Trading Places Redux

There’s free lunch. Even with free trade.

Ever since David Ricardo published the Principles of Political Economy, economists have recognized the benefits of trade, even if your trading partner can do everything cheaper than you can. It may seem illogical, but it works. It’s like a lawyer who can type 120 words-per-minute hiring a slower-typing secretary. Even if the lawyer’s faster, it’s better for them both for the secretary to do the filing.

So when global trade exploded after the fall of the Wall in 1989, economists rejoiced. All that comparative trading meant global output could grow faster. Restrictions fell, and billions of consumers entered the market. The only thing to worry about, according to many, was the transition to this trade nirvana.

But the law of unintended consequences asserted itself. Since trade expanded, networks are much more complex, and problems with fuel prices, piracy, and border control are huge. Disruptions in one area can affect the whole globe. So with an increase in global growth comes an increase in volatility.

It’s as if the world’s portfolio went from a blue-chip index to a group of small-cap stocks. The long-term returns are better, but at the price of more volatility. So Milton Friedman is proven right again: there’s no free lunch.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

direct: 603-252-6509
reception: 603-224-1350

www.chartertrust.com • www.moneybasicsradio.com • www.globalmarketupdate.net

Leave a Reply

Your email address will not be published. Required fields are marked *