of protectionist measures.

This reveals of the state of their government’s growing desperation which aside from protectionism has resorted to various financial repression measures such as raising taxes, imposing capital controls, inflationism, negative interest rates, price controls and various regulatory proscriptions.

In addition, Russia and Argentina’s deepening slide to statism has also contributed to rising incidences protectionism.

China, as the report said, is likely to suffer most from the reversal of globalization or deglobalization. In reality, the whole world will suffer as economic doors close.

Unknown to many, the resurgence of protectionism is likely to provoke retaliatory responses which should lead to a deterioration in geopolitical relationships that increases the risks of military conflagration. The great depression of the 1930s paved way for World War II.

As the great Ludwig von Mises warned,

What is needed to make peace durable is a change in ideologies. What generates war is the economic philosophy almost universally espoused today by governments and political parties. As this philosophy sees it, there prevail within the unhampered market economy irreconcilable conflicts between the interests of various nations. Free trade harms a nation; it brings about impoverishment. It is the duty of government to prevent the evils of free trade by trade barriers. We may, for the sake of argument, disregard the fact that protectionism also hurts the interests of the nations which resort to it. But there can be no doubt that protectionism aims at damaging the interests of foreign peoples and really does damage them. It is an illusion to assume that those injured will tolerate other nations' protectionism if they believe that they are strong enough to brush it away by the use of arms. The philosophy of protectionism is a philosophy of war. The wars of our age are not at variance with popular economic doctrines; they are, on the contrary, the inescapable result of a consistent application of these doctrines.

Desperate politicians and their cronies would use every trick on their books to preserve their privileges, mostly in the cover of nationalism, that comes at the expense of long term interest of their constituents.

Nationalism serves no more than a ruse conjured by politicians and those of the political order to justify social controls.

I hope and pray that the growing trend of protectionism will be curbed and that wars will be avoided.

The Coming Age of Capital Controls?

Bureaucrats in Brussels have been floating trial balloons on capital controls

The Daily Mail reports

EU finance chiefs today admitted holding contingency ‘discussions’ about possibly putting limits on Greek cash machines to stop mass withdrawals if Greece quits the euro.

European Commission officials also discussed imposing border checks and capital controls in a bid to stop a possible flight of funds.

‘There are indeed discussions, and we are asked to clarify what is foreseen in EU treaties,’ said Commission spokesman Olivier Bailly following a raft of press reports claiming this had happened.

He refused to reveal the precise details of the talks but admitted some of these ideas had been discussed under ‘disaster scenarios’.

He said the commission is ‘providing information about EU laws regarding treaties,’ that mean capital ‘restrictions are possible’ on the grounds of ‘public order and public security.’

However, he stressed that the commission was not planing on the basis that Greece would leave the euro depending on the outcome of elections on Sunday.

More from Simon Black at the Sovereign Man

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawls, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being releived of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system.

Capital controls are part of the grand scheme of financial repression policies designed by bankrupt governments to expropriate private sector resources.

Aside from capital controls, other measures include, raising taxes, inflationism, negative interest rates, price controls and various regulatory proscriptions.

Simon Black lucidly explains the nitty gritty and the moral issue of capital controls,

capital controls are policies which restrict the free flow of capital into, out of, through, and within a nation’s borders. They can take a variety of forms, including:

- Setting a fixed amount for bank withdrawals, or suspending them altogether

- Forcing citizens or banks to hold government debt

- Curtailing or suspending international bank transfers

- Curtailing or suspending foreign exchange transactions

- Criminalizing the purchase and ownership of precious metals

- Fixing an official exchange rate and criminalizing market-based transactions

Establishing capital controls is one of the worst forms of theft that a government can impose. It traps people’s hard earned savings and their future income within a nation’s borders.

This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation… both of which soon follow.

The thing about capital controls is that they’re like airine baggage fees; ultimately, all governments want to do it, they’re just waiting on the first guy to impose them so that they can shrug their shoulders, stick it to the people, and blame ‘industry standards’.

Moreover, capital controls were a normal part of the global economic landscape for most of the 20th century, right up to the 1970s. It’s been a long time coming for governments to return to that model.

A return to capital controls would extrapolate to deglobalization and protectionism whose likely outcome would be the Great Depression of the 21st century. I hope and pray that these parasites will not succeed.

Decoupling in Business Conditions?

Under the present financial crisis conditions, many parts of the world have tended to de-globalize or close interactive channels with the outside world which risks hampering trade, finance and investment flows.

In other words, the present environment could impair business conditions of some countries, but not all.

