Joys and Pains of a Global Paradigm Shift

NEW YORK—And now for this week's news, brought to you from what seem like two parallel universes.

From Universe One, where all is rosy:

• BHP Billiton Ltd. offers a massive $38.6 billion for the Potash Corp., the Canadian miner of a critical ingredient for fertilizer.

• Intel Corp. says it will spend $7.68 billion to buy computer-security software maker McAfee Inc.

From Universe Two, where all is gray:

• Initial U.S. jobless claims for the week of Aug. 14 hit 500,000, their highest level since November.

• The Philadelphia Federal Reserve's August business index shows a sharp, unexpected contraction.

In fact, these news items come from a single universe, one that's more in sync with itself than the otherwise contradictory headlines suggest.

In a high-tech, globalized economy in which economic power is shifting from high-wage, advanced countries to low-wage developing countries, it's perfectly reasonable for companies in some sectors to see big growth opportunities while others are so squeezed that they're laying off workers.

The deflation threat that's now driving Treasury yields ever lower is not just a U.S. cyclical phenomenon. It's global.

That's a depressing thought if you're an American worker in a business that's outsourcing your job to India or China to protect shrinking margins.

But it's good news for aspiring middle-class Indians, Chinese and Brazilians. And by default that's good news for businesses poised to tap their newfound spending power – business like Potash and McAfee.

Adding tens of millions to the world's middle class drives up demand for food, and thus for fertilizer. It also fuels demand for consumer telecommunications devices and broadens the international connectivity that facilitates the entire globalization process, which in turn calls for more and better Internet security.

Globalization has been going on for well over a decade, but it's now entering a challenging new phase. In part, that's because developing world spending power is reaching a critical mass. It's also because the movement to emerging markets increasingly involves services as well as manufacturing, which means a bigger chunk of middle class American jobs are at stake.

But it's also because the shift is happening at the worst possible moment for U.S. households. With their foreclosed homes, their soaring health costs, and their fruitless job searches, it makes U.S. consumers even less willing to spend, which puts added downward pressure on prices and feeds the global deflation spiral.

One way to think about all this is what some people call the "China price," the idea that firms are now compelled to compete according to a new low international benchmark, one that inherently requires them to go overseas. The equilibrium market price – for both goods and wages – is now an international price.

Trying to manage that is extremely difficult – nay, impossible – with the normal tools of domestic policy: monetary stimulus, tax cuts, or fiscal spending.

It is really why we're in a "jobless recovery." Weak growth is not just payback for America's debt-funded spending binges, or a response to some vague notion of business "uncertainty" over tax policy. It's because the "slack" that Federal Reserve officials cite as a reason for low inflation does not merely refer to post-recession overcapacity in the U.S.; it's global slack, and lower-paid developing world workers are racing to fill it.

Investors who recognize this big secular trend have two choices: They can hedge against the deflation threat, or they can tap into its growth opportunities. Buyers of Treasurys are doing the first, companies like BHP and Intel are doing the second.