Updated 5/1/2012: Of all my posts over the past 5 years, this one gets the most consistent hits, no doubt because it becomes ever more relevant with each passing day. So, I am dusting it off and moving it to the top of the list again, as time is running out on the Grand Ponzi...
Original Post: 8/10/2010:
If there is one good thing that comes out of this entire economic fiasco it's the fact that Globalization is soon to be Dead. As always happens during times of violent economic turmoil, trade barriers are usually one of the first items on the agenda, as each nation desperately seeks to protect its economy at other nations' expense. Viewed through the lens of a 30+ year trade deficit, the call to close off trade with China and other export mercantilist nations will soon be at a fevered pitch.
Original Post: 8/10/2010:
If there is one good thing that comes out of this entire economic fiasco it's the fact that Globalization is soon to be Dead. As always happens during times of violent economic turmoil, trade barriers are usually one of the first items on the agenda, as each nation desperately seeks to protect its economy at other nations' expense. Viewed through the lens of a 30+ year trade deficit, the call to close off trade with China and other export mercantilist nations will soon be at a fevered pitch.
The good news therefore, is that the race for the bottom with respect to labour costs and environmental standards will eventually abate, although near-term, the collapse in demand and deflationary forces will bring about a meltdown in wages across the labour spectrum. From an environmental standpoint, extreme competition will lead to even more extreme levels of degradation, however the collapse in overall demand and ensuing supply glut will shutter a substantial amount of resource production and curtail further exploration. Think of the tar sands with oil at $10/barrel i.e. Alberta basically offline.
Looking back on these past decades, export mercantilism coupled with deliberate currency manipulation, suppressed wages across the entire planet and hence did not bring about the equalization in living standards that text book macroeconomics would predict. Throughout this time, the developing nations remained lean and hungry (literally), awash in a bottomless pool of cheap labour, while the West deluded itself that everything was A-Ok, even as overall debt levels rose 8-fold in 60 years i.e. from 50% of GDP here in the U.S. in the 1950s to where they are today somewhere in the range of 300-400% of GDP across all Western nations. Therefore, as is the title of my blog, what we have today is not so much an economy, as a debt-sponsored Ponzi Scheme on the verge of violent unwinding. This ongoing transfer of wealth from developing (poor) nations to developed (wealthy) nations starkly illustrates just how morally bankrupt we have become as a society. Those of us in developed nations enjoy a standard of living unprecedented in human history, yet we are incapable of living within our own means. Western nations continue to borrow upwards of 10% of income, much of it from poor nations, to bolster our standard of living. This of course only serves to further depress the standard of living of those in poor nations, by a commensurate amount. On top of that, we expect our children and grandchildren to pick up the tab for our out-of-control spending. Truly unbelievable, and morally reprehensible on every level.
As we know, asset prices have spiked violently in past years, as capital is constantly misallocated from one market to the next (stocks, housing, commodities etc.) chasing ever-lower returns and ignoring ever-increasing risks. Once the multi-decade credit/lending bubble bursts with full force, then falling asset prices will force a chain reaction debt liquidation at lightning speed via bankruptcies and defaults.
Politicians meanwhile, will lose what little credibility they yet retain as it will become readily apparent that politics can't solve this problem, indeed, politics is the problem.
Likewise, trust in modern macroeconomic theory based on fiscal and monetary policy and open trade (aka. Globalization) will be obliterated, and eventually replaced by a new economic paradigm that is yet to be envisioned.
In short, belief in the globalized economic pyramid scheme will collapse at the same velocity as the economy itself - rather quickly.
Multi-nationals will bear a significant brunt of the ensuing rage. The soon-to-come trade barriers will put an end to their multi-decade industrial arbitrage even as the cost of capital soars, hence causing profits to evaporate. Meanwhile public sentiment towards country-club CEOs and big business in general will tank amid mass layoffs.
History tells us that ages of moral nihilism lead to decadence, and decadence to anarchy. This has been an unprecedented period of moral degradation and decadence - we are a society over-fed comfort seekers that makes the ancient Romans look like pious monks by comparison.
Brace yourself, anarchy is on deck.
