Andy Xie on globalisation

Morgan Stanley's Andy Xie thanks Federal Reserve chairman Alan Greenspan for giving him a job. Excerpt from his article entitled "Goodbye, Mr. Greenspan":

The quadrupling of US imports during Alan Greenspan’s 18-year reign summarizes his global impact. This increase in US import demand has underwritten globalization, led by the integration of developing economies with the US. In that regard, his policy has affected manufacturing-led Asia most.

Rising trade deficits have accounted for 38% of US import growth during the Greenspan era. One could argue that the rising US trade deficit has been the driver for globalization, and in particular financial globalization. Why does the US trade deficit keep rising, and why is it so well funded? The sustainability of globalization depends on the answers to these questions, in my view.

Mr. Greenspan’s ability to sustain investor confidence and his accommodative monetary policy towards asset demand are the answers to the above questions, I believe. The global economy suffered a huge deflationary shock when the Berlin Wall fell. The planned economies that accounted for half of the global population (China, India and the Soviet bloc) abandoned economic planning and looked to trade as the driver for economic development.

These former planned economies had to accumulate capital quickly to join the global economy, as their assets from the planning era could not add much value. The fall of the Berlin Wall was equivalent to a big outward shift of the global supply curve. The deflationary shock would have led to a prolonged global recession without an offset inflationary force.

Mr. Greenspan was instrumental in propping up optimism, which led to rising risk appetite and demand for risk assets. He accommodated such demand by tolerating a rapidly rising demand for money from asset markets. Rising asset prices in the US led to unusually strong consumption. This inflationary force has offset the deflationary force from globalization.

The high level of wealth and institutional credibility of the US have allowed it to play such a critical role in giving birth to globalization. The credibility of the US Treasury as the modern equivalent of gold for wealth hoarding is the instrument for sustaining the funding of the US trade deficit.

Mr. Greenspan has been the right person at the right time in right place to play such an important role. If there were a midwife to the current era of globalization, it would be him.

The epidural for suppressing the birth pain of globalization is the vast global property bubble, thanks to financial globalization. Mr. Bernanke, successor to Mr. Greenspan, will have to handle its aftermath carefully to prevent a backlash against globalization when the bubble bursts, as I believe it will.