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The New World Order

Posted by Larry Doyle on November 12, 2010 8:12 AM |

After three years of economic turmoil, why do I believe we are just now entering the second phase of a protracted economic drag here in the United States? While many economists and analysts would like to parse each and every bit of data that comes across the tape—that is what they do for a living—I believe we are better served to focus on the larger waves and currents at play across our global economic landscape. What do I see? A New World Order.

Do not think for a second that this reality does not have real long term implications for our economy and our people. I am not saying that there will not be enormous economic opportunities for individuals and businesses alike, but the skeletons in our American closet can only be hidden so long. Let’s navigate.

I am writing this commentary as I watch the recap of the most recent G-20 summit in Seoul, South Korea. What transpired? Just as President Obama was dealt a serving of repudiation at the mid-term elections on November 2nd, he similarly leaves the summit today rebuffed and with little accomplished. Leaders from the east, west, and south are looking askance at him and his policies, including those of his sidekick Ben Bernanke. (With that said, let’s forget the idea that the Federal Reserve is an independent entity. Our central bank is now nothing more than another politicized entity in an overly political town.)

The New World Order is one in which the United States has lost credibility on the political and economic stage. Really? Oh, yes.

In fact, that credibility went out the global economic window when Bernanke’s Fed decided to further experiment with our currency as a means of supporting our domestic economy. While we here at home may not feel the immediate impact of that experiment, emerging markets are feeling it quickly in a rapid rise in prices in a variety of products. China yesterday reported an increase in its consumer price index of 4.4%. Chinese markets fell over 5% overnight on fears that its central bank would raise rates in order to head off further inflationary pressures.

While nations in the eastern hemisphere are looking askance at Washington, our European friends to the west are not exactly embracing us. Nor are the economic leaders in South America. The Wall Street Journal captures all these sentiments this morning in writing, U.S. Wields Less Clout at Summit:

President Barack Obama headed toward the close of the Group of 20 summit, weakened by an anemic economic recovery and an election drubbing that have left world leaders questioning U.S. authority.

In private meetings with Mr. Obama on Thursday, Chinese President Hu Jintao resisted his pressure on currency revaluation. Mr. Obama also failed to secure a free-trade agreement with South Korea by a deadline he set for Thursday, a blow to a president who has pledged to double U.S. exports over the next five years.

The summit of the Group of 20 industrial and developing nations is expected to conclude with a communiqué that papers over differences on fiscal and monetary policy that had been exposed in the run-up to the gathering.

That will leave it to the G-20’s finance ministers to come up with some kind of mechanism to measure progress toward more balanced trade and flexible currency exchanges. Although the communiqué won’t include numerical targets, a senior U.S. administration official acknowledged the world will have to come up with some in the future. “You have to have numbers. This is economics,” he said. “And everybody recognizes that.”

Undersecretary of the Treasury Lael Brainerd said currency policy dominated a meeting between Messrs. Obama and Hu after the U.S. president raised it. Mr. Hu told his U.S. counterpart that China will push forward on revamping the yuan exchange-rate mechanism—a longtime goal of U.S. policy—but that such a move requires “a sound external environment” and can proceed only gradually, according to state television and a government spokesman.

Sound external environment? That statement right there is the proverbial middle finger salute to our President. Hu is telling Obama not to tell the Chinese what to do when the U.S. does not have its own economic house in order.

Mr. Obama found himself in the odd position of having to defend the U.S.’s independent central bank. He was also unable to quell concerns that the U.S. government is deliberately trying to weaken the dollar to boost exports.

Brazi’s President Luiz Inácio Lula da Silva said Thursday he would press Mr. Obama to explain the Fed’s move. President Lee demurred when asked about it. “I think that kind of question should be asked to me when President Obama is not standing right next to me,” Mr. Lee answered.

German Chancellor Angela Merkel and President Lee “stressed their common concern” over the U.S. Fed’s move in their bilateral meeting, a German official said.

One of the few leaders to come to Obama’s defense is Canadian Prime Minister Stephen Harper. In my opinion, Harper’s defense is nothing more than his realization that the Canadian economy is so closely aligned with the American economy. When capital flees the United States, that flight also negatively impacts Canada.

While the markets may continue to fluctuate and our economy will muddle along, regrettably I believe the United States will slowly but surely lose standing in the New World Order. Why? We have swept so many enormous structural issues under our rug for far too long. What issues? Education, especially urban education. Family structure or the lack thereof. Bloated municipal payrolls and accompanying future obligations and liabilities. What has festered as a result? Crony capitalism with no true statesmen. Shall I go on? I think not.

