Wednesday, 10 November 2010

Macro Level Trends - Globalisation – 11.11.11: Poignant Remembrance in 2010

In a very different character to the usual commentary and essays, the following words are an unashamed re-generation and modification of the comments made in this blog at this important time 2 years ago.

At that time investment-auto-motives recognised that the severe fracture of the western economic model from the consequences of the financial crisis would put severe strain on international relations between west and east hemispheres and those north and south, but potentially the greatest stemming from US – Chinese relations. The current subtle currency wars were predicted as a latter-day result, and unfortunately this has come to be as regions seek to both protect themselves and best place themselves in this new and fragile era

Recent days have witnessed western premieres seek to both placate eastern concerns about future political movements and the desire to be seen to strengthen trade relations; most prominently in the guise of the UK's Prime Minister Cameron visiting China and the US's President Obama in India and environs.

These visits are of course symbolic by their timeliness with remembrance of historic disputes that have manifested beyond purely financial wars into the atrocity of physical warfare.

It is at this juncture in the calendar that the UK remembers both its own fallen and those of allies and indeed foes. 11am on 11th day of the 11th month marks Remembrance with accompanying day and weekend church services eulogising the 92nd anniversary since the end of WW1.

Of course, many nations across the face of the globe hold similar services both now and at varying times throughout the year. Here in the UK, from the humble village church to the gravitas of the Cenotaph in Whitehall. In Germany prayers will be said for the re-burial of those lost during WW2 in Minsk, now located in Belarus, and symbolising a pertinent element of Germany's efforts to build an expanding and re-stablised EU to avoid regional conflict. And some months ago on 6th August Japan physically and spiritually gathered in Hiroshima's Peace Memorial Park

Yet, perhaps not for half a century have such sentiments had such a meaningful voice, given the level of political friction that exist both regionally and internationally.

The end of WW1 was not “the great war to end all wars”, indeed the very meaning of 'armistice' indicates 'truce' not finale, a sad fact highlighted only a generation later by WW2. It was that conflict that in turn led to the major super-powers of the day to create the Bretton Woods agreement that would stabilise the fundamentals of global trade. A major landmark, given that it was the perception of unfair inter-regional trade practices that has been the perennial problem behind a long history of international conflict. Similar efforts exist today with talk of moving beyond Basel 3 toward something that offers a greater substance-based rational for currency value identification. This being much of the nation-buying led consideration for gold, yet with additional exploration of expansion of ADRs (or similar) or IMF enabled SDRs (or similar) as new internationally-prescribed stabalisation instruments.

Ninety-two years on from that philosophical and literal spark in the Balkans that set the first of a billion bullets flying, the leaders of the G20 nations undoubtedly made initial progress in 'saving the world' back in 2008 with use of multi-lateral stimulus action. But the S.Korean summit this weekend will illustrate - beneath the surface - the new dis-chord. One that has emerged largely between a still spendthrift US and much more conservative tendencies consistently led by Germany's Merkel (much to her credit) and now ajoined by the policy-decisions of the UK, South Africa and elsewhere.

Thus it is seen that the creation of what was originally seen to be a long-term, far-reaching and transformative multi-lateral accord of the so-called 'Spirit of Bretton Woods 2' is seen at this juncture to be viewed as over-zealous. The level of rebound in many G20 member economies demonstrate the myriad of differences each region and nation faces: giving real demarkations of 'strong' versus 'weak'. Thus G20 international health discrepancies obviously split opinion, both between the lead EU countries and the US, but also within a fractured EU; demonstrating that local and regional issues in the relative 'micro' vein take precedence over a now past fear of global melt-down that previously held in the 'macro' vein.

Undeniably, different regions have suffered at different rates and therefore will be far less inclined to a radical re-alignment of trade policy-making set against an increasingly out-moded global policy mandate.

So whilst there was initial 2008 agreement for international fiscal co-ordination of stimulus packages so that each nation or region can assist themselves - ranging from the US's $700bn TARP to talk of an EU Fund to Japan's $51bn effort to China's $589bn by the CCP – the idea of an all-pervasive, completely global agreement has unsurprisingly now looks less appealing; even if re-tabled by America's new drip-fed $600bn QE2 programme, set for mid-2011.

The rest of the world sees it as a slippery-slope given their own – perhaps more manageable – circumstances, and so don't agree with its use. Moreover, other countries probably see it as a pre-curser to what would could inevitably be a global currency de-valuation war in which nobody ultimately wins. It would be one which goes far beyond today's 'fair-game' internal efforts of industry generated cost-base re-alignment (ie structural reform) to improve national global competitiveness.

Historical case studies show that such heavy actions only drive international ill-will and give local support to importation tariff-setting which in turn damages relations and the economically rational global-flow of capability-led free-trade

As stated 2 years ago, there is no singularly similar action plan that each individual national economy can or should undertake, each effort although globally co-ordinated through increasingly aligned open-gates trade-policies must be appropriate to domestic and foreign trade needs and growth plans. This basic premis is obvious given the 'differing states of differing states'. But exactly how this is achieved efficiently and permanently will be a major headache as both the US and China experience such differing internal growth patterns – even if that gap is slowly and only nominally closing

Given the size of the global financial fall-out there have been calls for increased regional and international regulation, and the push to align US accounting standards from GAAP to IFRS will undoubtedly be used as an argument co-coalesce the 21 or so central bank models currently in existence.

However, utilising the GAAP to IFRS vehicle to successfully promote global fiscal policy alignment has thus far been a problem given the negative effect it previously had on US standard results. However, multi-national blue-chips are increasingly moving to offer both accounting standards as an increasing level of income is derived from the rest of the world. Thus with its income stream centre-of-gravity moving eastwards, so its accounting principles should rightly be re-orientated around the standards of the income sources.

Such practices undoubtedly help calm investor waters by demonstrating a more level manner by which to compare the US against Europe, the Middle-East, Asia and South America.

This does create short to medium-term pain for the US economy – and should be undertaken whilst Wall St stays buoyed - but ultimately could strengthen its foothold against the ever more internationally accepted Euro (and possible petro-Euro), and even the broached idea of a Yuan accepted counterpart (and indeed the idea of petro-Yuan denomination if Ems saw it in their favour as was the historical case with the US petro-Dollar). But an accounting alignment especially useful regards creating an extended period for attracting foreign direct investment (FDI) into the US.

At this poignant and prescient time, having seen the well-founded G20 differences at the Korean summit, all nations must continue to remember the lessons drawn from the first half of the 20th century, and act responsibly.

As the spectre of terrorism hopefully wanes (even if the odd blip appears as seen recently) and the topic of climate change becomes the ethereal yet powerful new enemy for all, we will hopefully witness a new age of agreement in both the global fiscal framework of currency valuation aswell as better founded domestic government policy that provides for a global mutuality, Something that does not constrain the independence that the newly powerful 'emerged' BRIC+ nations demand.

To not achieve this will dangerously put the world back 96 years or more, to revisit a time of sullied, anemic economies that creates insularity and engenders nationalism, xenophobia and possibly neo-fascist international moves motivated by a sense of economic loss that was previously seen as 'rightfully' theirs.

To conclude, whilst we remember the past and those who suffered, we should not and cannot sleep-walk back toward the dark-past if the world's peoples are to win as a whole.

We must see the individual and national Chinaman, American, Arabian, European, African and Asian as worthy capability-led trading partners, not economic threats. And arguably for the most part regards an arguably over-indulged west – to be psychologically re-generated by the dynamicism of the east giving a new competitive force for international good.