The last couple of weeks have been full of events justifying predictions made in this column over the years, which is very gratifying. A 2010 prediction in this column and in a presentation to the American College of Cardiology talked about the possibility of de-globalization. Remarkably, that prediction appears to be coming to pass. I thus thought it worthwhile to look at how far the de-globalization trend might go, and whether it, unlike globalization, will be permanent.
Some of this column’s predictions were fairly obvious and so old, from 2002 or 2004, that their fulfilment is largely a matter of stopped clocks being right twice a day. Still the de-globalization prediction in 2010 was fairly counter-intuitive at the time, met with considerable skepticism, and thanks partly to President Donald Trump, appears to be coming true less than a decade after it was made. It thus counts as a win on my Nostradamus Indicator.
In 2010, I outlined several factors which I thought made it likely that de-globalization would occur. Some of them, for example possible resources shortages, derived from the high oil and mineral prices of 2010 and appear unlikely to happen. One can’t win them all. Some of them, like the forces pushing for higher tariffs, currency manipulations and other trade barriers, including those derived from conflicting regulations, were fairly obvious. Still others, like the possibility of a further financial crisis impacting trade credit and credit problems resulting from the growth in global indebtedness, have not happened yet but still look fairly likely. So too does the possibility of governments panicking in a further recession – with no more “funny money” to print and budget deficits already excessive.
Some of the factors I identified as leading to de-globalization appear prescient. Green protectionism, blocking economic activity for spurious environmental reasons, has proliferated. The Internet has been further Balkanized, with several countries setting up “Great Firewalls.” The barriers to trade created by excessive intellectual property legislation have proliferated, though the egregious Trans Pacific Partnership treaty has been defeated (that treaty was very far from a true free trade agreement, partly because it incorporated excessive U.S. patent and copyright protections.) Opposition to immigration has grown exponentially, largely because of the elites’ total and disgraceful failure to control it. Finally, I pointed out that de-globalization would benefit blue-collar workers in Western countries, who might therefore be expected to vote for it – this, above all, is a prediction I can be proud of, since there was no sign of it in 2010.
Enough with the self-congratulation – where do we go from here? Is de-globalization a temporary blip, a short-term pause in the inexorable trend towards a truly globalized world? Alternatively, is it a reaction so strong that we will spend the rest of the 21st Century in tiny atomized states, with Japanese-style immigration policies and autarkic attempts to develop domestic capabilities in everything? Or something in between?
Globalization was originally an economic concept, at its simplest complete global free trade with absence of barriers, but it has acquired both a political and a cultural dimension. Economic globalization, since the mid-19th Century when it was first tried by Robert Peel and Richard Cobden, appeared to the generation that read David Ricardo an undoubted driver of economic growth and efficiency, though even in that time it was obvious it had its downsides.
Anthony Trollope’s villain August Melmotte, from his 1875 novel “The Way We Live Now” is a globalizer par excellence, flitting from financial center to financial center developing spurious Mexican railroads, and leaving a trail of financial destruction in his wake. Melmotte was a perfect example of the kind of rootless cosmopolitan for whom his word was very much not his bond, whose very rootlessness made him utterly untrustworthy. There are many equivalent figures among today’s globalists; one thinks of George Soros, but also of Google, Volkswagen, SAP, Deutsche Bank, Goldman Sachs, and the other faceless multinationals that express such pride in having eliminated any trace of their national culture, replacing it with a globalized lowest common denominator. Like Melmotte, such people and companies are rootless, like Melmotte they are very much not to be trusted. It is highly questionable whether the theoretical Ricardian value added to the world by globalization is not more than subtracted again by the depredations of the rootless people and companies. In addition, globalized companies by their very nature tend to be very large, with complex management hierarchies; this is a further source of massive inefficiency and waste.
Globalization was immensely fashionable after the fall of Communism in the early 1990s, when Francis Fukuyama proclaimed “The End of History.” However even economically the form of globalism then propagated, the “Washington Consensus,” bore only a modest relationship to the Cobdenite ideal. For one thing, it was far too tolerant of bloated government and failed to realize that, if government represents 40-50% of GDP, then almost half the resource allocation decisions in the economy are being made on a non-market basis, and will therefore open themselves to rampant cronyism. Add in the inefficiencies of global communication and sourcing links and the lack of trust that comes from interaction between different cultures with different ethical assumptions, and you have a clunky mess.
Run the film forward 25 years, and add to the distortions of bloated government an additional set of distortions from crazed central bankers running a monetary policy that bears no relation to that of a free market, and you get the unpleasant economic system we have today. Globalism operates almost entirely in the interests of the politically connected, it is subject to infinite skimming by the world’s Melmottes, personal and corporate, and it has neither the fairness nor the integrity to be tolerable as an economic system for our future.