These issues are deeply embedded, and until they are acknowledged, addressed, and rectified, our nation will suffer and the New World Order will move forward.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Mike

    Powerful stuff Larry. Especially the last paragraph.

  • fred

    LD,

    New world order, try no world order. As global leaders ponder inflation they should be more worried about growth. What will other countries do without the purchasing power of the U.S. consumer or the loss in market share to U.S. companies in a devalued $US environment.

    Unless and until another ecomomy emerges with the size, vibrancy, and openness of U.S. markets, the world should show this country and our President more respect and cooperation.

    • fred

      LD,

      Right up there in terms of moral deficit, is the total lack of respect for our Institutions by the citizenry of this country and the world.

      Let me preface this comment by saying that our leaders have failed the stewardship given to them to protect the integrity of the Institutions that they represent and that the disrespect of the citizenry and the world has grown with each leadership failure.

      Institutional integrity has always been about the best interest of Main St not Wall St or big business; when did this all change?

      It is critical to this countries future that the respect of our Institutions, by its citizenry and global neighbors, be re-earned and protected at all cost.

      The leaders who have failed their stewardships must be cast out and those that have corrupted them be “shackled” and exposed to the public for ridicule.

      • Lou

        Fred,

        I agree. What happened? Politics became a ‘for profit’ business. What happened then? Corruption and moral decay became embedded.

        Now we pay.

  • divvytrader

    Dear Leader getting humiliated at G-20 as the developed world ridicules our bankrupt solutions to our economic problems ….no , Obama too stupid to know he’s being ridiculed so its our country that is ridiculed .

  • phil trupp

    A new world order is, in effect, civilization-in-progress, and the progress tends to be uneven and unpredictable. The New Deal represented a new order, a new economic calculus, with FDR branded a “socialist” and a “traitor to his class.” The end of WWII brought with it great upheaval, a restructuring of the world order, with the British Empire in ruin, Asia on its knees, and the U.S. rising for the first time as new center of economic and political power.

    The ill-fated Soviet Union attempted to change the calculus with its nuclear ambitions. Russia beat us into space with Sputnik. That blinking little satellite caused political leaders around the world to stop, look and listen, and also to postulate that Russia had taken an ascendant position over the West. Thus another “new world order” became the phony “cold war” in which the world chose sides and saw the rise of communist economies in Asia. Again, the world order shifted.

    We believed ourselves to be bullet-proof–until we were shown the truth in Korea, in Vietnam, and more lately in the Middle East, where we are spending blood and treasure like the despot imperialists of the ancient world.

    In this great stew of ever-changing and emerging world orders we have been up and we have been down. And yet we remain central players, perhaps flawed, perhaps temporarily weakened, perhaps threatened and shamed by the cruel bravado of those who can’t afford to live without us, i.e., China, Western Europe, and, yes, even the Middle East. In this spirit I take the criticism of the Obama administration as a healthy sign that our vitality must be restored: the world demands it!

    The current quasi-political anarchy and impotence in our body politic is a part of the ongoing evolutionary process. Our wounds are being exposed, often in bizarre fashion, but at least we are not hiding those wounds and pretending they don’t exist. Does anyone doubt we will heal those wounds?

    Nature has wonderful self-healing processes; those same elements are at work in the economy, even as we appear to stumble. In the world of realpolitik we are essential. Survival and growth are the imperatives, and I believe those elemental forces will soon (maybe not soon enough for some of us) reemerge and heal what ails us.

  • Beth

    we shall see about re-emerging and healing…
    or a mirror image of the Roman Empire and downfall… not that we could actually claim that title… ’empire’.

    ~Politics became a ‘for profit’ business~ as Lou stated…
    sorry state of affairs it is.

  • TeakWoodKite

    Interesting read LD.
    question;
    I have seen statement by
    PO-dude-TUS that he is worried about “deflation”.
    At the same time I see growing mention about inflation about inflation… the Chinese and Germans are upset with us printing the dollar just as fast as we can spend it.

    Finance Minister Wolfgang Schaeuble, 68, said last week that the U.S. Federal Reserve decision to buy $600 billion of government bonds undermined U.S. credibility and was “clueless.” There was no point, he said, in pumping money into the markets.

    Is this some sort of shell game where Bernanke is play with both sides of a double edged sword?

    And BO?
    “Going forward, no nation should assume that their path to prosperity is simply paved with exports to America,”
    HUH?
    http://www.reuters.com/article/idUSTRE6AC0BB20101113

    Can both occur at the same time in the same economic universe?

