The world has always been tied together economically. Long before any clever ruling elite bothered to create the term “globalization” to justify the unfettered flow of jobs, capital, resources and discount kitchen help across national borders goods and money found their way around the world.

Borders, unless enforced with Draconian vigor, cannot stop such things. They can slow it and reduce it, however. The net effect of such a slowing historically, has been to create economic firewalls between semi-independent economies. Because of this, it used to be common for a recession to begin in one region and slowly spread to others. Economists would talk of “contagions”, for example, and track the spread of the contagion from one economy to another.

But by the time the full effects a downturn in Asia or Europe had been communicated to America (or vice versa) the intensity of it may have decreased substantially and the source of the contagion had begun to recover. The collapse of investment houses or industrial giants or savings and loans on one continent did not usually spread to another region in real time in full force.

This is important because the worst thing about economic panics is their tendency to be self-perpetuating. For example, investors often sell assets because prices go down and then prices go down because more people are selling, and so on. Or people stop spending out of worry over a weak economy, decreased spending then weakens the economy and decreases spending even further.

Under these circumstances, the fundamentals of markets can go straight out the window as the lemmings all head for the horizon at the same time. Capital has therefore tended to withdraw from such panicked markets and head for “safe havens” in more stable nations to wait out whatever spooked a particular investors to begin with – whether it was inflation or deflation, or a burst bubble, or something else. Money may leave one market, but it then simply goes to work in another.

There are exceptions to this general rule, of course. The most notable is the Great Depression in which the entire developed world ended up in a downturn at the same time. This is part of what made the depression so insidious: it was a self-perpetuating deflationary collapse that spread beyond all national firewalls. Safe havens or stronger economies with which to trade disappeared. No one ever quite figured how to jump-start an entire world. But then World War II began and moved capital and labor back to work out of fear and patriotism after greed and self-interest had failed to do so.


Mac Johnson

Mac Johnson is a contributor to Townhall Magazine and writes regularly for Human Events and Energy Tribune.
 
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