The Life of the Expat

Recently, a former student of mine wrote from his first overseas position with an international company. He told me that though he appreciated my class, he felt that there was one area that I didn't address -- how tough it was to be the expatriate. He was excited by the position but felt lonely and isolated. Here's how I answered him: "I agree that taking the overseas assignments will help your advancement, particularly in a global company. The assignments will also broaden your perspective and give you a lot of valuable skills. "You're right I didn't talk about the difficulties of the expat. I tried to figure out how to convey the complex emotional issues involved for people without the direct experience. I will give you the insights that I got at the State Department in my first training course. "Everyone goes through a series of ups and downs when moving to a new country -- it's called culture shock. The first months are great -- everything is new and in some ways magical. You see life through a different set of lenses. Then the culture shock part sets in -- usually somewhere in the three to five month span after arriving in the new location. You start being aware of all of the cultural cues that you are either missing or don't understand. Ordinary tasks, like figuring out where to find a doctor or a barber get on your nerves. Traffic and local driving customs seem mad to you. Somewhere about six to eight months you achieve the long-run equilibrium. If you're in a location that suits you, your mood will be positive. If you are in a place that is not suited to you, your mood will be less than your "normal" state. I had culture shock to some degree in all six of my overseas postings -- so take it as normal. Life can feel very isolated and lonely at the beginning. The key is to go out and make the new friends -- and get everything you can out of your posting. "By the way, there is also reverse culture shock. When you come back to the US, you see it with different lenses. A lot of the customs we have seem odd -- even barbaric. Our solution to health care seems inhumane for those suffering economic losses from major illnesses. I remember the time that I took a German trade delegation to San Francisco in 2000 while I was still Consul General in Hamburg. We came off the freeway from the airport onto Sixth Street, right into the Tenderloin with homeless and drug dealers wandering the streets. They were shocked and I was embarrassed as an American. Most who live here in San Francisco just drive right by ignoring the human plight. "A word of advice as a returning expat: The Expat comes back to headquarters with ambivalence having seen different solutions work just as well in other parts of the world and citicism of practices here in the US. This is sometimes taken by headquarters as less than enthusiastic support for the mission of the company. Some corporations deal with this by keeping their expats overseas; others banish the former expat to marginal parts of the company; the wise companies learn how to integrate these people into their hierarchy. So when you come back to the US, ask your other expats how the company rewards them. That will be a major career decision point for you. "The Foreign Service Officer who ran that first training course gave me some advice, that I made my objective everyplace I was stationed: "Make each post a better place for your having been there. Strive to leave each post a better person physically, morally and spiritually." I'd be interested in any of your experiences in overseas living. Please post your comments.

Why global markets punish bad policies

A number of months ago, I blogged about the interconnectedness of modern financial markets. The events of the last month have clearly demonstrated this.

We have to look back about a decade for the origins of the crisis which had its origins in the US policy to promote home ownership. In 1997, the US changed its rules on capital gains to allow individuals to avoid (on two properties no less) capital gains tax on less than $500,000. (Remember that the US allows a personal tax deduction on intereste only for those associated with a home mortgage.) After that, banks and other lenders began liberalizing the documentation required to get home loans and lots of people qualified for loans that previously couldn't. People do react to the economic incentives around them and the prices of houses in real terms began to soar -- who couldn't afford to be part of the great bonanza provided by Uncle Sam.

A second enabling factor was the huge fiscal deficit by the United States. George W. Bush decided to fight two global wars without a tax increase. The result was over a trillion dollars injected into the economy.

Next, the expansive fiscal policy was complemented by an accommodating monetary policy. From early 2001 when the tech downturn took place and accelerating after the 9/11 attacks, the Fed cut and maintained interest rates at very low levels. From their point of view,the Fed looked at domestic inflation and saw little impact, but did see a continuing weak economy. It continued its accommodating monetary policy into 2005-7.

Both the White House and Fed saw the positive impact of their policies in a steady US expansion. What they missed were the negative results. First, despite the grossly expansionary fiscal and monetary policies, there was little US inflation as measured by the CPI or WPI. Why -- first of all housing prices were not included in the CPI -- only rental prices as a proxy. Secondly, Washington didn't look at the role of international markets. - specifically tradeable versus non-tradeable goods and services.

