So the other day I referred briefly to the new idea of decoupling. It never really gained any traction with me, and to be truthful I am not really sure how it gained traction with anybody.

How would it be possible to have a global, integrated economy and trading network where effects do not propagate. One might say that if there are multiple strong economies the failure of one might be mitigated by the others. As it is, the Asian and European markets are suffering from the changing fortunes of their American partners. This should not at all be unexpected. In fact, it is a classic social contagion problem.

Stock markets are not about value, but expected value and traders base at least part of their decisions on the actions of those within their network. So if one fails, one might be encouraged to believe that the other will fail soon - precipitating the drop in stock prices that we saw on Monday.

This is what confuses me about the current breed of market ideology. While everyone is quick to recognize the gains from global trade, people tend to look for any justification possible to convince themselves that the negative effects do not propagate in the same manner as the positive effects. You can have decoupling or globalization - but not both.

That’s human nature, I suppose. It hurts more to lose than it feels good to win, and nobody wants to be a loser. We are even seeing the same mentality in the domestic housing markets. Everyone wanted policymakers to butt out when real estate was gaining value, but now that the tide has turned everyone is looking for bailouts and stimulus packages.

My only regret is that I did not address the concept of decoupling before this so that I don’t look like yet another person hopping on the bandwagon.

This entry was posted on Wednesday, January 23rd, 2008 at 1:02 pm and is filed under Economics, Globalization, Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.