The Economist offers their estimate on the potential changes in business conditions, ``GLOBAL business conditions are set to worsen for the first time since 1996, according to a new report by the Economist Intelligence Unit, a sister company to The Economist. Its business-environment ranking for the next five years assesses 82 countries in categories including the economic and political environment, finance, and infrastructure. The outlook for half of the countries surveyed will deteriorate as the downturn takes its toll. While rich countries' scores will decline most, particularly those of Britain and America, they are still a better prospect for businesses than almost anywhere else. Countries with financial problems, such as Ukraine and Venezuela, will see conditions worsen considerably." (bold highlight mine)

The Economist gives a complete breakdown....
Countries impacted directly by the present financial crisis are likely to suffer most from deteriorating business conditions.

And these are the economies that experienced a national bubble bust (UK, US, Europe) and on economies that had their export markets directed to serving these bubble economy (Hong Kong, Singapore, Malaysia, etc.).

There are exceptions. Venezuela and Ecuador are economies that have been embracing socialism even prior to the bubble bust.

However some economies particularly the BRICs and other Emerging Markets have been expected to improve business conditions even as the others falters.

Clearly if these estimates hold true then it can be construed as decoupling in business conditions. And investments are likely to flow into nations with improving business than otherwise.

Tomorrow’s Investing World According To The Bond King

``Get your facts straight, apply them to the current valuation of the market, take decisive action, and then hold on for dear life as the mob hopefully comes to the same conclusion a little way down the road.”-William Gross, 2+2=4

The highly reputed Bond King PIMCO’s William Gross suggests that the global investment climate have radically been transforming where ``future of the global economy will likely be dominated by delevering, deglobalization, and reregulating”, from which the investment sphere would lead ``to slow global growth, a heightened risk aversion, a distrust of conventional investment model portfolios, and a greater emphasis on surviving as opposed to thriving.” (bold highlights mine)

Protectionism From Reregulation

Seen from a general sense, the idea seems true. For instance, aside from a sharp drop in global trade and investment flows as a consequence to the near US banking collapse last year, recent signs of deglobalization include the steep decline in migration trends especially from the corridor of Mexico to the US (New York Times) or the emergence of protectionism from policies aimed at “protecting ” locals-interest groups and not the local population-and the subsequent trade frictions in reaction to these policies such as the recent escalating row between the US and Canada over pipe fittings (Washington Post).

However, the chaotic reregulation in the misguided and the convoluted premise of the market’s inability to self-regulate is likely to spawn an even deadlier backlash.

Policy measures, which piggybacks on noble sounding myopic populism, have immediate beneficial solitary effects but at the expense of long term and far larger and wider damage to the system. And in the case of the pipe fittings, the political boomerang appears to have generated a greater impact than from the immediate intended benefits for the privileged groups.

And as the Washington post aptly reports, ``With countries worldwide desperately trying to keep and create jobs in the midst of a global recession, the spat between the United States and its normally friendly northern neighbor underscores what is emerging as the biggest threat to open commerce during the economic crisis.”

``Rather than merely raising taxes on imported goods -- acts that are subject to international treaties -- nations including the United States are finding creative ways to engage in protectionism through domestic policy decisions that are largely not governed by international law. Unlike a classic trade war, there is little chance of containment through, for example, arbitration at the World Trade Organization in Geneva. Additionally, such moves are more likely to have unintended consequences or even backfire on the stated desire to create domestic jobs.” (emphasis added mine)

Yet, this may serve as a casus belli for a global trade war which requires our vigilance. So reregulation seems to be inspiring more of “risk aversion” than containing it-again another unintended consequence.

Delevering Isn’t Equal

However where we depart with Mr. Gross’ outlook is on the premise of delevering.

The notion of delevering implies of a world, including the Philippines, equally swamped by an ocean of debt.

In the Philippines, it is the public sector and NOT the private sector (household or corporate) that has significant debt exposure. But the public sector has been “delevering” since the Asian Crisis in 1997. So this observation, while true in many or most of the OECD economies, is far from being accurate yet from many of the Emerging Market’s standpoint. I say yet because present policies could drive the public to indulge in a debt spree.

Moreover, the notion of delevering puts into the prism that the world revolves around the US only. Similar to the defective idea that “decoupling is a myth”, recent events have disproved much of this misplaced conventional academic expectations as the world seems to be recovering earlier than the US, see charts in Investing "Ins" and "Outs": US led Global Economic Recovery and Decoupling a "Myth". Thereby, deglobalization and reregulation will likely accentuate the decoupling process as previously discussed in Will Deglobalization Lead To Decoupling?.

