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Belmont Club

The End of Globalization

April 7th, 2013 - 6:58 pm

It was the best of times. It was the worst of times. Choose which.

The IMF’s Christine Lagarde welcomed the Bank of Japan’s enormous money printing program as a “step in the right direction”. But  Hongkong’s South China Morning Post said that China’s leading economists are “furious”.

One disgruntled economist even accused the BoJ of “monetary blackmail” and called on the Chinese authorities to retaliate in kind … Chinese economists regard this policy as a devious attempt to drive down the value of the yen, and so boost the commercial competitiveness of Japanese exporters compared with their rivals in China.

If Lagarde thinks Japan has saved the Global Economy, Chinese economists by contrast painted the Japanese move as the first shot in a global currency war that “will doom other nations”. “Liu said Japan’s unprecedented easing programme, aimed at ending more than two decades of deflation, was ‘a monetary blackmail’ targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.”

Among the possible doomed, according to the Financial Times, is Korea. “South Korean officials are particularly sensitive to Japan’s recent monetary stimulus, which has brought a significant drop in the yen’s value. The Korean won has gained about 6 per cent against the yen this year after surging more than 20 per cent last year, threatening Korean manufacturers’ price competitiveness against Japanese rivals.”

Even before the BoJ fired its salvo the Koreans were rattling their sabers. “South Korea is preparing to fight ‘speculative’ investors betting on the won, as the currency’s appreciation against the US dollar and the Japanese yen erodes Korean exporters’ competitiveness.”

Are we watching the unfolding of a currency war? The Telegraph delving into history notes that ”in the Great Depression of the 1930s, currency wars became common, with nations effectively competing to export unemployment. However, global trade declined sharply as fluctuating exchange rates harmed international traders, hurting all economies.”

Humayun Shahryar of Auvest Capital Management suggests that the handmaidens of currency war — trade war and protectionism — are already present.  The reason is that once someone exports job losses, everyone exports job losses. Soon the whole exercise fails and barriers go up.

In a fiat currency system it is increasingly difficult to devalue a currency if everyone tries it at the same time, as demonstrated by the fact that most major currency pairs have not moved much on an average over the last four years as a result of constant interventions through quantitative easing and other actions by central banks.

Frustrated by this failure, the Swiss National Bank and the Bank of Japan have fired the first open shots and others are likely to soon follow suit as falling global trade leads to a rise in protectionist sentiment across the globe. Once central bank action fails in this covert trade war through currency manipulation and bank bailouts, governments will be forced to take direct action through subsidies, tariffs and other trade barriers. References to currency wars will soon be replaced with trade wars as global imbalances come to the forefront again.

Herve van Caloen of Seeking Alpha says that if these trends continue it will be the end of globalization. The Fiscal Times quotes a McKinsey report which argues the same thesis.

But in recent years, the amount of money flowing across borders has drastically decreased. According to a new report, this represents a drastic shift away from international commerce, with localized markets more dependent on domestic consumption for growth. It could mark the end of modern globalization. …

According to McKinsey, there are two possible ways forward. In the first scenario, countries would becomes isolationist, continuing to retreat from international capital markets and concentrate on domestic growth. …

McKinsey’s second option: financial institutions and policy makers will have to put a regulatory system in place to prevent catastrophes like the 2008 crisis. These regulations would allow money to move across borders more efficiently and with less risk.

All of these scenarios predict that the party is over. Either walls go up or the gates and conditions of entry become negotiated. Either way happy days will not return for a long time. If history is any guide the nations of the world must go through a long period of re-adjustment before a new period of growth becomes possible. In the meantime there will be a lot of belt-tightening and adjustment, and the countries will fare according to their resource endowments, population and skill.

President Obama seems destined to face a crisis like one of his storied predecessors. Which crisis? Ah there’s the rub.

Obama as FDR

Obama as Reagan

Obama as Lincoln

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All Comments   (36)
All Comments   (36)
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Getting back to the original post, there is an undercurrent I have often wondered about.

Over the last 30 or so years little has been said of the economic growth caused by the increasing numbers of two income households. In addition to up-sizing homes and miscellaneous luxuries, entire industries like childcare were created. Bottom line, individual household consumption went up, the goods allowed for 'in poverty' went up and poverty, funded by dual income taxes became a career choice. On and On.