    • LD

      TWK,

      Great comments and questions. In fact, I do believe we will experience both inflation and deflation within our domestic economy. In fact, we already are. I raised this very topic in October 2009 here at Sense on Cents. I wrote,

      Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable?

      Inflation? Deflation? What is it going to be? As we continue to navigate the economic landscape, that question – perhaps more than any other – is of paramount concern. As I assess the economy and the markets, I envision the following:

      > Ongoing deflationary pressures in real estate. Foreclosures hit a record level based on a report this morning.

      > A likely increase in deflationary pressures from wages as unemployment continues to increase, hours worked do not pick up, and average hourly earnings are stagnant. How are corporations reporting earnings? Not from growth in top line revenue, but from cutting costs, including headcount.

      I firmly believe these two overriding forces most concern the Fed and the threat that the deflationary forces could grow if not counteracted. How does the Fed counteract these pressures? Keep the liquidity pump running via a 0-.25% Fed Funds rate and now increased speculation of perhaps more quantitative easing in the form of purchasing more mortgage-backed securities.

      What has been the result of all this liquidity running into the system? A significant decline in the value of our dollar. What does that create? Inflation. That’s good, right? A little inflation will provide some pricing power which supports our equity market. Not so fast.

      The inflation is not directly addressing the deflationary pressures in real estate and likely deflationary pressure in wages. The inflation is being generated primarily in commodities. What does that mean? Prices for food, gas, oil, and other raw material inputs will increase. As those prices increase, the cost of living in America will increase. Regrettably, that increase in cost of living will not be offset by an increase in wages.

      Thanks for the prompt. While our grand wizards are trying to craft the right potion here at home, those in emerging markets are largely feeling just the inflationary pressures and do not like it….they are voicing their dislike, distaste, and ultimate distrust of our leaders in the process.

      Hence, The New World Order.

      All the best to you.

      • fred

        LD,

        “Ask and you shall receive”. Awhile back I questioned whether Rick’s (over at Consumer Metric) methodoligy might be improved by utilizing global prices paid vs. just domestic.

        MIT has a great web site, the billion price project, which does just that http://bpp.mit.edu. Apparently all this liquidity being unleashed has not yet fanned cpi inflation (ex Argentina). If raw material costs are rising and cos are not yet passing along the increases, eventually profit margins will have to take a hit. Layoffs and debt refinancing can only take you so far!

        • LD

          Fred,

          Outsatnding. Nice job and thanks for sharing. Will add the link to the Financial Primers in the right sidebar here at Sense on Cents.

          • fred

            LD,

            Check out the price data at the MIT website on China. As you probably know, the big news that moved the markets on F was China cpi of 4.5%. The MIT site would lead you to believe that F reported info was old news.

            MIT reports China CPI now running aprox 3% y/y and most recently trending lower; going foreward things could change but for now China cpi looks managable to me. Any comments?

  • coe

    LD – Quite a sobering message, and in my opinion, one of your best…optimistically, I happen to believe that Phil is onto something central here as well…when you step back and/or rise up from the immediacy and visceral nature of the moment, history does provide some perspective. And yet, as also pointed out by a number of your other commentators, many of the above mentioned inflection points did not end well for the ones that just didn’t get the joke – or perhaps really did, but lost the capability of selling it! I certainly believe it is clear the world is a smaller, and much more interconnected place today than it was in virtually all of the 20th century – your coda, LD, couldn’t be any more pointed – deeply embedded issues that need to be acknowledged, addressed and rectified. Yes, there is and will continue to be economic and hence real suffering; yes, our education system needs an overhaul, yes, the public sector has run amok and the future contingent liabilities are mind-numbing…for my two cents, your observations are usually both accurate and thought provoking…and, though I often think it, but never really comment on it, you should be ever proud for having the courage of your convictions to offer principled and constructive support for your strong beliefs of what is important and rests at the heart of the human condition – even moreso in a financial blog.

    My only minor quibble with your conclusion this time out is that I do not believe these realities are an either/or…the New World Order is a process and in process as we speak – and we are just an actor, though with an important role, in the drama…it is up to us as a nation and it really falls on the underperforming shoulders of our leadership to determine how we might help shape this New World Order. The election results and the court of international opinion seem to think they/we are not up to the task. Let’s hope and work toward turning that sentiment around.

    • LD

      Coe,

      Bravo!! Do our leaders have the courage and character to make the necessary steps in order to shape our place? Do the American people themselves?