In the layman’s perspective, globalization can be interpreted as a process of world integration via the trade, investments, migration, and financial channels. A more globalized world should imply of more “recoupling”. On the other hand, deglobalization does the opposite.

Further, while many debt overstretched private sector in the OECD economies have indeed been “delevering”, governments have been substituting these losses with its own massive debt expansion binge see figure 1.

Figure 1: Economist: Pumping It Up

Savings rich and foreign currency surplus laden Asian nations have commodious room to undertake lavish fiscal stimulus.

If the policy options for Asian economies has been to choose between stashing US dollars at the cost of risking currency losses from a devaluing US dollar and spending these domestically then it would appear that Asia has opted for a “politically favorable” profligate public spending option-that’s because they can afford it!

US And China Pursues Diametric Policy Directions

Yet while many economists ascribed the recent the recent “outperformance” to these government activities, our take is much more of the “unseen”- aggregate colossal liquidity, the inherent low systemic leverage in the region, high savings, greater thrust towards regional integration in spite of the financial crisis, the aftershock of “Posttraumatic Shock Distress (PTSD)” effects and creative destruction have been the major driving force around Asia’s resurgence.

For instance, while the US seems to be antagonizing its closest and friendliest neighbor and ally Canada with “closed door” policies, China, on the other hand, has been aggressively adapting “open door” policies with erstwhile archrival, Taiwan.

Recently both key Asian countries announced more transportation linkages via new shipping routes, and the expansion of direct airway routes, aside from the easing of once prohibited investments where according to the Time magazine, ``For the first time, mainland investments would be allowed in a broad range of Taiwan manufacturing and services companies. China Mobile, the mainland's largest cellular-service provider, has already agreed to invest about $530 million in Taiwan's Far EasTone Telecommunications, although the landmark deal has not been approved by Taipei.”

Tax incentives have also been extended by China to the Taiwanese investors (Bloomberg).

Moreover, such collaboration hasn’t been confined to the economic plane but also extends to the world of politics, again from the Times Magazine, ``In perhaps the most hopeful sign of change, China recently relaxed its longstanding opposition to Taiwan's inclusion in international organizations. After being rejected since 1997, Taiwan was finally invited this year to be an observer at the World Health Assembly, the governing body of the World Health Organization — the first time it has participated in a U.N.-related forum since Taiwan lost its U.N. seat to China in 1971.”

In short, the underlying trend of policies undertaken by the US and China have been running on a diametric path. So if incentives drive human action, seen from the vastly divergent aggregate policies undertaken, then obviously the expected returns, considering the risks variables, should likewise be different. This view runs in contrast to mainstream ideology, who does not believe in incentives but on the inexplicable effervescent impulses of “animal spirits”.

So yes, the atmosphere where “heightened risk aversion”, a “distrust of conventional investment model portfolios” and “greater emphasis on surviving as opposed to thriving” most probably is applicable to the defunct US centric financial paradigm and the fast evolving politicization of the US economy which seemingly has become increasingly hostile to its business environment.

But we suspect that this path shouldn’t necessarily apply to Asia or to emerging markets unless a global trade war erupts.

Delevering In A World That Rewards Leveraging, Profiting Around Regulations

Yet delevering should be seen in the “right” context and not from a generalized point of view. We shouldn’t interpret some trees as representative of the forest. This is the Achilles’ heel of macroeconomists whose inclination is to oversimplify events.

Specifically, delevering is a market process being experienced by the private sector (mostly the housing and financial industry) in key OECD economies. This has not been valid relative to its counterparts for most of the Asian or Emerging Market economies-especially in the Philippines.

Aside from the thrust to replace private delevering with government leveraging, the collective policy thrusts by global governments has been to resurrect the status quo ante of systemic leveraging by imposing aggregate policies (Zero bound interest rates, Quantitative Easing, etc.) that encourage the “buy, speculate and spend” incentives, which effectively penalizes savers.

So systemic delevering isn’t likely to happen yet unless a global government bond bubble goes ka-boom which isn’t distant from our perspective.

Incidentally, Mr. Gross has been staunchly supportive of the same unsustainable serial bubble blowing interventionist policies. Mr. Gross expects the US Federal Reserve to buy more long term treasuries in order to keep mortgage rates down. However, we can’t say as to how long artificial rates can be maintained by the US Federal Reserve’s manipulation and distortion of the marketplace, considering the huge amount needed to “fix” the price of the treasury markets. But we understand that interest rates in the US are ultimately headed higher, and Mr. Gross thinks so too as revealed by actions-PIMCO has reportedly been selling US Treasuries.