Further, every one still looks for growth. Profit (I prefer the term return on risk to profit) growth is based on increasing sales due to business growth, i.e. more McD's, rather than more efficient operations. The numbers are bigger and it is more fun to ride the wave than wade in the pools. Farming is an excellent example. There are only two ways to increase income from a given acre of land, increase its yield or increase prices. Yield increases are reaching diminishing returns. So the operator has to learn to view the farm as fixed income. But fixed returns do not fuel increased farm owner income. (Corporate farms solve the problem by vertical integration, from farm to table)

How does an economy adjust to a static model? Modest or steady or lessening (hat tip Spengler) population increase, which is the absolute growth engine, with more or less sated real needs? (An explanation why some RINOs secretly support unlimited immigration. They will stay in their gated communities while the immigrants populate red states. We've seen this before)

If the globalization pendulum is on a back swing, house holds begin to revert to single or 1 1/2 incomes, poverty is again re-defined as true needs, the economy must deflate or reach some sort of steady state. And, the remaining economy must become a zero sum game.

Now steady state economies are historically the norm. Only in the last 150 or so years, as huge sections of the planet moved away from subsistence farming to surplus farming and manufacturing, has consumption jumped. (In the early 1900's over 70% of US population were on farms).

What happens when everyone has a new car? And can replace it regularly?

Food for thought.
1 year ago
1 year ago Link To Comment
"How does an economy adjust to a static model? Modest or steady or lessening (hat tip Spengler) population increase, which is the absolute growth engine, with more or less sated real needs? (An explanation why some RINOs secretly support unlimited immigration. They will stay in their gated communities while the immigrants populate red states. We've seen this before)" Well said. The part the RINOs miss simply because Texas has stayed red despite a near Hispanic majority (most Hispanics in Texas don't vote) is that there's no question California went dark blue due to the Mexi-nization. But how long can Texas assimulate Hispanics into what one Hispanic comedian called the 'Billy Bob Martinez' culture of big pickups and guns?
1 year ago
1 year ago Link To Comment
RINOs don't secretly support unlimited immigration...

They OPENLY support accelerated immigration.

Globalization is, and has been, a very trendy word.

At this time, manufactures dominate globalization...

And the next trendy wave is Robotics which is going to crush the economic game plan of shipping thither and yon to find ever cheaper proles to task.

BTW, Red China was the last, mega-bastion of smart proles.

The edge of the Petri dish is in sight.

No-one will be shipping jobs to Africa from China.

Instead, guilt-free Chinese are going to recapitalize Africa -- intellectually.

I'm sure everyone remembers that the one-child policy does not apply overseas.
1 year ago
1 year ago Link To Comment
Blert, this is my precise reply to those like Michael McFaul who insisted ten years ago -- or Doug Casey in the present - that the Chinese grasshoppers will soon overwhelm Siberia. Why would Chinese want to go to the frozen tundra where enormous amounts of energy are required just for heat as well as logistics overland when they may re-colonize coastal Africa with easy to float out resources instead? Fighting off pirates is still lower cost than drilling for oil and gas through permafrost and building 3,000 mile long pipelines.
1 year ago
1 year ago Link To Comment
The only way forward is to abandon Mercantilism.

Red China only has these huge piles of stash, IOUs from everyone, because she's enthralled with Mercantilism.

But, these stashes only have value when they are spent on -- gasp -- imports.

Further, the ghost cities only have value when -- gasp -- the proles are paid living wages.

The world can only wonder if the geniuses in Beijing can figure out they must cash in their chips as they leave the casino. Otherwise, they can't walk out as winners.

Right now, Kim & Company, their puppets, make one think that the PLA will blow up the casino -- without even leaving the table.



1 year ago
1 year ago Link To Comment
Red China is ranting because she holds a staggering position in Japanese government bonds right now.

This impending hyperinflation of the Yen functions as a staggering wealth tax on a $1,000,000,000,000 asset pool. -- Without doing the computations, it's likely to be at least a haircut -- in real wealth -- of $100,000,000,000 against the Red Chinese.

Hyperinflating the Yen also must blow up the Red Chinese currency game. This is probably the true purpose -- and can be considered a down payment on building up the Japanese Navy -- and a counterpoint to their territorial dust-up.

Holding massive fiat assets is a weak man's position.

The casual posters over at ZeroHedge are idiots: Red China is in a weak position. Her economic miracle depends totally upon American sufferance.

It's the stronger power that hands over confetti, the weaker hands oven the goods.

1 year ago
1 year ago Link To Comment
Yes as the honest CCP Chinaman said in New York, "We hate you guys, but there's little we can do".
1 year ago
1 year ago Link To Comment
"The casual posters over at ZeroHedge are idiots: Red China is in a weak position. Her economic miracle depends totally upon American sufferance." How much bulleon would you say Beijing has in comparison to the USA, since we can't look inside Fort Knox and no one has probably since De Gaulle cleaned the place out in the 1960s? Have you noticed that Jim Rickards is saying Russia is probably the nation best prepared to fight the currency wars (because oil will always have some value and the Russian Central Bank like the Chinese have been buying up their own considerable mining output off the books).
1 year ago
1 year ago Link To Comment
In any currency war, America starts out holding Five-of-a-Kind.