      These steps do not and will not just happen because they had in the past or because we merely want them to happen.

  • EM

    Maybe it is a good thing that the U.S. is no longer (in the views expressed by the liberal media) the overpowering world leader.

    Perhaps now we will quit trying to tell other countries how to solve their domestic problems – and just tend to our own problems here at home, which are quite significant.

    Perhaps we will reduce our $13 billion of Foreign Aid, and start distributing Domestic Aid to U.S. citizens who need a hand up, not a hand out.

    Perhaps we will start seriously closing down the 737 military bases we have around the world, which employ 278,400 persons occupying 48,854 buildings – plus all the leased civilian employees. At the height of the Roman Empire, Rome commanded 37 bases, and at its height, Britain supported 36. We do not need to lay them off, but we can employ them to escort millions of illegal persons home, immediately creating more jobs here in the US, and spending all their payroll and operating expense within our own borders.

    We do not need a military based on the offensive capability of fighting 2 or 3 wars, but one that can defend our borders, our culture and our citizens. It is criminal to be taxing Americans to support these imperialistic activities abroad.

    The Social Security system is the world’s largest Ponzi scheme, and the entire Congress should be indicted for ripping off the contributions made by our citizens, for their security – to fund their pet projects and the enterprises of their political contributors. We should start sensible funding now – just as an insurance company does – investing in the American economy, with corporate bonds, real estate and a small percent into stocks. In fact, why not simply employ the life insurance companies to invest the Funded Social Security portion, and keep the hands of greedy politicians off of it – forever!

    Perhaps we will tell banks that their federal aid is contingent on their lending the money back out to small businesses who have always demonstrated their ability to grow rapidly, improve products and services, produce innovative technology. Aid to banks is to increase their local involvement, and boost the economy, not for paying large bonuses to corporate executives.

    Perhaps we will re-institute the Investment Tax Credit to provide companies with the incentive to buy new equipment – but let’s limit that to products and services from within our country. Spend US tax dollars here in the US!

    Will the world desert us? Of course not! We are the largest trading partner for most of the countries of the world, and they need us, far more than we need them. We can (as we have proven in the past) produce high quality machinery, electronics, systems, planes, cars and other commodities. A good example of this trade-interlocking is the booming country of Australia – it exports $161 billion: 22% to China, 19% to Japan, 8% each to Korea and India – and a major portion of those raw materials ends up in products sold to America.

    We need to scrap foolish legislation that has been around for decades – like paying farm owners not to farm. We do not pay other companies not to make products or to deliver services – why are we still meddling in farms?

    Novel idea – tax the daylights our of foreign oil coming in to the US. And take the restrictions off of domestic oil production, fund the Fischer-Tropsch process to convert coal into usable fuel. We will be independent of foreign oil very soon if we allow the profit motive to function correctly – without the special relationships and friendships with middle east oil producers.

    Perhaps we will start seriously funding research on fusion energy plants, and start building medium sized nuclear plants that are all identical, so that we can more effectively maintain quality control and reduce construction and operation errors – as the French have done.

    These things could all be done, if we had an American President – and one who would quit abasing himself at foreign meetings and stop apologizing for the country that has brought more liberty and a higher standard of living to more people than any other in history.

    If the U.S. were so bad, then why do millions of people want to move here? If we opened the borders, our population would soon equal China. No, we do not want that, but we should concentrate our immigration on persons who are educationally qualified, physically healthy, have a job or a lot of capital, and who have no criminal records. Now there is another novel idea….

    So rather than being an imperialistic bully and know-it-all, let’s just run our own country well, and count on the capacity of American workers, teachers, doctors, and all our citizens to help us our of our current economic crisis….. and oh, yes, let’s seriously reduce the most wasteful portion of our society – politicians and community activists!

    • fred

      EM, I like the way you think. Now fix yourself another double espresso and focus in on Social Security. I like your idea about “fiducitizing” life ins companies to invest Social Security assets. Maybe they’ll stop harrassing us into buying their life insurance products.

      Seriously, part of the problem is the structure of Social Security as a “pay as you go” system. Can you imagine the overfunding that would have resulted if our gov’t had simply invested prior baby boomer overfunded SS payments into “actual” tbonds the past 35 years, invested and protected for our future actuarial need rather than diverted into a bloated bureacracy that replaced our hard earned wages with gov’t IOU’s?

      Back to reality, we are where we are, our government has squandered our retirement savings, now what?

      Needs based means testing? a 10 year actuarily determined retirement age to be adjusted as life expectancies change? unreported income initiatives? Realistic, conservative, return assumptions based upon a diversified “U.S. friendly” global portfolio?

