Protectionism = Ignorance

One top-down event that could severely hamper investors the world over would be a decisive global shift toward protectionism.

How anyone with any knowledge of history could want protectionist measures implemented is really amazing. Some people are truly ignorant about this -- and I don't mean that as the slam you might think. I simply mean "a lack of knowing history."

Of course, many people are frightened about losing their jobs and think barriers will save their positions. But, again, history proves this is futile. And others may succumb to nationalist sentiments. But, gosh, that's even worse when taken to the extreme. People can go for all sorts of lousy measures when they get nervous and emotional.

Over the past year or so I've read comments from the likes of Cundill managers and Jeffrey Everett (before he left Templeton) that the threat of protectionist measures around the globe gave them pause.

I was reminded of that when reading the always-interesting Michael Sesit's latest Bloomberg column. The entire thing is worth reading, but here's an interesting bit:

Several hundred Japanese companies have adopted poison-pill takeover defenses in an attempt to discourage hostile foreign bids. Others are increasing cross-ownership stakes with business partners and banks, reversing a decade or more during which cross-shareholdings were being unwound.

Well, that's a step backward. And there's this:

Free trade's demise might unleash a cocktail of stagflation, rising interest rates, a plunging dollar, squeezed corporate- profit margins and tumbling stock markets. World trade fell 70 percent two years after the enactment of the U.S. Smoot-Hawley Tariff Act of 1930.

Most people don't realize that the New Deal didn't start under FDR. It started under Hoover. It wasn't called the New Deal, then. But it was the start. And in addition to the Smoot-Hawley tariff, Hoover raised taxes substantially at the worst possible time.

What's needed is for people to remember history. And keep their emotions in check.

Comments

[Hopton]

We are already on the cusp of most these things (or at least the fear of them) because of The FEDS excessive easy money policy (twin bubbles): "stagflation, rising interest rates, a plunging dollar, squeezed corporate- profit margins and tumbling stock markets."

Yes, you need stimulative fiscal policy during a downturn, obviously. Indeed, this is what politians should be talking about... unfortunately our country is already carrying quite a bit of debt. Oops...

Pointing to increased protectionism after the fact is a silly argument. Sounds like public relations from mutual fund firms.

Current macroeconomic ideology needs a rethinking. Our last economic expansion was quite weak, all told.

DeLong has a good piece about Friedman
http://www.project-syndicate.org/commentary/delong75

[John]

Hopton: Thanks for the link. But I'm not arguing against increased protectionism after the fact, I'm against increasing it from here, which some want. (I'm also against it up to this point, but that's another matter I imagine.)

[David]

John
Yes some countries are going down the path of increased protectionism.
Countries like Malaysia for example have implemented strict measures about foreign capital investment in the country. This has had adverse effect on their economy. Compare that to their neighbor Singapore whose economy is on par with the Western world and it continues to grow at a decent rate.

-David

[John]

David: As many have pointed out before, Singapore and Hong Kong haven't been "cursed" by having any natural resources! ;-)