Tuesday, October 28, 2014

Globalization = Permanent Instability

Globalization continually creates imbalances that fuel a perpetual instability that gradually impoverishes every sector other than global capital.


Globalization has two guaranteed consequences: permanent instability and endless boom-and-bust cycles. As noted in Forget "Free Trade"--Focus on Capital Flows, the key engine of globalization is mobile capital: capital that can borrow money for next to nothing in one nation and then move that capital to other nations where yields are higher and opportunities for exploitation riper.

This mobility of capital is an enormous benefit to the owners of the capital, but it creates extraordinary instability for those who are not as mobile. When mobile capital encounters anything that reduces profits--higher taxes and rising labor costs, competition or restrictive regulations--it closes factories and fires its workers in that locale and shifts to another locale with greater opportunities for high returns.

The workers left behind have limited means to replace the lost wages, and the local government often has few resources to repair any damage left by the exploitation of resources. The advantage of mobility is reserved for capital, and to the relatively limited cohort of workers who can immigrate to other nations to find work.

This illustrates two key ontological characteristics of financialized globalization: perpetual instability and a never-ending cycle of boom and bust as capital sparks rapid development in one locale and then moves elsewhere once profits decline.

The scale of global capital is difficult to grasp; trillions of central bank-issued dollars, euros, yen and renminbi are sloshing around the global economy, seeking low-risk profits.

Capital has no loyalty to anything but its own expansion, and the damage it leaves in its wake is of no concern to the owners of capital.

There are even less visible consequences to the globalization of markets, capital and labor. Once goods and services are priced globally, local supply and demand no longer set the local price. As my colleague Mark G. has observed, consumer prices can rise even if there are deflationary surpluses in the local economy because price is set by global supply and demand. As a result, measuring inflation and deflation locally is meaningless in a globalized economy.

This financialized globalization of goods, services, credit and currencies continually creates imbalances that fuel a perpetual instability that gradually impoverishes every sector other than global capital, which being mobile, can exploit the imbalances for its own profit.

Correspondent Mark G. recommended a recent article by China-based economist Michael Pettis, How to link Australian iron with Marine le Pen:

"In a 'globalized' world, no country, not even the US, can protect itself from the consequences of imbalances elsewhere. The global economy is a system in which certain types of imbalances are impossible. I especially focus on the requirement that global savings and global investment always balance, but there are others. Because an imbalance at the global level is impossible. if there are imbalances in one country or region, there necessarily must be the opposite imbalances in another, and the more open an economy, the more likely it is to respond to imbalances elsewhere.

It is impossible, in other words, to understand any non-autarchic economy in the world except in the context of global imbalances.

As I say in my book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, in a globalized world anything that affects the relationship between savings and investment in one country--and nearly everything affects that relationship -- must have the opposite effect on the rest of the world. There is no way of escaping the fact that imbalances generated in one country become a problem for everyone."

Here is Mark's commentary:

The logically following converse of Pettis' point is that only economies enjoying autarchy in any category of economic activity can ever hope to reach reasonable price stability in those activities, and then only if these activities are also made non-tradable by local practice. Restated, "free trade" between large central states is a prescription for perpetual instability at all levels.

Ricardo's theory of comparative advantage is only advantageous if you enjoy an advantage in a particular field. Otherwise it is merely a road map to rapid impoverishment. The only localized response--even at continental level--is to embark on a series of successive financial bubbles. This is pretty much what we've seen everywhere in the world for the last three decades.

Thank you, Mark, for summarizing the consequence of central bank-funded mobile capital and the imbalances and boom-bust cycles this free money for financiers generates globally.

Of related interest: A Thought Experiment in American Autarky (January 17, 2014)



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