The Retirement Corporation of America

A Quick Visit To The Global Economy

WE'RE NOT ALONE in the world. There are a great many other countries to think about—from the industrial giants such as Germany and Japan to the developing countries such as Malaysia and Mexico. The countries of the world have always been linked together by trade and tourism. The arrival of high-speed computers and advanced telecommunications has linked nations together as never before.

To understand our economy, you can't just look at what goes on in the 50 U.S. states. You have to keep an eye on developments thousands of miles away. Consider the global financial and economic crisis of the late 1990s that:

•  Began in Thailand.

•  Quickly spread throughout Asia.

•  Overflowed into Latin America.

•  Nearly crashed the Russian economy.

•  Did serious damage to the U.S. stock market.

•  Slashed the earnings of some of the world's biggest corporations.

The world is so closely linked together that everything from the price you pay for gasoline to the security of your job is heavily dependent on events occurring halfway around the world.

How It All Works

To see this linkage in action, look back to the early 1970s when a sudden rise in water temperature in the Pacific Ocean contributed directly to the double-digit inflation that hammered the U.S. economy. Here's how that played out, step by step:

1. Cattle in the U.S. are routinely fed with fish meal from anchovies caught off the Pacific Coast of South America and then dried. Fish meal is very nutritious—and very low-cost.
2. A rise in water temperatures in the Pacific drives the anchovies far offshore—making fish meal scarce.
3. With fish meal scarce, U.S. farmers must feed their cattle with home-grown grain which is much more expensive.
4. The result is sharply higher prices for both grain and beef and an inflationary jolt for the whole U.S. economy.
5. Just as food-price inflation heats up for American consumers, war breaks out in the Middle East, quadrupling oil prices.
6. Consumer price inflation in the U.S. goes from 3.2% in 1972 to 6.2% in 1973 to 11% in 1974.

In short order, events in faraway lands played a major role in driving up the rate of consumer price inflation for Americans.

The pattern was repeated again when Asia led the world into financial crisis in the late 1990s. Events half a world away eventually disrupted the investment markets and hurt corporate profits in the U.S.

How to Incorporate It Into Your Planning

No one is asking you to become a student of international economics in order to make your own financial future secure. But you want to keep watch on events that can influence your financial life—and some of those events will happen in far-off lands. Here's what to pay attention to:

The value of the dollar. Just as there are markets in almost every country to trade stocks and bonds, so every country has markets that trade foreign currencies. The stronger our economy looks, the higher the price of the dollar against other currencies. The weaker our economy, the lower the price of the dollar.
- A strong dollar attracts foreign investors and helps our stock and bond markets. It also makes it cheaper for Americans to travel abroad. Finally, the stronger the dollar, the less it costs us to buy the products of other countries. That encourages us to buy more from overseas which can hurt U.S. industry. But keeping import prices down is good for inflation.

- A weak dollar reverses all of the above. Our investment markets suffer and foreign travel becomes expensive. Imports cost more, which isn't good for inflation. But the cheap dollar makes our products more attractive to foreign buyers which is good for U.S. industry.

Favor U.S. investments when the dollar is strong. Comparison shop the prices of imports vs. American-made goods before you buy. The imports may be cheaper. Squeeze foreign travel in when the dollar is strong. Consider foreign investments when the dollar is weak. Still comparison shop before you buy—but expect to find the bargains among made-in-America products. Spend your vacation time in the U.S.

The potential for trouble. Because it's a tightly-linked global economy, expect trouble in one corner of the world to eventually spread around the world. Even the U.S. won't be completely spared. Expect U.S. companies with the biggest share of sales outside the country to be hurt when there is trouble in the global economy and invest accordingly. Smart investors understood that the Asian financial crisis would spread around the world and shifted from speculative stocks to safe U.S. Treasury bonds. They were insulated when the crisis finally hit Wall Street.

The opportunities for diversification. It may be a global economy, but events don't happen at the same time in each country. The Asian markets tumbled long before Wall Street was hit. The Asian markets later soared when Wall Street was recording only small gains. One reason to hold some international investments is to make the most of this diversification. If you hold a global cross-section of investments—U.S. funds and foreign funds—you improve the likelihood that at least some of your investments will always be gaining.

Tracking the Global Economy

As with everything else economic, the global economy is covered in great detail in both the print media and on radio and TV. When the Asian crisis began, you knew about it because newspapers, magazines, radio and TV covered it. Ditto for the Latin American crisis and the Russian crisis.

Keep your eyes and ears open and you'll get all the clues you need about what's happening in foreign economies—and how to incorporate those clues into planning for your own financial future.