The End of Globalization…Again

It took a pandemic, war, and surging inflation to end the great age of globalization…105 years ago.

Source: The Wall Street Journal, Fouquin and Hugot (CEPII 2016), Goldman Sachs GIR

The first modern age of globalization was the period between the 1850s and WWI. This was an exciting period when business leaders like J.P. Morgan, Andrew Carnegie, and Cornelius Vanderbilt connected America and the world with networks of steamships, railroads, and telegraphs. See Chart 1.

Leading economists of the day proclaimed war was “obsolete” because of the interdependence between countries that these businesses developed. Those economists were wrong, WWI brought a decisive end to that era of globalization.

The foundations of globalization were set out by Adam Smith in his famous Wealth of Nations (1776). His notion that through trade, each country should provide the rest of the world with what it does best, where it had inherent advantages of natural resources, unique talent or manufacturing prowess.

His ideas upended the historical economic model known as mercantilism, the principle of a fixed total value of global wealth (i.e. pie). The only way for one country to get a bigger slice was to take it by force. Thus, the incessant wars since time began.

Adam Smith’s capitalism provided another way…grow the pie…make each country richer without war. Globalization embodies the ideals of capitalism for all participating countries. But globalization requires rules of the road that are fair and respected by all.

This did not happen between the two World Wars. Nationalism and communism took center stage, beggar thy neighbor policies took root, and ruthless dictators rose to power.

Globalization did not pick up again until the formation of the United Nations and the General Agreement on Tariffs and Trade (GATT) in the aftermath of WWII. At first, globalization was only among the non-communist nations of the West. Despots such as Mao Zedong and Joseph Stalin continued the cruel subjugation of their peoples in the East.

This began to change with Deng Xiaoping’s new direction for China (1978) and the fall of the Berlin Wall (1989). Capitalism had defeated communism as an economic model! This brought these new entrants to enjoy its benefits.

For several decades this new era of globalization blossomed. Countries like Germany fully bought in, putting international business connections well above any security concerns. They were not alone as businesses in most participating countries benefitted from the lower material and labor costs that globalization provided.

The inter dependencies of this era of globalization far exceed those of the prior one. Computers, the internet, container ships, air travel, and education have integrated businesses at countless points. Relationships such as “just in time inventories” were born. Most business elites (the Davos men) have presumed that “this time, major wars must be obsolete.”

Yet one thing is clear from both the earlier period as well as the current one…in the end, political forces trump business connections. Political rivalries (hegemon) and yearning for past glories have given birth to authoritarian leaders who cast aside the former business elites in favor of their own agendas — Vladimir Putin in Russia and Xi Jinping in China.

Such bullies often get their way until some breaking point is reached, when the rest of the world finally responds…as with Ukraine, today. “The Russian invasion of Ukraine has put an end to the globalization we have known for the past three decades,” wrote Larry Fink, the CEO of Blackrock. This is notable as he has been perhaps the best-known cheerleader of globalization.

The world is breaking up into several “blocks” — the West (democracies, rule of law, independent judiciaries), the East (authoritarian, controlled media), and Non-Aligned (those with some features of each, trying to play both sides).

I believe strongly that the western principles will prove more resilient in the face of this new “competition” …just as capitalism won the Cold War. The people of Ukraine have demonstrated overwhelmingly that freedom, once achieved, is not something people give up lightly.

Opportunities within the West (potentially a new League of Democracies) are endless as this is where innovation thrives and people are free to make their own choices.

Disclosures

A Look at Schwab’s Advanced Beneficiary Designations

When it comes to asset transfers at death, beneficiary designations are just as important as a will, particularly when the beneficiary account (such as an IRA) is the largest single asset in the estate.

Because of the new shortened 10 year distribution period for Inherited IRAs, more people are forgoing naming trusts as beneficiaries and listing children directly.

Many clients may be surprised to know that Schwab’s “default” beneficiary designation simply divides the assets among the surviving beneficiaries – with no consideration to their lineal descendants. For example, if there are three named beneficiaries and one dies, the account is divided among the two surviving beneficiaries. Under this standard “default” designation, nothing would pass to the children of a deceased beneficiary. See Illustration 1 below for two examples of the standard designation where 1 of 3 and 2 of 3 named beneficiaries are deceased.

An often overlooked and misunderstood beneficiary option is a “per stirpes” or “per capita” election. These elections include the lineal descendants of a named beneficiary in the event that beneficiary predeceases the account holder. It is like having a built in contingent beneficiary without specifically naming all the heirs.

With a per stirpes election, the lineal descendants of a deceased beneficiary split the portion that the deceased beneficiary stood to receive. See Illustration 2 below for two examples of per stirpes where 1 of 3 and 2 of 3 named beneficiaries are deceased.

Schwab’s per capita election is the same as per stirpes if any named beneficiary survives. The difference is how descendants are treated if ALL the named beneficiaries pass away. With per capita, all the descendants are treated equally. See Illustration 3 for an indication of the difference between the standard, per stirpes and per capita elections in the event there are NO surviving beneficiaries.

The easiest and preferred way to view and update your beneficiaries is online via the Schwab website under Service/Beneficiary. They can also be changed using a Schwab beneficiary update form.

Keep in mind, this applies specifically to Schwab, other custodians can have a different approach for their beneficiary designations.

Please reach out to your Wealth Advisor to review and ensure these designations align with your ultimate wishes.

Funding your Revocable Living Trust with Real Property

Tanglewood has long espoused the benefits of Revocable Living Trusts (RLT). An RLT allows you to transfer ownership of your assets into it while maintaining control over those assets during your lifetime.

Benefits of an RLT include:

  • Avoids probate

  • Flexibility and control

  • Privacy

  • Continuity of management

This article focuses specifically on the importance of including all real property (including your home) into an RLT.

Unlike a will that requires involvement from the probate courts, an RLT allows a successor trustee to immediately step in to make management decisions on the property without delay.

If you have an RLT, fund it

Many people who have a living trust never retitle their real property into it. If this is you, keep in mind the executor of your will cannot transfer property from your estate to your RLT until after the probate court names them as executor, something you wanted to avoid in the first place.

This is especially important for clients who own property in more than one state as probate in certain states (e.g. California) are more cumbersome than in others. Retitling out of state real property into an RLT will not only avoid the time and expense of ancillary probate, but it allows for continuous management of these assets.

Putting your residence and other assets into an RLT today saves time and resources later. As many people age, they risk potential incapacity and/or dementia; making it much more difficult to retitle assets.

Contact your insurance agent

Finally, after you retitle your real property into an RLT, contact your insurance agent to discuss adding the trust as an “additional named insured” on both your homeowner’s and umbrella policies. If a home is damaged by fire or flood, the individual persons have an insurable interest in the home contents, but the living trust technically has an insurable interest in the structure. If the trust is not also added to the policy, it is possible the insurance company will pay the claim on the contents, but not on the structure.

Disclosures