by Cato 8/4/14
The MSM is littered right now with gleeful rants about what they see as the failure of capitalism and the end of this second major age of globalization, anchored in the reserve currency of the $US. For those of you a bit behind in your economic history readings, the first age ran for 70 years or so ending with the start of WW1 in Europe, and was anchored in the reserve currency of the £British.
I strongly dislike the term “globalization” and forbade its use in my classroom. It means everything and anything generally and therefore nothing specific at all. I call such terms “Red Queen” terms … their use diminishes understanding; they mean whatever the speaker chooses them to mean at one moment and something else later on.
I propose that our current round of increasing global trade (to distinguish it from the British-led one and from all the other lesser eras of mercantilism and colonial international expansions) is driven by four primary forces. These forces are unique to the post-1980 era, have proven to be uncontrollable by governments, and explain the panic and rejection (to the point of terrorism) of cultural fundamentalists, social ‘reformers’ and economic communalists.
1) Securitization: the separation of the characteristics of an asset into it’s fundamental definitive parts and the pricing and sale of those parts individually. The specific skills of this craft are referred to as “financial engineering”. The output of financial engineers are called derivatives. The most common derivatives are options and futures. Think of acquiring the price volatility of a stock without acquiring the dividend or the voting rights of that stock, for instance, by buying an option on it. You never really own the stock, but you benefit if the stock price rises as though you DID own it if you are ‘long’ or if the stock price falls and you are ‘short’. Or consider selling a Euro-Dollar swap (a future) to speculate on the interchange risk. You agree for a fee to deliver $US10,000 in exchange for €7500 three months from now. If the Euro is worth more than $US in three months, you win when you swap your $US into €’s. If not, you lose. You can do these sorts of deals with interest rates, currencies, stocks, coal, oil, gold … any asset you can name. Securitization is a post-1980 phenomenon as a private market function, and it effectively prevents governments from “managing” assets as they see fit. Which is why progressives rabid to control the flow of the economy despise this financial invention, and why the MSM is on a crusade to destroy it.
There is a second kind of securitization, that used to carve up and sell income-producing assets like mortgages and credit card balances, car loans and student loans. These are what fools in the MSM are chanting “caused” the financial crisis in 2008. This is nonsense. There is nothing inherently dangerous about a derivative unless the underlying asset is itself foul. A derivative is just a contractual agreement referencing that asset. If the credit standards are politically corrupted, as they were for sub-prime mortgages, then the derivatives built on those corrupted loans will be corrupt, too. But to say that it was the creation and sale of the derivative that “caused” the crisis, while ignoring the politics that fouled the mortgage system, is both politically cynical and mind-numbingly stupid. Without derivatives to efficiently price the individual elements of the complex assets of our modern world it’s 1955 all over again.
2) Privatization: the separation of government from effective control of domestic commercial assets leads to loss of control over domestic economies, naturally. Prior to about 1980 governments had the final word in their domestic domains. They were “bigger” than their economies. In the terms of an earlier era governments held the “commanding heights” of the economy. Not any more. Consider: the entire concept of Keynesianism is built on the premise that governments can overwhelm economies when necessary; spend more when the private sector is weak and less when the private sector booms, thereby “managing” the economy. But suppose governments no longer have this power over markets. Keynesianism would be a useless idea, would it not? The erosion of government fiat as the dominant level of control is a hallmark of this post-1980 age, which is what distinguishes it from all prior periods. It’s why Keynesian prescriptions for Europe’s problems and our own have proven to be futile.
Think of it from another perspective. Why is it that private companies everywhere are cash-rich and earning record amounts, while governments everywhere are running massive deficits and are slowly going broke? The market rules. Governments can no longer just dictate outcomes, to the fury and rage of the ‘governmentalists’, progressives, socialists and fascists of the planet. Governments in Europe are being forced to sell off companies, even entire industries, all sorts of assets they have owned for decades to balance the books. This as The Left rages on, demanding more market regulation and higher taxes; howling for more governmental dominance as their coveted institutions become ever more insolvent.
3) International Confederation: the reaction of marginalized and overwhelmed governments is to upscale; to join into larger combines to try to take back command from the increasingly unmanageable markets. So we have NAFTA, the EU, dozens of UN agencies, the newest incarnation of the IMF, the WTO, the G-8, G-20 etc, etc. The sole purpose of all of these supra-national organizations is to suppress by treaty and unified intervention what no single national government can: the politically unacceptable demands of the marketplace. These combines are a useless attempt, for the most part, to hold back the tide of history. They attempt in various ways subtle and obvious to regulate securitization into impotence, to stop the slow disintegration of 100 years of socialist institutions comprising the welfare state, and to reverse the transfer of governmental power into private hands. The combines are less stable than is the privately managed marketplace, than are the businesses they are supposed to control.
The combines are less financially sound than the markets they are supposed to dominate, as well. These various confederations will be expensive wreckage in the coming Age of Constraints on a global basis, just as the European Union is becoming the wreckage of the supra-national efforts of socialists in Europe. I study the EU closely because it is a microcosm of what will come to the rest of the world during the course of the rest of my life. The loathing of The Left for individual liberty on a personal level, and for all freedoms market-driven on a macro level, finds its focus in the demand that national sovereignty must be surrendered to international confederations. The future is being driven by the markets in the opposite direction.
4) Technological Individualization: This is the key to the previous three. The ungovernable power of individual companies and individual people via the acquisition and use of communications and computing power expands geometrically while government can only grow linearly. Starting in about 1980 the ability of individuals and corporations to walk around, ignore and avoid official government channels and central bank communications lines, the ability to bypass government-monitored and in some cases government-owned routes of capital transfer drove and allowed the first two drivers above. The world of derivatives is a private world, with the vast majority of hedges, swaps, and speculations being done out of reach of the bureaucrats and regulators. The world is better off for it. Sarbannes-Oxley and Dodd-Frank legislation will not stop this technological, privatizing march, though it will drive all the innovation and benefits of that march out of the US and into areas of the globe less hostile to it. This destruction of American financial innovation, cynically in the name of “safety” but more honestly to stall the engine that is powering market dominance and recover government by fiat, is considered by The Left a small price to pay.
The propaganda regarding the “evils” of free market capitalism put out by the MSM is not winning the debate in the US, fortunately, but it is in Europe. Which might explain the inflow of immigrants in the US and the outflow in the EU. “People vote with their feet”, is the best proof I can offer of the will of the people of the world for freedom of action and a merit-based society.
None of these four drivers add up to “globalization” as the word is commonly used, implying some sort of expanding unity. This is expanding disunity. This is atomization of government and society. And it’s healthy and wealthy and wise. This is economic process independent of government, and it’s precisely why socialist governments which refuse to participate in this openness, this explosion of individualism, top the list of the poorest nations on the globe. Nations that reject this atomization outright are poor and internally violent: North Korea, most of the Mid-East, too much of Africa. Those that attempt to stall and contain it, the EU for instance, are economically weak and governmentally ill. Countries that embrace this economic atomization … China, India, Australia and the USA most prominently … show resilience to shocks and trauma and lead the list of nations thriving.
The fires of this four-driver change were lit when the Bretton Woods Accord collapsed in the early 1970′s and broke out in a uncontrollable blaze with the coming of the personal computer and cell phone. I am at a loss to see what will stuff this genie back into his bottle and return the world to the socialist’s paradise of 1975. Today, the markets rule. But don’t call it globalization.
Cato blogs at Cato’s Domain.
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