The Brave New World of Deglobalization

In previous articles, I have voiced some of my criticisms and predictions re globalization here, here, here, and here. Unfortunately, it is becoming clearer by the day that globalization was largely a fraud where Americans could endlessly consume and Chinese factories could endlessly manufacture without any adherence to economic fundamentals and creating a false and bloated version of prosperity and rising living standards. The brilliant minds of Wall Street came up with “risk management strategies” (irony alert) so that derivatives could endlessly build a never-ending Ponzi scheme which would go on forever and ever.

We are now entering a very painful period of unwinding of what economist Niall Ferguson called “Chimerica”. Now, China and America are entering a dangerous period of deglobalization, where they have come to the realization that after the bubble pops and the deleveraging begins, their interests are really quite different. Instead of China and America being two sides of the same economic coin, they need to play or pander to their own constituencies. The blame game will begin.

And their native constituencies are confused, hurt and angry. But they are not nearly as angry now as they will be in the near future when they have figured out what has happened to their wealth. When that happens, there will be hell to pay, and there will be blood in the streets.

The reason for this is because the leveraging which occurred is simply too big and too complicated. Taking all the bad leveraging out of the system and replacing it with cash and credit liquidity is like trying to rebuild the engines of an aircraft in flight. It cannot be done. This means that there can only be a crash.

The bright side is that crashes can be managed. You can go into a death spiral which is impossible to pull out of, but a smart pilot will look for a stretch of land and try to glide in for a crash landing. So far, the political leadership worldwide is pursuing policies which more closely follow the former path of the death spiral. This is because everyone is acting in what they perceive in their own interests, instead of keeping their heads and thinking through what needs to be done. It is a deadly panic move.

The problem is that we are now entering a phase where the crisis has spread from subprime mortgages, to derivatives, and then on to currencies. In the beginning the patient suffered from a lack of credit liquidity (constipation), so the central banks are going to provide liquidity (the enema). This did not work, and the patient has become bloated. There is the very real chance that this will eventually cause runaway inflation (dysentery) and the patient will then die of dehydration. When this happens, the currency becomes worthless and society falls apart until a new dictator imposes his will on the society, as Hitler did at the end of the Weimar Republic in Germany. In China’s case, runaway inflation led to the Kuomintang and Chiang Kai-shek’s loss of support in the cities, and directly contributed to the establishment of the People’s Republic.

Sounds really really really bad, doesn’t it? That’s because it is.

But there are survival and prosperity strategies. I will talk about them in 2009. But you will have to be really really tough.

6 Responses to “The Brave New World of Deglobalization”

  1. Charles says:

    I believe that we have more to gain if we work together. The knee jerk reaction is of course to protect oneself, in the event of crisis but overcoming that enables us to find truly great solutions. There are many interesting thoughts already swirling around the globe, but it’s crucial we control our animal instincts to lash out through civil action or conflic,t or side with the needs of the individual. It will be more messy that way but some are unable to change. Let’s not let that stand in the way of intelligent purpose. Don’t tolerate idiots.

    In any case I like the patient analogy. To me the wealth aquisition model that the US was somewhat fixated with led to a massive coronary heart attack on what is now evidentally a morbidly obese patient. The adrenline and glucose kick start injections have been administered and cardiovascular shock treatment to restart the heart but it appears auto consumption while unable to borrow sufficiently have left a permanently irreversible state.

    Perversely the diagnosis led to a prescription by the US’s most consumption convinced minds that immediate portions of consumer food including super size meals to return to an immediate flow of disproportionate consumption have left us with a picture that is self evidently not going to work.

    Its over. We rewire our economies and if we’re really smart we crack on with the stuff that actually was utterly out of our control despite also pointing towards our very demise. The brutal and pathological failure of market forces to create wealth sustainably. We need to fix that one while the distribution retail chain is down for a long summer shortly. Sooner the better despite our world class ability to bullshit ourselves.

    Seriously. It’s messy but I have no idea what could have saved our miserable and selfish agendas. I hope we do it. I think we can. But I’ve prepped my mind in case it gets ugly.

    Think South Africa. Critically high unemployment despite gated communities and runaway crime figures. It’s tough to keep a level head and human heart in those circumstances. Tough but not impossible.

  2. Stephan Larose says:

    Globalization is a ponzi scheme thought up by massive multinational corporations trying to find a way around the protections afforded the citizenry by their democracies. The WTO, NAFTA, CAFTA, the failed MAI, and GATT were all non-democratic institutions run for the benefit of the richest 1%, and were all, by necessity, totally non-transparent, because if people were to see these agreements in detail they would discover that these agreements are about disenfranchising regular people and rolling back the hard won gains of the past century in areas of labor, civic and environmental protection. Globalization has been going on for much longer then the WTO, and during that time the divide between rich and poor has yawned ever larger, and typical middle class wages afford the middle class a quality of life that is inferior to that they enjoyed in the 1970’s. The putative “benefits” of globalization are a right-wing fantasy, and that includes all the “poverty reduction” brought about by having millions of people crammed into sweatshops working 80 hours a week on slave wages to provide richer consumers with slightly cheaper goods, and major corporations with super-sized profits, and a way to keep Western labor “flexible” a code word for living in a state of constant job insecurity. How insecurity works to the benefit of society is beyond the fathoms of moral humans, but to sociopathic corporations running the show, its an inviolable mantra. Globalization is an economic model based on socialism for corporations, they get to socialize risks and costs, and get tax breaks while we lose our jobs, education and health programs. What sense does it make to devalue the labor of a human being in Vietnam to “save costs?” None. An economic system that allows the labor of someone in one place to be valued 1% that of another persons identical labor somewhere else is morally indefensible. What economic sense does it make for a country that produces wood to ship its wood halfway across the world to be made into toothpicks and then shipped all the way back? Zero, but that is the world we live in, with an accounting system that counts our living, breathing world as an infinit garbage can, a financial system that allows private entities to legally counterfeit money and then sell it in a myriad of fraudulent credit instruments to be paid for/back by real production and value by ordinary people, and a political system that works behind a facade of democracy for the benefit of a tiny group of elites. Trade makes sense, globalization is senseless. Word.

  3. […] brings me to the link of the day. Paul Denlinger recently wrote one of the grimmest arguments I’ve seen about where we’re all heading, and why China and the US have got to crash. […]

  4. Scott Sykes says:

    Good, though depressing, post Paul :-) Tough times, for sure, and remains to be seen how it will shake out in China. I’m much more of an optimist than you, but you make some good points here, supported by facts.

  5. […] crisis has been talked about in economic terms–the death of equities, stag-deflation, and deglobalization.  But perhaps even more than the $50 trillion of lost global market wealth (Asian Development […]

  6. […] some time, as previously mentioned by websites like China Digital Times and Paul Denlinger’s China Vortex last year. Most people following global economic news are probably already familiar with the […]