The End of Globalization 2.0

The first wave of globalization lasted from 1870 to 1914. It ended with a war, an interwar period, and a second war. The second wave began in 1945 and lasted until 2001 or 2008 or a date yet to be chosen by historians.

Socionomics predicted the end of globalization with the social mood peak in the year 2000. The generational theory of Strauss & Howe predicts a 4th turning, a period of great upheaval. Economists see the limits of free trade. Even solar cycles predict a rise in warfare, if a solar minimum is on the way:

Michael Pettis asks, How much longer can the global trading system last?
At that point the global trading and capital flows system nearly collapsed. It was clear that the cost to the United States of maintaining the regime exceeded the benefits. Rather than opt out of the system, however, the US was able to “resolve” the crisis in August 1971 by reneging on its Bretton Woods commitment to convert dollars into gold, following this up with a series of agreements in 1972 and 1973 in which Japan and Europe took steps to reduce their external imbalances by adjusting their currencies. Because there was no automatic adjustment mechanism, it was wholly up to the US to decide whether to abandon its role altogether and allow the system to collapse, or to improvise a negotiated resolution in which other counties agreed to take on part of the adjustment cost.

The “Nixon shock” in 1971, by severing the link with gold, eliminated one of the few formal constraints left within Harry Dexter White’s system, although because the gold link only existed to the extent that no one tested it, it was a fairly meaningless constraint.
I disagree that it was not a constraint. Here is the growth of total debt, by annual percentage change.

The end of the gold standard unleashed a period of financial instability that lasted until the 1987 crash. Another period began after the fall of communism in the 1990s, with a continual rising growth rate in debt issuance in the United States until 2008.

Here too is the trade balance. The severing of the gold link looms large.

Back to Pettis:
hether the US captured a disproportionately large or disproportionately small share of the total benefits, and arguments can be made in either direction, it is probably safe to say that the US share of total benefits has declined since the 1940s and 1950s in line with the decline of the US share of the global trading system. As the world has grown faster than the US, and especially as countries that were once excluded fro the global trading system have joined – Russia, China, and large parts of Africa and Asia – the US share of the relevant world has declined very sharply.

But there are substantial costs to maintaining this system, and these have risen sharply. As the creator of the rules, and as by far the largest player within the system, the US is not able to game the system in the way other countries can. And other countries do often game the system – among the most obvious examples being cases that I discussed above, for example Germany and France (in two very different ways) in the 1960s, Japan in the 1980s, and China in the 2000s – not for evil intent but simply because policymakers everywhere always prioritize the resolution of domestic imbalances over external imbalances, and domestic and external balances are often difficult to manage simultaneously.

Put differently, the world economy is necessarily volatile, and to the extent that the US tries to limit destabilizing volatility, it can only do so by finding a way to absorb that volatility itself. The most obvious way the US absorbs external volatility is by absorbing trade and capital flow distortions, and the associated cost is likely to be higher to the extent that other countries try to game the system to generate more growth at home.

Pettis sees the tipping point as already having been passed:
I would argue that we have probably already passed that point, and that the US would be better off today by significantly modifying the way it participates in the global trading system. The longer it waits to do so, the riskier it will be, and either the more debt or the more unemployment it will have to accept. Among other things, the US must address the role of the US dollar as the world’s reserve currency and the way this role forces the US into absorbing volatility and shortfalls in demand that originate abroad.

......Many economists may disagree with me that the costs of the current role the US plays in the global trade regime exceeds the benefits, but the point of this essay is to show that even if I am wrong, as long as the world grows faster than the US, more of the world is incorporated into the global trading system, and more countries design growth models that suppress domestic consumption in order to subsidize domestic growth, there must of necessity be a point at which it makes sense for the US to opt out of its role as shock absorber, and – by raising tariffs, intervening actively in the currency, restricting foreign purchases of US assets and especially US government bonds, or otherwise reducing capital inflows – become simply one more member of a system with no automatic adjustment process.

The current system, in other words, is inherently unstable and will sooner or later force the US economy into a position of choosing either to take on excessive risk or to abdicate its role as shock absorber.

If there is no shock absorber, then the market will turn to the shock absorber par excellence: gold.

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