Sunday, June 29, 2008

We're all in this together

It used to be, if US stocks were down, those in Asia were up. Vice-versa, if Asia was down, the US was up. Now, seemingly in sympathy of the US downturn, we see reds in stock markets all over the world. Now it seems, when America sneezes, practically the whole world gets a cold.

More than ever, nations on earth are linked together by globalization. And now more than ever, many nations are dependent on a strong US economy. With the US economy in recession, the resulting slowdown in US demand for world products is causing a recession in other parts of the world.

But more than this, there’s another reason for the global slowdown.


Again because of globalization, many developing countries are building domestic infrastructure to catch up with the standards of the developed countries. And with development came rising incomes, and with it, rising demand for goods.

With more people demanding more products, but with supply of the basic commodities to make these products still at the same level, inflation has gone up. Because demand for is now global, everybody all over the world is now affected by the resulting inflation.

With globalization, everyone is now inter-linked. The merits, therefore, of diversifying portfolio investments across the globe has been diminished. Everybody is now a customer of one another. A decline in a major trading bloc/country will result in a downturn in another. On a bright note though, this should mean that a major pick-up in any one major trading corner of the globe can raise the others.

In the meantime, though, with global inflation at unsupportable levels, demand destruction will have to be global as well. That should be good though.

With everybody sharing the decline, no one country should have to bear the brunt of stagflation. With demand slowing down across the globe, inflation will be tamed sooner.

That should mean, with the correct and coordinated policy moves across the world, a global turnaround could come much sooner.

We just have to make sure global inflation does not give way to global depression. Again, correct and coordinated global policy moves will be key. Another key component of a recovery will be a sharp increase in commodity supply, coupled with milder but more manageable growth world-wide.

Maybe then, we will start seeing stock prices world-wide turn green again. Just don’t expect astronomical price appreciation again.

Well, maybe with stocks of commodity producers….

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