Don’t Call It Globalization

Globalization2by 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.

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7 Responses to Don’t Call It Globalization

  1. Timothy Lane says:

    The crucial aspect of derivatives is that mortgages or other securities are divided up into tiny slices. Each slice is then combined with slices from other such securities and sold as derivatives. This works all right as long as the underlying securities are mostly all right, and no doubt looked like a good idea. But it was hard for those buying the derivatives to evaluate the large number of securities that had been sliced up (and this was made worse by the fact that most securities ratings agencies are paid by those they rate). So when a large number of mortgages went sour, so did the derivatives based on them.

  2. Kung Fu Zu Kung Fu Zu says:

    This is a huge subject and many volumes have been and, no doubt, will be written about it.

    Having been active in “global trade” all my business career and having lived about 25 years overseas in 7 different countries, I have seen some of the incredible changes which have taken place since the 1970’s.

    I will try to summon the energy to comment on various points in this piece which I believe needs some refinement.

    Until I am able to do so, I will make a couple of observations regarding Cato’s assertion below:

    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.

    I am not sure your assumptions regarding the meanings you use are correct. First of all, it appears you are dealing only with trade, whereas the term “globalization” covers more than simply trade.

    And while it is true the advances in technology have given people more choices with which to become atomized, it is also true that the same technology is spreading and mixing culture in such a way as to increase sameness across the globe.

    I find the silly video (I believe it is called Gangnam Style) made by that Korean fellow to be the perfect example of this. He was able to copy musical bits from America, take a simple English word or two, add some syllables which sounded like English, but were really jibberish and create something which was perfect for Asia and much of the world where English is not spoken.

    Like the toy “Guitar Hero”, Gangnam Style, feeds peoples conceit that they have some skill which they don’t. This particular one being something along the lines of “I must be cool as I can understand some of the English this guy is saying”.

    As one who has been involved in international trade since the 1970’s and who has lived in countries which have undergone tremendous change during that time period let me say that there is absolutely expanded unity between nations in the sense that more nations have come into the WTO since the 1980’s. And it is agreements between the nations which have allowed international trade to expand enormously. Had the nations not agreed on this, I assure you much of that growth would not have taken place.

    Furthermore, nations make treaties and agreements between themselves, such as the Basel Accords or Convention. So they are not atomized in that sense. They still have controls.

    Individuals and smaller groups are another story.

    I have already gone on more than I intended so I will stop here and try to get back to this later.

  3. Brad Nelson Brad Nelson says:

    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 agree, Cato. And it’s why I dislike the term, “sustainability.” What it means, in practice, is more pseudo-scientific tinged with feel-good energy, than it is specific about any method or resource. There can certainly be a “sustainable” harvest of salmon or cod in a specific region. But as this word has entered popular culture, it seems to be more of an agreed-upon affection — voodoo, if you will. As long as some product is determined to be made via “sustainable” parts or processes, the sensibilities of the libtards are not offended.

    What I understand “globalization” to mean is twofold:

    1) It’s meant to be a critique of capitalism. In the Progressive romantic view of society, we will all be buying “natural” products from the non-corporate “sustainable” farm or craftsman down the road. “Globalism,” regarding economics, means a corporate giantism — impersonalization-gone-wild.

    2) “Global” (if not actually the word, “globalization”) — in the social and political sense — is a good thing for the libtards. It’s the super-duper kumbaya word. We are to “think globally.” The point of a Progressive education (which now runs amok in public schools) is to teach students — not to be productive members of society — but to be “global citizens.” The Left wants globalization in terms of society and government. They want a one-world government, controlled by them, of course. This also is behind all the libtard “fill-in-the-blank without borders” movements, such as “Doctors without Borders.” And it’s not that they don’t do good work. It’s that the libtard mentality sees “global” as good and national borders of any kind as bad. (Note: I don’t know a single libtard who feels the same way about the fence that marks his or her property line. As is typical, they want to tell us how to live while they live as they will.)

    As for the ins and outs of the market, I haven’t a clue as to the technical financial aspects, although I would think that the oceans facilitating cheap transport (especially with super-container ships) has had perhaps the greatest impact regarding a global market for goods. And the internet has certainly opened up (as anyone can attest who has ever had to deal with tech support from someone who could barely speak English) a global market in the service industry as well.

  4. Kung Fu Zu Kung Fu Zu says:

    What I understand “globalization” to mean is twofold:

    1) It’s meant to be a critique of capitalism.
    2) “Global” (if not actually the word, “globalization”) — in the social and political sense — is a good thing for the libtards. It’s the super-duper kumbaya word. We are to “think globally.”

    I believe you are reading into the word more than is there.

    1) I do not see how the word can be anything like a critique of capitalism when used in the economic sense. It covers a phenomenon which opened up many controlled or semi-controlled economies to free market capitalism or at least moved them toward a closer proximity thereof. The two largest of these economies being China and India. As you know, China was basically a central command economy tightly controlled by the Party which left little room for individual economic activity. India’s economy was run by a bunch of English educated fabian socialists. Neither economy is remotely like they were in the middle 1980’s much less the 1970’s or before.

    2) I believe you may be on firmer ground here. Types like Thomas Friedman like to throw the term around in a way as to praise the way everyone in the world is heading in the same, somewhat utopian, direction. We are all going to get along once we know and are dependent on each other.

    I believe the word, like many labels, is used as a shorthand which is not precise, thus many different meanings can be attributed to it. But that is a problem with language in general.

    • Brad Nelson Brad Nelson says:

      I do not see how the word can be anything like a critique of capitalism when used in the economic sense.

      It seems to me the word is used quite often in the media and elsewhere as something bad…along with such terms as “out-sourcing.” I don’t think this is at all a controversial or obscure idea. It helps to know how words are being used in the culture at large. And I think “globalization” is indeed often a slam on capitalism.

      Of course, to say that this is how the word is sometimes used does not mean it does not have other meanings, perhaps even technical meanings in the financial sector. But since we talk about all aspects of things here at StubbornThings I included that aspect.

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