Posted by:
Kenneth Rudy
Corporate Solutions

Good evening from CoreNet.  Those of you who attended the opening session (or read Richard McBlaine’s post about it), know that economist Jeff Rubin views the current recession as the result of oil shock as opposed to over-leveraged housing markets and Wall Street greed. In essence, the run-up in oil prices to $147 per barrel two years ago caused inflation to jump from 1.5% to a 5.7%, prompting central bankers to raise short-term interest rates.  That rate hike in turn affected billions of dollars of subprime housing debt, resulting in massive default problems that rippled through the global economy.

It’s a compelling argument, and it raises the “60 trillion dollar question”:  Is the world headed for dangerous deflation because of significant overcapacity, or into the teeth of high inflation as countries continue to print money to finance their economies?  The answer has important implications on corporate decisions about their balance sheets and long-term investment strategies.

With half of U.S. government debt held by foreign entities, our government will be more willing to allow inflation to return in order to deflate the value of the outstanding debt, e.g. making it easier to repay today’s debt with inflated future dollars.  This will also deflate the dollar as a global trade currency.

So, if oil returns to high prices as economies recover and the U.S. reflates its economy by printing dollars,  there will be a serious threat of domestic inflation in the years ahead.  That stands in contrast to the very low inflation pressures and artificially low interest rates from government stimulus we see in the current environment.  This may explain why global corporations have issued close to $1 trillion in long-term bonds over the past 12 months.  With the ability to raise capital at historically low cost, many are preparing for a time of high-cost capital, not to mention expensive materials, energy and other dollar-denominated investment. 

We live in a very interesting time!

Kenneth

Posted by:
Richard McBlaine
Strategic Consulting

It was great to see so many familiar faces at last night’s opening reception. The weather was great, the food was great, turnout was high and they didn’t run out of alcohol – not much to find fault with, except that no one got wild and jumped in the pool. For once, what happened in Vegas didn’t have to stay in Vegas.

I just attended the keynote opening session, “Why Your World is About to Get a Whole Lot Smaller.”  Economist and energy expert Jeff Rubin painted a grim picture of globalization based on dwindling oil supplies.

Rubin’s premise is absolutely correct: We have largely depleted the supply of oil that is easy and inexpensive to extract and refine. Contrary to the economic principle of the upward-sloping supply curve—the higher the price, the more that is produced–global oil production is not rising in the face of price hikes and increasing demand, primarily from developing nations. Rubin notes that every global recession in recent decades has been preceded by—and in his mind, largely caused by—steep increases in oil prices. And as this trend intensifies, there are major implications to the global economy.

In particular, the movement of jobs around the world to take advantage of inexpensive labor rates can not be sustained, Rubin argues. He uses the example of steel: When oil prices leaped a couple of years ago, steel imports from China dropped and U.S. steel production increased. Why? Because it was no longer cost-efficient to ship raw steel from the U.S. to China and then ship the finished product back. The same concept applies to a host of goods and services, leading to a worldwide economy that is much less global and more local.

True—up to a point. But Rubin does not really account for new technologies making oil easier to extract, making vehicles run on alternative fuels, and so on. Moreover, the labor arbitrage of a call center or a software programming department is unaffected by cost of oil. And multi-national companies will continue to operate globally even if they seek out  labor and materials closer to their end-user markets.

I think Rubin totally underestimates the power of innovation to influence outcomes.  Bioengineering, nano technology and countless other advances will likely alter the trajectory of the world in unprecedented ways.

So, while companies should be considering Rubin’s “small world” scenario when setting their global supply-chain and labor location strategies, (with apologies to Mark Twain), reports of the death of globalization are greatly exaggerated.

Richard

PS–Check out some photos from last night…

Tom McCarty, Jones Lang LaSalle (left) and Will Esterly, Procter & Gamble

(from left to right) Caren Jones and Doug Sharp, Jones Lang LaSalle; Lana Gosnell, Union Bank; Bryan Jacobs and Stephanie Leta, Jones Lang LaSalle