It would appear that world’s bond king’s alpha (extra or premium returns) has been to arbitrage from regulations and maybe that’s why his strong support for interventionist policies.

Deglobalization and Economic Fascism

From a monetary policy induced globalization boom to a deglobalization bust, the global political economy is ostensibly undergoing a dramatic transformation.

According to the Economist (bold emphasis mine), ``THE economic meltdown has popularised a new term: deglobalisation. The process of the global integration of goods, capital and jobs is in trouble. The IMF predicts global growth of 0.5% this year, the worst in 60 years. World trade has plunged. Foreign direct investment, a common route to transfer skills and technology from rich to poor countries, fell by 21% in 2008 to $1.4 trillion and will contract by another 12-15% this year. Unemployment is expected to rise by 30m from 2007 levels by the end of this year. A poll taken in the last two months of 2008 by Edelman for the World Economic Forum found that 62% of repondents in 20 countries said they trusted companies less, with a majority keen on more state regulation.”

This trend towards more government, higher taxes and increased regulation or socialism is based on the belief of quick fixes. People are now invoking for a sacrifice of civil liberties for economic "salvation" based on serfdom.

And this had been foretold by Ludwig von Mises (Human Action), ``The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse. In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.”

This addiction to inflation is also equivalent to embracing economic fascism.

Professor Gary North in Economic Fascism And The Bailout Economy elaborates (bold highlight mine)…

``Liberals love to call conservatives fascists. The problem is, the liberals are right. Of course, well-informed conservatives like to call liberals fascists, and they are correct, too. Everyone who believes in the efficiency of the so-called government-business alliance is a fascist.

``The fascist State was always an attempt to control private industry by means of inflation, taxation, and regulation. Fascism was always a system of keeping the big boys alive and happy at the expense of the taxpayers. Of course, the faces changed. The system was always one gigantic system of cartels, regulation, and fiat money.

``The modern economic system is one gigantic interlocking system of promised bailouts, beginning with Social Security. In commerce, it is a system designed to keep large producers protected from consumers…

But will a more socialistic form of government succeed in restoring economic growth?

``This economy will revive, but it will revive a new basis. It is no longer possible for someone who understands Austrian School economics to look at this economy as anything remotely resembling a free-market economy. At the very core of the free-market economy, as Mises said in 1912, is the monetary system. That system is now completely and openly run by a cartel that is now trapped by the Federal government. The Federal Reserve System is soon going to have to bail out the Federal government. The Federal government is bailing out the commercial banks, and if the Federal government cannot bail out the banks, the Federal Reserve has got to do it directly. In either case, the banks are busted…

``These scholars agree: we are seeing the bankruptcy of every Western government that has made too many big promises to too many voters regarding free healthcare and guaranteed retirement. All of it will collapse. The tatters of the promises will point to the tatters of those who made the promises -- politicians -- and the tatters of the system that supposedly was going to guarantee delivery of the promises.

``The academics still believe in the healing power of the State. The voters still believe this, too. But voters are catching on more rapidly than the academics that the State is running out of wiggle room. Millions of voters have figured out that they are going to get stiffed. They don't know what to do about it, but at least they understand that they really are going to get stiffed…

Yes, economic transformation will occur. However, economic realities will compel a reawakening of the people mesmerized by the delusion of prosperity based on policy based manipulation.

And how will this happen?

``We will have another round or two of centralized government, and probably more than one or two rounds of increased monetary expansion. But what we will not have is a restoration of anything resembling the financial world that existed prior to September 2008. That world is gone. The insiders will not get it back. They may get an imitation of it, based on fiat money that does not buy very much, but they will not see the world of 2007 restored. The power base of the modern fascist State is unraveling rapidly."

According to von Mises, ``The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”

In other words, repeated attempts to manipulate-the grandest experiment of all time-the fractional reserve paper money system will lead to a government debt bubble which may ultimately implode at the cost of the world’s monetary system.

Professor North’s suggested course of action…

``This is why it is important for you to preserve your assets by not believing the official assurances. Put your money where the experts tell you should not put your money. You should take your money out of those segments of the economy which the experts say you should put your money, and will soon boom. They have ignored the fact that the stock market has been a losing case since March of 2000. They would not admit it then; they will not admit it now. Anybody who bought and held a portfolio of indexed American stocks in March of 2000 has lost well over half of his money. Investors will learn, even though academic economists will not.”

The last word from von Mises, ``It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”