In his latest note to clients, Morgan Stanley head of global economics Joachim Fels relays an idea he says has him increasingly worried these days, even though, in his words, it is “
no more than a tentative thesis that still needs to be fleshed out and checked for robustness.”
“In short, I wonder whether just as 1913 marked the end of first Golden Age of globalisation that had begun in 1870, 2013 may mark the end of our age of globalisation, which accelerated since the 1980s and 1990s after many emerging markets opened up to international trade and capital flows,” says Fels. “To be sure, I’m not predicting the world wars, mass sufferings and economic depressions of the three dark decades following 1913, but I do worry about a creeping trend towards a de-globalisation of economic activity and capital flows.”
Fels points to the Federal Reserve’s easy-money policies following the financial crisis, which caused investors to scramble into investments in emerging markets, a trend that is now reversing.
The economist envisions problems down the road as a result, as he explains in his note (emphasis added):
Why worry now if even the Great Financial Crisis of 2008 didn’t result in a de-globalisation of economic activity and financial markets? Well, neither did the Panic of 1907 on Wall Street, which preceded the final hurrah of the Golden Age of globalisation and paved the way for the creation of the Federal Reserve in, yes, 1913. Following the 2008 crisis, central banks and governments around the world opened the floodgates to prevent a depression (and rightly so) and fuelled a powerful rebound in economic growth, global trade, asset markets and capital flows. Yet, one unintended consequence of QE and ZIRP was a rush of liquidity into emerging markets, which offered a seemingly successful growth model and thus higher expected returns.
Five years on, the EM growth model looks severely challenged, as Manoj Pradhan and I already pointed out more than a year ago. Many companies in the old industrialised countries are repatriating production that they sent offshore during the globalisation frenzy, and investors who burned their fingers in the quest for higher returns in EM are reconsidering their decision to globalise their portfolios. A localisation or renationalisation of investment has already taken place in euro area financial markets in response to the euro area debt crisis. Could we now see a similar move globally? I hope not, but I wouldn’t rule it out.
Needless to say, a de-globalisation of economic activity and financial markets would have dire economic consequences for the global economy and markets overall, but would also redistribute wealth and create a lot of losers and winners, in my view. And large redistributions of wealth create conflicts within societies and between countries. This is what I really worry about. Surely our societies and governments have learned the lessons of history, you may say. The long-term optimist in me believes they have. But then again, back in 1913 at the peak of the Golden Age of globalisation, nobody had a sense of what would unfold.
“I’ll stop here before I get carried away,” concludes Fels. “After all, this is a tentative thesis that deserves more deliberation.”
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