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The Coming Deglobalization
Fifty years ago, Air Force One, recently renamed the “Spirit of ‘76” in honor of our nation’s pending bicentennial, landed at the Shanghai airport. When its door opened and President Richard Nixon walked out, it was the first time in 25 years that diplomatic relations had reopened between the two countries. The significance of Nixon’s trip went far beyond just normalizing relations however, as it marked the start of what would become a dramatic change in worldwide economic growth, wealth distribution, and importantly, help trigger decades of subdued inflation.
At that time, the U.S. stood alone as the wealthiest and most powerful economy in the world. And that prosperity resulted in rising manufacturing and labor costs, which in turn led to U.S. companies seeking cheaper manufacturing centers elsewhere in the world. China, with their lower cost of production, complemented by their managed currency exchange rate, became that spot. Subsequent advances in computing and telecommunication, improving global supply chains, generally low commodity prices, and relative worldwide peace and stability, all further helped to keep prices low and constrained for decades to the benefit of consumers everywhere.
But nothing lasts forever.
Today, China has become an economic and military superpower—with prosperity, rising wages, and higher manufacturing costs to go with it. Additionally, China’s geopolitical priorities have progressively diverged from those of the U.S.; and following the CV-19 lockdowns, global supply chains have become increasingly dysfunctional. Meanwhile, Europe is wrestling with how to reverse decades of built-up interdependence with Russia following the invasion of Ukraine. The breakdown of those trade relationships, and the likely long-duration sanctions that have been put in place, are triggering reshoring and alt-shoring considerations as the risk of interdependence rises. That reality, combined with years of excessive government spending, unprecedented quantitative easing, rising regulation, a shrinking labor force and a global evolution towards cleaner burning fuels, among other contributing factors, have collectively contributed to a new and rather profound inflationary cycle, one that will likely persist for many years, if not decades, to come.
While this is all an unpleasant reality, we believe that reality should be taken in stride. In part, this is because despite the global supply shocks of this moment, uncertainty usually resolves itself and severe trade diversions ultimately reset gradually. This is one of the reasons why today’s inflation readings are so elevated, but this phenomenon is unlikely to persist for long at the current feverish pace. In fact, many of the vexing supply chain disruptions are expected to dissipate as we distance ourselves from the pandemic. And should we be so fortunate as to see geopolitical tensions deescalate, those developments would also contribute to a relative calming of the waters.
But the combined impact of the multi-year global pandemic, rising geopolitical tensions, and significant commodity price shocks have clearly reset the world in a new direction. Even if society and the current economic environment normalizes, as we anticipate, we likely will find ourselves at the start of a new era that is manageable but less forgiving. Afterall, the world is a very different place than when President Nixon stepped onto that foreign tarmac fifty years ago. Today, many are acknowledging that the globalization pendulum appears to have swung too far—and that is a transformative realization worth planning for over the long horizon.
Articles and Commentary
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