Smoot-Hawley's ghost lives
By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET Mar 13, 2006
ANNANDALE, Va. (MarketWatch) -- When I started monitoring the investment newsletter industry in the late 1970s, political commentary was inextricably intertwined with the letter editors' investment advice.
This partly was a function of the pro-gold orientation of most of that decade's newsletter editors, and the anti-gold stance of the U.S. government. It wasn't until well into that decade that U.S. citizens were allowed even to invest in gold, for example.
But newsletter editors' political stance traced to more than their love of gold. It also derived from a general recognition that what politicians do profoundly affects the markets.
Consistent with their free-market orientation, most of the editors espoused a Libertarian philosophy, harboring a deep distrust of both political parties.
Today, in contrast, it is the rare newsletter editor who pays more than passing attention to what the government is doing, except for the Federal Reserve's interest rate policies.
The untimely passing early this month of Harry Browne, a newsletter editor who several times was the Libertarian Party's candidate for President, symbolizes the difference between the average newsletter editor today and from three decades ago. ( Read Peter Brimelow's tribute to Browne.)
A notable exception to this trend is John Mauldin, a money manager, author of several investment books and editor of an e-newsletter called Thoughts From the Frontline that reportedly is sent to a million readers each week.
Mauldin devoted much of his letter Friday night to the economic and investment implications of Congress' refusal to allow a company from the United Arab Emirates to purchase a U.K.-based port management firm that runs six ports in the U.S.
Mauldin concedes up front that in focusing on this issue he will "upset about 90%" of his readers. But he plows ahead nonetheless. Mauldin's worry is that this "port debacle" is more than just a "one-off thing," and instead represents a "rise in protectionism." If so, then the odds grow of a worldwide economic depression on the order of that which occurred in the 1930s.
Mauldin differentiates between a recession on the one hand and a depression on the other. The former is an inevitable part of the economic cycle, and though not comfortable by any means, is something through which we can muddle. But what could transform a run-of-the-mill recession into a full-scale Depression would be "a new wave of protectionism."
That, Mauldin reminds us, is what happened in the 1930s: "Senator Smoot and Representative Hawley infamously sponsored a bill in 1930 that raised tariffs on a variety of products in order to 'protect' American jobs. Of course, the rest of the world retaliated and soon we went from a recession into a global depression. Unemployment soared and all those jobs we 'saved' went away."
Mauldin sees many disturbing parallels between the Smoot-Hawley legislation and Congress' action last week to block the port deal. Mauldin dismisses the national security rationale with which the members of Congress blocking the deal defended their actions. "Anyone who did their homework knows that national security on any level was never at risk."
Instead, in Mauldin's opinion, the Congressional action boils down to either political posturing by both Republicans and Democrats or economic ignorance, or both.
Either way, though, Mauldin believes the economic consequences of a rise in protectionism will be the same: A worldwide reduction in trade and cross-country investment, leading to major contractions in economic growth and significant increases in unemployment.
"We have spent decades persuading nations around the world to open up their countries to investment," Mauldin writes. "And they have. We have over $10 trillion invested outside of the US, which made American firms $500 billion last year, a little under 5% of our GDP! That is about $1,600 for every man, woman and child in the US. That money gets paid out as dividends, gets invested in our economy and goes to pay our workers.
"Last year, foreigners increased their investments in the US by $1.4 trillion, in a wide variety of investments. Without those dollars, the US dollar would have collapsed, interest rates would be through the roof and we would be facing (or in!) a REAL recession, not the garden variety ones we have had since 1990."
Is Mauldin exaggerating the probabilities of a depression? As you ponder that question, consider that, according to Mauldin, some members of Congress have urged that a foreign ownership ban extend beyond just the running of U.S. ports to "roads, telecommunications, airlines, broadcasting, shipping, technology firms, water facilities, buildings, real estate and even US Treasury securities."
And place yourself in the shoes of foreign politicians, who must pander to their constituencies just as U.S. politicians do. How likely is that they will respond favorably to U.S. calls to keep their markets open to U.S. investors?
For the record, Mauldin himself believes "that this will simmer down... But if things keep going on this trend, we will look back from the dark times and point to this deal and realize this is where the lights started to go out."
tm.wc.ask.com |
