Saturday, December 29, 2007

globalization, the end game

In the 1990s, the era of permanent global “free trade”, so called, or globalization, was ushered in. Local production workers everywhere, that is in America and abroad, hated it, and protested. Economists loved it because it was more “efficient”. Global trade's most charismatic promoter was probably Bill Clinton. I don't know where, but I think I read some theorist saying that globalization was a permanent beneficial change to the world's economic system. Maybe it was the same train of logic that led philosopher Francis Fukuyama to declare permanent prosperity and peace for the globe in the form of the “end of history”. History, it turns out, is now proceeding to change things at an accelerating rate. And the era of globalization will end a lot sooner than those ideolouges thought. Three powerful trends will seem to conspire to break up the world trade routes (despite the fact that a lot of wealth is created for a few powerful rich magnates and they will try to preserve this system at all costs):
  • Nationalization of Resources
  • Protectionism
  • Capital Controls
In the first place, we are witnessing an era of resource nationalization. Globalization was predicated on the assumption of efficient worldwide commodity markets, and such markets only function with a relative abundance of commodities. One of the curious and most exploitive of the tenants of the GATT talks (so viscously protested in Seattle in 1999) was the idea that all signatory nations had to agree to produce, and sell in open markets, any natural resources they possessed. Efficient production usually occured alongside the environmental degradation of the less wealthy nation. But that is now changing. Nations such as Bolivia, Russia, etc, are finding that they do have to power to regulate and nationalize oil, gas, and mining production.

There have been no shortages of commodities to slow down global economies for a long time, and some economists seem to think shortages are so obsolete they it couldn't possibly occur in the 21st Century. But the trend is for commodities of all kinds to rise in price and value. Scarcity of resources is the coming dynamic and free markets do not love scarcity. This will not just slow down the global trade in the resources themselves, but also affect trade in such manufactured goods which require non-local resources. China, for example, will be limited in its manufacturing by how much energy and copper it can import, now that it is no longer self sufficient. In time even American precious metal mining and energy production will need to be nationalized, if only to keep them out of the control of our creditors.

The second anti-global-trade factor is a slowly building force in the USA. It is simply the demand by citizens to support their domestic production. Protectionism. Now that the the American economy is obviously stumbling and there will be layoffs, and people losing their homes due to mortgage defaults, the government will need to do everything it can to try and keep as many people employed as possible. Even if it is not economically efficient. Social unrest will be a bigger threat than loss of cheap imports. This is the same force that was protesting against globalization in Seattle, but now they will have a much more sympathetic ear from congress. We will very likely see import quotas, tariffs and other abrogations of our trade treaty obligations.

The third trend will hit the global economy with terrible shock waves in the next two years: capital controls. Why economists assume that currency will remain freely exchangeable is baffling to me. The world now runs on fiat currency managed by central banks. This system was created to finance the gigantic economic expansions of the past half century. It is now teetering on the brink of collapse. The huge structure of artifice convinced people that paper money was as good as gold, and it was very effective in the times of plenty that the world has seen. Now that almost all central banks (Switzerland is the sole exception) are inflating their money supply at double digit rates, and the US dollar is in a death spiral, the system is doomed. The plunging dollar has created a global state of emergency: pretty much everything traded internationally is priced in dollars. If no one knows what, if anything, a dollar is worth, how do they know what anything else is worth?

Nations holding US treasury bills will be forced to sell their dollars and no county, including America, will be happy to take them in. Like destitute refugees, no nation will want to give the dollar a home. I have heard people say that because the dollar is the world's reserve currency, and no other currency will serve, it has to stay. I don't buy it. Within a very few years all fiat currency (unbacked by gold or other assets) will not be welcome in international trade. The euro can not save fiat currency either: the European Central Bank is racing America's Fed to inflate concurrently with the dollar. BTW, If you think you will always be able to own stock in that Australian mining corporation.. well I'm saying maybe not, unless you are in Australia. Soon, capital will have to stay closer to home.

This is not to say Saudi Arabia, China and other exporting nations will no longer export oil or goods. They can't do much else after all. Trade will be negotiated between nations under secret terms in guilded state department halls and embassies instead of open electronic trading bourses. Agreements will be made with armies and navies in the background, always the subtle threat of war (historically, most wars have been fought for control of resources and trade routes). Terms of trade will consist of exchanges of hard assets, military services, manufactured goods, or precious metal bullion. Barter between nations is the future of trade, and will be made to secure strategic advantage, not the best price. No nation will want to trade with its strategic rival, except under threat of war or other coercion.

1 comment:

Dean said...

Very nice writeup. Your analysis seems to right on.