The Brave New World of Deglobalization

January 4th, 2009

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.

What Happens To E-Commerce When Credit Cards Don’t Work?

October 9th, 2008

During the past several years in China, I have spent a good deal of my time explaining to Americans that e-commerce solutions do not have to depend on credit cards. In many parts of the world, such as Germany and Japan, and in China, e-commerce is about building payment gateways to different banks using debit cards or other devices which connect directly to bank accounts.

This was how Paypal started in the US. It is also how Alipay, Yeepay and other solutions work in China. Tencent, a company with a market cap of US$80B, based in Shenzhen uses a subscription payment system which also deducts payments directly from users’ accounts.

As the global Ponzi scheme which started as the subprime credit crisis continues to unwind, defaults on credit cards in the US will shoot up.

In the near future, credit will be given out much more sparingly. American society will very quickly change from a credit-based society to a cash-based society for most transactions. But there will be plenty of honest people who will need to buy, and sometimes they will want to buy online. If they don’t have access to credit and credit cards, how will they buy?

When you think about it in these terms, many of the payment solutions developed in China look more interesting, not just for China, but adapted to suit the needs of Americans who no longer have credit. Most likely these won’t be Chinese companies, but American e-commerce firms who want to develop something suited for Americans and the American market.

So which American company would come out with a non-credit card based payment solution? My guess is that it would be the leading e-commerce company, Amazon. I’d bet they are working on it right now.