Signs and Symptoms of a need to De-globalise

The most recent event of Credit Swisse, SVB and bank runs that happened are symptoms of possible de-globalisation and the incentive for a rise of regionalisation.

In the following year, when Donald Trump or Republicans win the next US presidential election, coupled with the expected Recession, most individuals shall confuse the soon to materialise devaluation of US dollar with the de-dollarisation effects.

In this article:

Recession;
De-globalisation;
Cyclical Currency depreciation

Signs and Symptoms of a need to De-globalise — Image: UNSPLASH/Maksym Kaharlytskyi

Recession

When the high Interest rates environment starts actually having the desired effect in the world's economy and central banks decide to finally cut rates, investors shall put back their "risk on" hat and buy more of other countries currency in order to do more business and avoid the potential recession on US.

The region is in a bad position as its inflation shall be stickier than what most people expect. As soon as the FED starts cutting rates, the US Dollar shall depreciate and thus creating more inflationary tendencies in the region. Therefore, more flows - in and out - of people, goods and money at BRICS nations shall increase. Thereby giving BRICS nations the leverage needed to further expediate talks and plans for their "BRICS currency".

I have previously mentioned, there is a higher probability (according to data) for a US recession when a Republican is President. This is in part due to them being more conservative and therefore implementers of policies which has higher probability of creating tensions between nations, thus getting in the way of expansionary policies.

De-globalisation

Free trade and growing international dependency are decreasing. With any big economic and social changes has positive and negative effects for each country. Hence a potential reversal then becomes a major issue.

One of most influentials investors, Larry Fink of Blackrock and Howard Marks of Oaktree said that these geopolitical changes may be permanently changing the world´s order.

Geopolitics now are at the front of everyone’s data before investing. With Europe's reliance of Russia's oil and Western outsourcing of chips as a paragon of red flag. Larry Fink stated that these events made governments think about how to increase the creation of imported products inside their country.

After WW2, cheap labour and modern manufacturing techniques made Japan and other Asian countries a major manufacturing powerhouse. This led to American countries exporting jobs abroad which led to increased competitiveness for American goods. This helped keep inflation low in US (PCE) as Globalisation leads job to be exported to places where labour is cheaper.

Globalisation made international trade increase and led policy makers to worry about supply-chain resilience - which the most recent Pandemic brought it further to the limelight.

World trade have been growing slower than GDP. Thus, the slowing of globalisation has become intertwined with talks of supply chain resilience. The concern stems from fears of an environment of high inflation, which leads to high Interest and then shortage of goods, including other various reasons.

According to recent paper of Pinelopi Goldberg (of Yale University) and Tristan Reed (of World Bank)they described three phases of slowdown in globalisation that has occurred since the financial crisis:

The 1st phase, started around 2015 with concerns about the impact of import competition from low-wage countries, especially China, on the labour market, and the impact of refugee flows, primarily in Europe.

This phase is marked in Europe by Brexit and in the US and China by increasing tariffs on one another.

They say that the economic effects of this phase were meaningful but not sufficient to reverse decades old globalisation trends.

The 2nd phase, according to Goldberg and Reed, played out during the pandemic when new arguments against international trade began to emerge, these were driven by temporary shortages of PPE (like facemasks) and other items that could be blamed on fragile global supply chains. There was public outcry around the world for export bans on certain items that were deemed critical in the fight against covid.

The authors argued that if anything trade "increased" economies resilience during the pandemic but they argue that the extensive coverage of some of the difficulties by the press contributed to the villainisation of globalisation and laid the groundwork for phase 3.

The 3rd phrase, according to the paper, began with the Russian´s invasion of Ukraine last year, and provided possibly the strongest argument of all for rethinking globalisation: concerns about national security. Europe's reliance on Russia for energy, exposed a real weakness. The example provided by Europe's reliance on Russia for a critical commodity led to strong policy actions by the US that included sweeping export restrictions in the semiconductor sector targeting China. Goldberg and Reed say that these developments can be plausibly considered the markers of a new era in international trade and globalisation.

Cyclical Currency depreciation

As mentioned above, In the following year, when Donald Trump or Republicans win the next US presidential election, coupled with the expected Recession, most individuals shall confuse the soon to materialise devaluation of US dollar with the de-dollarisation effects.

This is due to two main forces:

1- Investors selling their USD to buy other currencies in order to hedge the cyclical depreciation of the market;

2- The increased discussion of de-globalisation process. Some countries are starting to focus more on regionalisation than globalisation - the recent war of Russia and Ukraine, Pandemic and Taiwan-USA-China conflict over semiconductors are highlighting that a full/complete interdependency is also a risk.

When the central bankers start cutting back on rates, the world´s economy is expected to pick up, international trade is also expected to pick up, flow of people, goods and money likewise, hence creating a perfect opportunity for BRICS nation and wannabes to start asserting their dominance in their respective field. From there on, transactions involving the conversion of EUR, JPY and Dollar to other currencies shall also pick up and the share of international trade on US dollar shall further decrease -Paving the way for a better diversification of risk which shall not leave all countries at the mercy of FED.

The topic on everyone’s conversation nowadays regards to the US debt ceiling, this also highlights the issue of every country having to wait with anxiety on whether the debt ceiling shall be lifted or not – as majority of countries debt are in US dollar denominated assets.

Not raising the debt ceiling shall bring about an enormous chaos to the financial market. In all, I do believe that when something is not right or not working to the benefit of which it was intentionally created for, then it must be replaced or reviewed.

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