Globalization and Its Discontents

The Daily Reckoning PRESENTS: Globalization is nothing more than the extension of the division of labor across international boundaries. However, in this DR classique from April of 2005, Bill Bonner asserts that in modern America, globalization means the rest of the world sends you things you don’t have to pay for. Read on…


It is widely believed that the Chinese are eating our lunch. Their factories hum and belch smoke, while ours go silent and send up weeds in the parking lot. This phenomenon is commonly called “globalization.” But it is also commonly misunderstood.

In the reverie of modern Americans, globalization means the rest of the world sends you things you don’t have to pay for. The burden of today’s little essay is two-fold. The first part is easy; we point out that anyone who thinks such a thing is a fool. The second point is harder – and more important.

The world has been globalized for a long time. An Englishman in 1910 could sit in his parlor off St. James Park and drink tea that came all the way from Ceylon in cups that came all the way from China. Then, putting down his drink, he could pick up a Cuban cigar, put it to his lips…and perhaps sprinkle a few ashes on the carpet that he had bought in Egypt…or the leather boots he had ordered from a shop down the street that sold Italian goods. He could buy stocks in New York as easily as he could pick up oranges from Spain or the latest French novels to make their way across the channel.

But as Niall Ferguson points out in the current issue of Foreign Affairs magazine, globalization is not without its disappointments. In 1910, England had been a great world power…and one of the world’s greatest economies…for two centuries. But global competition had recently edged the British out of the top spot. American GDP surpassed it at the turn of the century. Germany marched by a few years later. Relatively, England, that “weary Titan,” was in decline.

Still, why would the English complain? They lived well – perhaps better than anyone else. Even if they didn’t, they thought they did. The rest of the world was content too. People liked buying and selling. People in Europe liked globalization, because it brought them oranges in the wintertime. People in the warm latitudes liked it – now they had someone to sell their oranges to. Even then, people spoke of the “annihilation of distance,” and assumed that more miles would be destroyed in the years to come.

Globalization is nothing more than the extension of the division of labor across international boundaries. Our little village in France has the vestiges of a self-contained community. As recently as the end of WWII, almost everything people needed was produced right there. The farms grew wheat. Farmers raised vegetables…and cows…pigs…chickens. There was a machine shop…a forge…a woodworking atelier. There still remain the ‘Versailles’ boxes, in which lemon trees were planted. The boxes allowed the trees to be moved into heated space in the winter. Otherwise, they would freeze and die.

But as distance was annihilated, commerce in lemons was born. There was no longer any need to plant lemon trees in transportable wooden boxes when the lemons themselves could be shipped, quickly and cheaply, by the millions. One country can produce lemons. Another can produce machine gun cartridges.

Individuals…towns…enterprises…regions…can divide up the labor, work more efficiently, and produce more things at lower cost. Everyone involved gets a little richer.

There are really only two ways to get what you want in life, dear reader. You can do so honestly…or dishonestly. You can get it by working for it…or by stealing it. You can get it by trade and commerce…or by force and fraud. You can get it by civilized methods…or by barbaric ones. You can get rich by “economic means” or by “political means,” as the great German sociologist, Franz Oppenheimer put it. Globalization is merely an elaboration of the economic means of getting things. It requires civilized relationships to make it work; people have to get along with each other in order to trade. They must rely on others – even other people in strange, faraway places – for their daily bread. They must also be able to count on the medium of exchange that they trade goods and services in. If they can’t trust the money, they are not likely to want to do business.

The end of history has been announced several times. But it never seems to arrive. People always tend to think that what is will remain…that trends in place right now will continue at least indefinitely, and perhaps forever. The odds of anything going wrong, they tell themselves when the going is good, are like the extreme edges of a bell curve – vanishingly small. But people badly “underestimate the persistence of history’s traditional side, the rise and fall of empires, the rivalry of regimes, and the disastrous exploits of great men,” wrote French historian Raymond Aron. That is to say, they tend to ignore the political means that tend to mess things up…and the rare, fat tail events that make history interesting.

Such a fat tail event happened in 1914. A European war disturbed nearly 100 years of peace and progress. People thought the war could not happen. And if it did happen, they said, it would be short and sweet. They were wrong on both points. Globalization had entered a shrinking phase.