On top of economic globalization, we have since the 1990s been subjected to political globalization. This takes several forms. The international institutions such as the World Bank, the IMF and the United Nations agencies have mostly been around since World War II, but they have recently been given more resources and power. This matters; if Argentina was being bailed out by Rothschilds or Barings, as in the 19th Century, there would be a much better chance of free-market solutions being applied than if it is bailed out by unaccountable bureaucrats at the World Bank or the IMF, most of whom wouldn’t recognize a free market solution if they fell across it in the street.
New institutions have also been created. The World Trade Organization is about the only international institution with a genuinely useful purpose, providing a forum for resolving trade disputes and an advocate against protectionism, but in practice it has been ineffectual, partly because since 2005 it has been run by nationals of the thoroughly protectionist France and Brazil. The plethora of institutions surrounding the chimera of climate change are also thoroughly anti-market; they exist to distort science to favor their aggrandizement and to impose an undemocratic mass of regulation upon a public that has no effective way to oppose it. The Basel Committee on banking regulation, and the International Accounting Standards Board also exist to impose globally agreed banking regulations and accounting standards that have been driven by an unholy alliance between crony capitalists in the multinationals and socialist control-freaks in government.
Immigration has been vastly increased, both at the highly skilled level and by the immigration, legal and illegal, of impoverished and unskilled denizens of Third World countries. Innumerable studies have been carried out purporting to prove that this benefits domestic electorates, but those studies are spurious, bought and paid for by the cheap labor lobby, another example of the corruption and cronyism that has accompanied globalization. Agricultural activities that should economically be outsourced have been carried out by illegal and illegal “guest workers” while various visa scams have been perpetrated to create massive low-wage sweatshops that immiserate even many of the relatively high-skilled domestic workforce.
Then there are the sub-global supranational institutions, notably in Europe, that have arrogated power to themselves, entirely without democratic control. The EU was supposed to be a common market, but by creating an international bureaucracy with legislative power and an entirely unaccountable Parliament, it has since the 1990s robbed the citizens of Europe of their democratic birthright – and impoverished them by its regulation-crazy incompetence. The Euro was a good idea, a common currency between the countries of the EU, but was so poorly designed that it had no controls on the worst-run members, so that countries like Greece enjoyed spuriously low interest rates while running up credits that would eventually be funded by the Bundesbank or the European Central Bank.
Finally, as well as economic and political globalization, there is cultural globalization, which has immensely increased with the rise of the Internet. Today Lady Gaga, Hollywood, manga and sushi are close to being worldwide products. To say the least, this has not improved the intellectual capabilities of the human race, though it has improved its culinary skills. In any case, in this sphere at least, globalization seems unlikely to reverse.
Now that the blue-collar masses have caught on to globalization’s downsides, a certain amount of de-globalization seems inevitable. Supply chains will be re-domesticated in many cases, as analysis shows that the costs of global reach in most cases exceed its benefits. Multinational behemoth companies will often go the way of the dinosaurs, being replaced by smaller nimbler beings with a primarily domestic or regional focus, albeit with licensing agreements on especially competitive products with independent companies outside their region. Intellectual property claims will be scaled back in terms of duration and global enforceability, with drug prices, for example, increasingly determined and if necessary regulated at the national level and much use of licensing agreements.
Blue-collar workers in rich countries will ensure that immigration rules are both tightened and enforced, with the U.S. visa lottery abolished and the various H1B and H2B visa programs substantially reduced and focused on attracting only the best and brightest, rather than a mass of semi-trained drones that impoverish domestic workers. Regulations will be eased, as the awful productivity performance of the last decade has shown the damage they can do, but will become once again national, as democratic control of the regulators proves more important than harmonization, which benefits primarily multinationals.
Tariffs will be increased modestly, with various tricks like Speaker Ryan’s border adjustment tax used to avoid provoking an outright Smoot-Hawley type tariff war.
Politically, President Donald Trump and the Brexit vote will prove harbingers of politics to come. Supranational structures will be dismantled, to restore democratic control over policy and put the bureaucrats in their place. Some populist-nationalist parties will come to power, but in general mainstream parties of the right will co-opt their most popular policies and cease favoring the global Melmottes, appeasing the regulators and destroying the living standards of their ordinary voters.
Emerging markets will continue to emerge, but more slowly, and without losing all their best and brightest young people to rich countries. Overall, de-globalization will proceed about half way and then oscillate, as these mega-trends tend to. Only the supranational politicians and bureaucrats will lose out entirely, and they will not be missed.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)