The following editorial was published in Price Perceptions issue #1190 on March 24, 2001
Remember in the early Nineties when President Bush worked to sell Americans on the concept of free trade? The idea was even endorsed by his presidential opponent, Bill Clinton. Another presidential candidate, Ross Perot, was against globalization saying: The sucking sound you will hear will be American jobs moving to Mexico. There was heated debate on the issue for years. Some economists believed it would raise living standards throughout the world. Others thought it would allow big corporations to cross borders at will and give them too much power over government and national economies. As it turns out, all were right to some degree...
The Sucking Sound: The US did lose jobs to Mexico and Asia. But, American workers found new jobs in the booming service economy. Although many were forced to take pay cuts, living standards were maintained by borrowing. Easy credit through home equity loans, car leasing, and fierce credit card competition allowed many to maintain, or improve on, previous living standards.
Living Standards: Asia, Latin America, India, and China benefitted most. Everything from cars, electronics, and tennis shoes were produced with cheap labor and exported throughout the world. America loved it. The price of computers, TVs, clothing, and other items actually declined in the Nineties as a result of out sourcing production to foreign countries.
In addition, low priced imports helped to hold inflation down. The Federal Reserve expanded money supply at will, with little fear of inflation. The historic money supply expansion lifted stock prices and provided seed capital for thousands of new start up companies. The rising stock market also produced thousands of millionaires and they bought bigger homes, luxury cars, and supported new businesses such as personal shoppers and pooper-scooper service for home.
However, as living standards improved in Asia, demand for food increased. Grain prices skyrocketed to record highs in the mid-Nineties as food demand appeared insatiable. The problem was solved quickly. Congress passed Freedom to Farm legislation and acreage was brought into production that had been idle for decades. Large corporations also helped ease the shortage by building processing plants, storage, and shipping facilities in undeveloped nations, such as Brazil.
Corporate Power: Another unexpected problem appeared in the late Nineties. Developing nations, unaccustomed to booming times, found that poor loan standards had been applied in their banking system. Huge bailouts were required. However, the International Monetary Fund came to the rescue with billions of surplus US dollars. They loaned governments money to support depreciating currencies and at the same time, found large corporations willing to buy distressed loans or take over ailing industries.
Low interest rates and a booming stock market made it possible for corporations to consolidate. Large banks bought out smaller ones, leading to standardization and greater efficiency. They also bought insurance companies and brokerage firms, making it convenient for consumers to transact all financial affairs at one location.
Food processors also consolidated. Rather than thousands of independent poultry producers supplying inconsistent product to consumers, there are now three that grow, process, and package nearly all of Americas franchise and grocery store chicken. The same principles were applied to the packing industry. There are now three large packers that slaughter nearly 80% of all cattle. The same consolidation is happening in the pork industry. Although consolidation has benefitted consumers with more consistent product at lower prices, it has reduced buying competition for farmers. Farmers now have only two or three outlets for their products and have been forced to accept lower prices. If it were not for government subsidies, many would now be bankrupt.
Globalization has benefitted America. It kept Americas inflation rate down by providing goods at lower prices. It allowed the Federal Reserve to pump the money supply at an unprecedented pace and hold interest rates at the lowest levels in decades. It provided capital for the stock market and made millions of Americans wealthy. It helped America enjoy the longest economic expansion in history. It helped to build modern industries in developing countries and raised living standards nearly everywhere.
However, globalization euphoria is beginning to wane. It has led to overcapacity. There are now too many chip makers, too many farmers, and nearly too much of everything. Competition is becoming fierce. Countries are devaluing currencies to make their products cheaper in the world market place. The Canadian dollar fell to a record low of 63 cents this week. The Australian dollar also fell to a record low of 49 cents. The yen is at two year lows and the Brazilian real is near historic lows. This has pushed the value of the dollar to near record heights, making US products uncompetitive in the world marketplace. Even huge corporations that benefitted by globalization are now beginning to suffer.
Whether or not this sequence of events leads to a worldwide recession is beyond the scope of this article. However, one thing is clear... commodity markets are suffering the backlash of globalization. If this trend continues, nations can be expected to erect trade barriers to protect their industries. This scenario is not too dissimilar to those that ended periods of rapid economic progress in the past.
TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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