It takes a Buraq to blow it. He's giving it everything he's got -- and everything he can borrow, too.
1 year ago
1 year ago Link To Comment
Ah David Stockman, does anybody remember why the Regan Administration booted him? I seem to remember it was because he didn't believe in the Laffer curve or supply side economics. Doesn't seem to realize the benefits of deregulation. Can't quite visualize what happens to technological and economical progress when government sucks up all the available capital for investment in the private sector or what happens if you cut government spending. He's maybe one notch better than a Keynesian but not by much.
1 year ago
1 year ago Link To Comment
1 year ago
1 year ago Link To Comment
Seems he's had a come to Jesus moment or a come to Ron Paul at least :)
1 year ago
1 year ago Link To Comment
He picked up some splinters in the woodshed.

After that' he couldn't sit still.
1 year ago
1 year ago Link To Comment
Stockman says that the way out would be so radical it can't happen. The printing press can't stop now. Inflation will ultimately pay off the growing debt with all the freshly printed currency. In such inflationary time, the issuer with the greatest perceived stability and the biggest balance (even negative) will persevere with the accepted universal medium of exchange. That will be the US unless Dear Leader is successful in his goal of tearing the country apart.
1 year ago
1 year ago Link To Comment
"Tax havens force poor people to pay the taxes of the rich"
1 year ago
1 year ago Link To Comment
Richard,

I should have made myself more clear. I meant that when i click on a link in someone's piosted comment nothing happens. The link is not live.

http://www.youtube.com/watch?v=NDgncPD0bew

Testing to see if I can post a link that works
1 year ago
1 year ago Link To Comment
Well, we can still copy and paste them into our browser window. Which I hope all of you will do with the CSPAN link below: it's well worth watching the whole thing.

I have no love for the Dismal Science, but I was both fascinated and appalled by the two Davids' account of the current economic disaster. OH: bonus feature -- they were giving a talk to reporters on the Economy/Money beat! Trying their utmost to impart knowledge and understanding. The Q&A at the end is . . . interesting.
1 year ago
1 year ago Link To Comment
I feel kind of foolish for not realizing this. Copy and pasting works. Thanks.
1 year ago
1 year ago Link To Comment
All y'all need to watch this CSPAN special:
http://www.c-spanvideo.org/program/311904-1

Pay particular attention to (the passionately angry) David Stockman, former WH Budget Director under Reagan, and author of THE GREAT DEFORMATION: The Corruption of Capitalism in America.

He makes a blisteringly clear analysis of the whole TARP debacle, and he and David Walker (former US Comptroller General) are furious with both parties and the widespread economic illiteracy in the plutocracy.

Wait 'till you hear what they have to say about Bernanke and Goldman Sachs, among others. They don't hesitate to get personal, either. Excerpt from Stockman's book:

"...The central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi- Keynesian demand–pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities, as shown below, for speculative gain in the Wall Street casino.

"At the same time, Keynesian economists of both parties urged prompt fiscal action, and the elected politicians obligingly piled on with budget-busting tax cuts and spending initiatives. The United States thus became fiscally ungovernable. Washington has been afraid to disturb a purported economic recovery that is not real or sustainable, and therefore has continued to borrow and spend to keep the macroeconomic “prints” inching upward. In the long run this will bury the nation in debt, but in the near term it has been sufficient to keep the stock averages rising and the harvest of speculative winnings flowing to the top 1 percent.

"The breakdown of sound money has now finally generated a cruel end game. The fiscal and central banking branches of the state have endlessly bludgeoned the free market, eviscerating its capacity to generate wealth and growth. This growing economic failure, in turn, generates political demands for state action to stimulate recovery and jobs."
1 year ago
1 year ago Link To Comment
By links do you mean links? They don't work for me either, so I paste in links as text as in: http://pjmedia.com/richardfernandez/2013/04/07/the-end-of-globalization/?show-at-comment=129869#comment-129869

The current format is simple text. I'll ask about it.
1 year ago
1 year ago Link To Comment
Richard,

Under the old format links worked; under this format links don't work, at least for me. Is it me or is it the format? Advise, please.
1 year ago
1 year ago Link To Comment
That is correct; there are no live links because its text, not html. I will see if there are any plans to change this.
1 year ago
1 year ago Link To Comment
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