The Vicious Cycle of Globalization

Published By: All Right Magazine on May 28, 2009

ricardo

Economist David Ricardo

By MICHAEL JAY DEAN

Think for a moment about a drug addict.  A man takes his first dose for the euphoria he expects to experience.  A trusted source told him how much better his life could be by using.  Pretty soon he is dosing every day.  Then it’s a double dose, because if he stops, he feels nothing but withdrawal pain.  Later his life is in chaos, but he cannot stop feeding his addiction, even if he wanted to.  In the end he is a shell of his former self, completely dependent upon the drug for survival, even though it is slowly killing him.

Another visual for consideration.  The positive feedback loop.  A man has stepped in quicksand.  At first he slowly sinks, and he attempts to keep walking, which causes further sinking.  He responds by attempting to jump, which results in his slipping down to his knees.  He then jerks to the side and falls down to his mid thighs.  He is now frightened as he slowly drops into the sand and he begins to struggle and twist, which only increases his rate of sinking.  Soon he is frantic with fear and passes the point of no return, sinking to his death.  The more he struggled the more he sunk into the sand, and the more he sunk, the more he wanted to struggle.
Globalization works this way as well.  We got into this mess when a philosopher created a (false) explanation of why a nation superior in the production of all things would want to trade with a nation inferior in the production of all things.  Until Ricardo’s theory of comparative advantage, Adam Smith’s absolute advantage was the accepted explanation of trade.  But Ricardo promised to make the richest nation richer.  It was like a drug, and over time it caught on.  Even though it was obviously counter intuitive, it was attractive.  Even though the United States had experienced the most rapid growth and prosperity buildup in world history under its protected market economic system, the allure of even more rapid growth and wealth was too attractive.  Banks and outsourcing manufacturers had too much to gain.  And with the convoluted sales presentation that purported economic growth would result, it was sold to the American people.  But it took a long time; it was really not until 1971 that the “free trade era” began in the United States.

Eventually our economics professors forgot economics.  They stopped teaching that capital investment is the catalyst that leads to growth and prosperity in a capitalist system.  Instead they started teaching that trade is the catalyst.  Any student should jump out of his chair on that one, but few do.  Consider what is being said; a nation that does not trade would have 0 economic growth?  A nation that does nothing but trade would have maximum growth?  And what happens then when you produce nothing that you consume… and you are fully trading with every nation; is further growth then impossible?  Truly the argument is so weak it is hardly worth discussion.

But as the free trade era began, a positive feedback loop was created.  We are in quick sand, and as we struggle, we sink deeper.  If you are listening carefully and watching the markets through this crisis, it becomes very obvious.  A commentator on CNBC said yesterday that the number one risk to our market now is anything that would hamper the flow of capital.  If we don’t have money coming from China, in his example specifically, our banks would fail, and our economy would collapse.  What he means is not simply “money”; he means ownership.  If we don’t sell our banks to the Chinese or other foreign buyers, our banks will collapse.  We are, it appears, insolvent as a nation.  We are dependent upon foreign capital to bail us out.

But how did we come to this?

Subprime loans? Hardly.

Loose monetary policy?  Yes, but not standing on its own.

Short sellers?  Please.   If our system is so weak that short sellers destroyed our economy, we should start over from scratch.

We got here by becoming interdependent with the rest of the world.  As corporations pushed for cheaper labor, they demanded free trade.  As we got free trade corporations over leveraged so they could grow quickly enough to keep up with the competition.  As the amount of international trade taking place increased the banks had to grow in order to finance it.  More leverage was necessary to make this happen.  That means you need earnings.  Banks earn money and increase assets by lending, so they had to find more people to lend to: and here comes subprime.   As Merrill would offer a billion in mortgage-backed bonds, Lehman would have to follow suit or fall behind.  But Lehman would offer 1.1 billion and lower credit standards to get that 10 percent volume boost.  Goldman would see this happening then and offer to fund 1.3 billion with lower standards still.  It becomes a vicious cycle; a war of attrition.  Eventually, things got out of hand.

As foreigners bought more and more of our Federal debt, more and more of our stock market, more and more of our real estate, and produce more and more of what we consume, our perceived need for them only increases.  An independent nation, formed with a Declaration of Independence had decided to attempt to maintain political nationalism without economic nationalism.  Indeed, they are inseparable.  Economics is the means to achieve goals.  Politics is the determination of the goal.  You can’t have one without the other, and if you choose internationalism with one, the other has to follow.

But how do we solve this problem?

Detox.

We have to slowly become an independent nation again.  Some might advocate a cold turkey approach.  I would recommend a slower shift back to independence to allow our corporations and investors to adjust.   But make no mistake, any solution to our economic problems that does not include tariff protection simply takes us further down the internationalist path, and will further damage our standard of living.

MICHAEL JAY DEAN is an advocate for protecting American industry and replacing “free trade” with fair trade.

Share

2 Responses to “The Vicious Cycle of Globalization”

  1. Michael Says:

    Dean “nailed it” in this article!

  2. unlawflcombatnt Says:

    I’d advocate the cold turkey approach. Anything in-between will just allow multinationals to circumvent the policy, and continue outsourcing jobs and production to cheap foreign labor markets. We need 100% tariffs on all non-oil imports. The things we can’t produce here, like aluminum and coffee, will cost a lot more. But everything else can be produced in the US, and eventually we’d have our economic independence back.

Videos, Slideshows and Podcasts by Cincopa Wordpress Plugin