While US prices have not move dramatically over the past years, the subsets have. Internationally traded goods -- like food, clothing and consumer goods -- have shown little growth and in the case of electronics, prices have fallen. Why? Because as international trade barriers have fallen, cheaper international goods have flooded the US marketplace. The consumer has profited from lower prices. There have been negative effects for those workers in those industries who saw their jobs move overseas.

Meanwhile prices of non-traded goods, like health care and education, soared since consumers had extra money in their pockets (often after having taken out second mortgages on their homes that suddenly were worth much more). And the non-traded good with the largest price increase -- houses -- were excluded from the index. In short, we exported part of the inflation (and at the same time lots of US jobs) and we were baffled at why education and health care continued to rise far faster than the CPI.

As Americans purchased more goods and services from overseas, the trade and current account deficits soared. Suddenly there was a lot of US dollars flooding world currency markets. Here comes in the last element -- normally, the rates of exchange would have corrected themselves by making dollars cheaper, pushing exports and decreasing imports. However during most of this time, China wanted to keep its exchange rate fixed to ensure continued export competitiveness. The Chinese were able to support the RMBI only by buying up the excess dollars, with which they bought US Treasury notes.

US home prices started turning down in late 2006 and accelerated this past year. As a result, many found their home prices less than the mortgage, causing defaults. That cascaded from the mortgage holders to the guarantors of the mortgages (Fannie Mae and Freddie Mac) to the investment banks (Bear Stearns, Lehman Brothers) to the insurers of the derivatives (AIG). At the same time, the Chinese government lost the capacity to control the influx of cash and resultant inflation. It has let the RMBI appreciate at a 15% per year rate and took severe measures to restrict the leverage of the Chinese banks. When the financial crisis hit in the US, the Chinese were also worried about buying US securities, accelerating the global credit crunch.

What's the moral in this? Bad economic policy catches up with you. In this interconnected world, the results may be less easy to see, but the markets eventually punish excesses. So for all those who say Wall Street greed led to the collapse, you missed the essential elements. The bubble couldn't have built up except for huge fiscal deficits, tax policy pumping up one sector, accommodating monetary policy and attempts internationally to fix exchange rates. Wall Street firms are supposed to be greedy -- it's the job of the politicians and ordinary citizens to make sure that this doesn't happen.

How to do business with high inflation countries?

If you ever lived through a period of hyper-inflation, you know the effects on an economy. Savings are lost, basic necessities become scarce and credit disappears. Ending a period of high inflation always requires major contractionary policies, policies that inevitably hit the poor and weakest members of society the hardest. I remember one time visiting in Brazil when the prices changed from the morning to afternoon. I was completely dumfounded by the currency -- there were several varieties floating around and in one case the government just added six zeros to the old currency. One curious fact that I realized is that in high inflation economies, there are no coins. The metal in the coins rapidly becomes more valuable than the currency and bad money (cheap paper bills) drives out the good (copper or even aluminum). The New York times reported this week about the crippling effects that inflation has had on Vietnam. The country's fledgling stock market, which had been booming a year ago, has fallen in volume by 95 percent and is at a virtual standstill.Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs, delaying major purchases and waiting for the cost of a wedding to go down before marrying. More importantly, the downturn has crushed hopes for a better life. The mood in Vietnam, after years of upward mobility, is tense, said Kim N. B. Ninh, the Asia Foundation's country representative. "I think people are pessimistic," she said. "You sense a tougher environment, a more restricted environment, a more pessimistic environment. It's a moment of turmoil, I think." So how does the international businessperson cope with the highly inflationary atmosphere? The answer to remember that "Cash is King." You certainly cannot extend credit in the local currency. You also have to check that your banks will continue to extend trade finance -- if conditions worsen, even respected guarantee agencies like EXIMBANK will go off cover for a country. All transactions have to be in a stable international reserve currency -- usually the US dollar. Obviously a currency hedging strategy is useless with such volatility. But even be careful of contracts in dollars backed by dollar deposits from within the country. Argentines woke up in 2002 to find that their dollar deposits were frozen -even to pay for international contracts. Lastly, rely on your customers to figure out how to handle the inflation and resulting foreign exchange problems. Frankly in the 1990s and early 2000's the average taxi cab driver in Buenos Aires or Sao Paulo knew more about foreign exchange strategies that all but a handful of traders in London or New York. If you work with your established customers during the down times, they will remember you when the market stabilizes again. It always does return -- the question is just how long until "again" arrives.