Friday, May 28, 2010

Gold And Deglobalization

Deglobalization as a theme doesn't make for a great fit with gold, given the metal's ties to the libertarian subculture. Globalization, in the sense of expanding global markets, fits well with libertarians' worldview. On the other hand, the deglobalization position has overtones of "Small Is Beautiful," localism, greenism, and skepticism about free (if managed) international trade. Jeffrey Rubin has worked deglobalization into his own work, but he's an oil-watcher. Deglobalization does fit in with the Peak Oil hypothesis, as the former is a foreseeable consequence of the latter.

Nevertheless, Martin Hutchinson has made a case in Money Morning that deglobalization will be good for gold.

He begins by discussing a prior period of deglobalization, after World War 1, and continues by saying that another stretch is before us:
In the 1990s, most countries were open to world trade, with free-price mechanisms and relatively low tariffs. Public and private equity investments in the "emerging markets" soared in popularity, in spite of the "Asian contagion" and Russian financial crises of 1997-98.

These developments were justified by the formerly socialist intellectuals as a new, moderate "Washington consensus," under which governments retained a role in moderating the forces of the market. The Washington consensus tended to fall apart under stress, as it did in Argentina, because of the excessive government spending to which it led. But it didn't hinder globalization in the form of free trade and free movement of capital.

With the 2008 financial-system crash, the "Washington consensus" fell apart. The intellectuals had been getting very bored with free markets and had moved on to "global warming" environmentalism. They seized the opportunity to blame free markets for the crash. That change in philosophy allowed protectionist forces in most countries to raise barriers in the form of subsidies and "anti-dumping" actions....

[Should deglobalization continue,] many of the economic advances that globalization has brought to the United States - and the world as a whole - will be reversed. The world economy will have to adapt to a much lower level of efficiency, with higher manufacturing costs and less outsourcing. Both inflation and unemployment will be high. The result: We'll be looking at a decade of inflationary recession, with declining living standards.

We have already traveled a considerable distance toward de-globalization and should work towards reversing this trend. We should keep trade barriers down and international capital markets open. As protection against the possibility that governments and markets will fail in this attempt, investors should look in one direction - at gold.

He has his point, but deglobalization tends to be associated with deflation moreso than inflation. At the very least, deflation accelerates deglobalization because autarchy looks appealing in a threatening world.

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