      Think of the leverage we would have as the owners of the largest Sovereign Investment Fund in the world.

      Sounds good! Let’s let the life insurance companies go over the books, crunch the numbers, and get the real facts back to us ASAP. No more gov’t mumbo jumbo or double talk!

      Privatize social security? Why not, the US Goverment has proven itself inept as a fiduciary and violated our trust.
      How could any other option be any worse!

      • LD

        Fred,

        In regard to your quesiton above about CPI in China being reported at 4.5% versus most recent data indicating a run rate of closer to 3%.

        Oh the tangled web we weave.

        Perception vs reality at play once again? The time lag in reporting is always a critical piece of understanding the artwork. We see this reality all the time in the work produced by Rick Davis at CMI.

        I need to spend more time getting acclimated with the work at MIT/Billion Prices Project. Thanks for bringing that to our attention. The link will hopefully be added shortly.

        • fred

          LD,

          After the past few days the master plan may be coming into better focus, the Fed is trying to chase liquidity into the stock market rather than into commodities. As the marginal buyer of nearly all commodities, China needs to be seen as tightening to drive commodity prices lower.

          If the Fed is successful, it will be in control of nearly all financial markets, talk about manipulation!

          It will be interesting watching the yield curve as maturities not being influenced by QE2 spike higher, (kind of like that kids game where you bang the heads down as they pop up).

          Of course the manipulation of higher stock market returns can be “justified” by the Fed because of the enormous scale of baby boomer pension assets and the potentially devastating impact should the “underfunded status” be affixed to plans that lag expected returns,(the GM and California pension plans comes to mind).

          Another nagging problem, long term expected returns based on normalized profit margins are now only about 5%. Profit margins are at historically high levels but are notoriously cyclical and mean reverting.

          What else can the Fed do to facilitate profit margin expansion and keep this charade going? Already the Fed has engineered the purging of bloated payrolls and the refinancing of corporate debt at rediculously low levels, now it will trying to reduce raw material input costs while keeping cpi in the 2-3% target range.

          Im not sure whether I should be impressed or disgusted by the Feds attempt to micromanage the corporate balance sheet and ultimately stock market prices.

          The statuatory problem as Michael Steinhart mentioned on CNBC, is that CPI is running pretty close to the Fed target of 2-3%, and Chinese CPI is running at a similar level, neither gov’t can really justify doing anything here!

          Can’t wait to see what cutting edge smoothing techniques gov’t statisticians conjure up to nudge cpi and ppi reporting higher and lower to suit gov’t purpose.

    • coe

      EM – This theory is so logical that I’m afraid sadly will never be destined to be embraced. The very premise that we could/should superimpose our ideologies/will on other countries, cultures, religions, and peoples seems preposterous on the surface and the height of arrogance. The history of man is littered with ongoing failures of societies whose stretch outreached any semblance of common sense. Many of the elements you speak to are “third wire” hot buttons – but I grow increasingly dismayed by our interest in solving everybody else’s problems when we have tons of our own. Maybe limit our non-US intrinsic expenses to cases of dramatic humanitarian need and volunteerism, and for God’s sake get to work fixing what is broke here. Certainly deserves a fair hearing, doesn’t it!

  • A controlled demolition of the world’s economy? Yes, it appears to be so. However, there may be much more to this story than most are willing to consider.

  • “There’s class warfare, all right, Mr. (Warren) Buffett said, but it’s my class, the rich class, that’s making war, and we’re winning.”

    I lost (outgrew? educated enough to toss aside indoctrination?) loyalty to the USA federal government and MANY entrenched bureaucracies and to a lesser extent state and local governments AND came to view many corporations AND the corporate structure in general as my enemy AND an enemy of the USA’s working-poor class and those above that particularly hard-hit class.

    I advise to NOT possess ANY loyalty to that which does not return your loyalty.

    Prepare yourself as much as possible for a generally rough, tough economic future as the Founders’ Great Experiment falls for MANY reasons….. including the general concept labeled “political correctness.”

  • Bad Moon on the Rise

    Today’s PPI

    “Volatile” food and energy prices are left out of the calculation. You need to know that commodities are priced in dollars worldwide and that it is the decline in the dollar that has made them appear expensive ( they are if you are using dollars, of course ). Inflation is also present in those areas where supply/demand imbalalances exist ( think healthcare ). For the baby-boomer generation, those happen to be the 3 areas where they spend most of their money. Inflation in the needs, deflation in the wants!






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