A friend of ours recently sent me my first ever 6 page text message. In it, he was describing a conversation that he'd been wrestling with. Rather than summarize it, I think it would be best to put it up in it entirety so that the conversation can be correctly formed.
From the Philosophical Rail Defender (PrD):
I find myself asking the same question over and over. If globalization was the agreed upon mechanism to lead the undeveloped nations of the world forward and capital is finite, doesn't such forward progress require the developed nations of the world to give up a portion of their piece of the resource pie?
More importantly, depending upon your answer, I'm also curious as to why the "richest", "most developed" nations are also those with the most debt (both public and private)? And, in the event of a large scale shift of resources between sovereigns, what would one expect to happen to the cash flow of said nations' debentures?
I eagerly await your response. I suspect that the connotations our society has attached to "globalization" will present you with a unique challenge to weigh the working pieces of the process against the stratified public opinion of the subject. Will you be called a pragmatist or a protectionist, a capitalist or a fascist? I suppose it depends on how many people it reaches.
As these questions filtered in {through 6 text messages} I tried to identify the thrust of his real questions. I firmly believe that in order to formulate an answer, you need to know what is being asked. Though I have great respect the art of debate, I'll be the first to tell you that it isn't a defining factor in who I am. {The situation changes only slightly when I'm trying to convince you of a trade idea. However, I am surrounded by some individuals that have often put my intellectual prowess to shame. So in a brazen attempt to harness their collective genius, I asked my colleague, Mr. Practical Thinker, to expound on his views as the pertain to PrD's question(s). His response {as I would have predicted} is nothing short of exquisite.
From the pen of Mr. Practical Thinker:
Those are some serious questions to be sure. So much so, I've had to break them down to their elements in an attempt to answer. To begin, I'm not so sure there's a global consensus on how to move the undeveloped nations forward. I remember a fun factoid in the CFA curriculum (sorry no citation) about emerging markets and the global balance of GDP. We all know global GDP should grow significantly in the next 30-50 years but the tiny little secret no one wants to admit is the vast majority of that growth will be attributed to the strengthening currencies of those emerging markets. If you've grabbed a newspaper lately, you'll more than likely recognize that currency issues are grabbing the headlines almost everyday. Brazil's Finance Minister thinks we're at war over them! Japan, South Korea, Taiwan, Switzerland, the UK, the EU, and the US have all intervened in their currency markets explicitly or implicitly (QE is a stealth intervention in my book and buying member sovereigns isn't behavior for sainthood either). China's currency policy is fodder for the front page daily. Even if they are cheating (read: artificially weak yuan), they're sure as hell treating it like war.
Secondly, I'm not sure capital is finite. Even in the context of the Austrian gold standard, there's still a mechanism for capital formation through gold discovery. Fiat systems lack a considerable morality comparatively and capital is still up for a proper definition (tongue firmly in cheek).
So do we need to give up some of the resource pie? If the Chinese are going to play like that, we do. Global wage arbitrage has sure been a loser in developed countries and is getting difficult to swallow politically. Without aggregate demand reallocation in emerging markets, it will not get better any time soon.
Why do developed nations have the most debt? I'm twisted between the chicken or the egg axiom and cultural progression on that one. What came first, big buildings or big loans? Probably the legal construct to secure property and intellectual rights and the sacrosanct structure of corporate limited liability. Once those are in place, a responsible banking culture should grow out of diligent risk management. Check India for horror stories on what happens if those events happen out of order.
Lastly, how will a large scale shift of resources between sovereigns affect cash flows? Depends on the dynamics of the sovereign in question. If it was a developed economy, hopefully Say's Law would take care of them. If the country was mired in debt (the leftovers of credit, a once valuable resource laid waste) and couldn't pull the appropriate levers (read above) to squeak out alive, then just pay attention to Ireland as the ending to that tragedy is being written.
Mr. Practical Thinker
Suffice to say, his deconstruction of the questions led to his ability to reconstruct an answer. Hopefully, that will satisfy PrD's questions. I'll close with this: Self awareness is paramount to crafting great decisions. In the same token I find it refreshing that Mr. PT has stayed out of the altruistic box while adding dialog to the attempted repair of global economic policy.
~LH
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