Then, on April 2, 1917, Woodrow Wilson stood before Congress and announced that the world’s biggest economy was about to shift to “political means” to get what it wanted. Instead of merely doing business with the Entente powers, America, too, was going to get involved in killing people. This day marked not only another big setback for globalization…it also establishes a frontier for where one empire ended and another began. Britain ceased being the world’s hegemonic imperial power. Henceforth, the United States was the cock of the walk…the Alpha nation…the biggest damned bull in the field.

There are times when civilization goes forward. And there are times when it goes in the other direction. Woodrow Wilson slammed the United States into reverse in 1917. It has been backing up ever since, in the sense that Americans rely more on force and fraud to get what they want. Gun-toting soldiers now defend America’s many supposed interests all over the world – even in places where America seems to have no interests. The U.S. government takes far more of its citizens’ money than it did in 1917…and provides detailed instructions to Americans on such a wide variety of matters that one can scarcely toss a chicken out the window or blow up an outhouse without asking permission of the authorities.

But we’re not complaining. For while the U.S. Empire was growing, so was world trade. In the free world until 1989…and now almost everywhere…a “pax dollarum” greatly aided the cause of globalization throughout the second half of the 20th century. But this new globalized commerce has a fraudulent side to it. The hegemonic power is using political means, even while it shops. During the last big boost in the division of labor, in the 19th century up until 1914, the money in which transactions were calibrated was backed by gold. No country – not even an imperial one – could cheat.

If a country consumed more than it produced, other countries found themselves with surpluses of the laggard nation’s currency. They then could ask for gold in settlement. Gold was real, the ultimate money. When a nation’s gold horde was in danger, it quickly adjusted its policies to correct the imbalance. The dollar, on the other hand, is merely a piece of paper, backed by nothing more than the full faith and credit of the United States treasury. How good a promise is that? No one knows for sure. Niall Ferguson explains why it may be worth less than many think:

“A rising proportion of Americans may consider themselves to have been ‘saved’ in the Evangelical sense, but they are less good at saving in the economic sense. The personal savings rate among Americans stood at jut 0.2 percent of disposable personal income in September 2004, compared with 7.7 percent less than 15 years ago. Whether to finance domestic investment (in the late 1990s) or government borrowing (after 2000), the United States has come to rely increasingly on foreign lending. As the current account deficit has widened (it is not approaching 6% of GDP), U.S. net overseas liabilities have risen steeply to around 25% of GDP. Half of the publicly held federal debt is now in foreign hands; at the end of August 2004, the combined U.S. Treasury holdings of China, Hong Kong, Japan, Singapore, South Korea, and Taiwan were $1.1 trillion, up by 22% from the end of 2003.”

The odd thing about the spurt of globalization in the last five years is that it’s so lopsided. The U.S. takes…but it doesn’t give. It borrows…but it doesn’t pay back. It buys…but it doesn’t sell. It imports…but it doesn’t export. The only reason foreigners put up with those shenanigans is because they receive paper currency in payment. They assume their dollars will be as valuable in the future as they are now. They assume the trends of the last 50 years will continue unchanged. They assume that no terrorists will knock off an archduke…and no fat tail will plop itself down in the currency markets. They assume that someone, somewhere, had the situation under control. And yet…”If the private market – which knows that with high probability the dollar is going down someday – decides that that someday has come and that the dollar is going down now,” writes Brad DeLong, “then all the Asian central banks in the world cannot stop it.”

What will happen when the world figures out that the United States is pulling a fast one? We don’t know. But like the period following the sinking of the Lusitania, we’re sure it will make the history books.

Bill Bonner
The Daily Reckoning
April 20, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

The Symposium takes place July 24th and July 27th, 2007…but tickets are sure to sell out, so secure your spot today by calling Agora Travel at 800-926-6575 to be added to the list right away.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

Getting to the ranch is an adventure, which we have already described. At first, it is all sensations – mountains, rivers, dust, rickety bridges, fog, rocks, bright sun…and a twisty, bumpy road that seems to last forever. But after having done it a couple of times, we are beginning to see the pattern in it.

You leave the rich, flat land around the capital – Salta – and you drive west. It takes about an hour and a half to reach the top of the range of Andean foothills that stand between the Valley of Calchaquies and Salta itself. Then, you are up on the high plains for about an hour and a half. You drive downwards, through the desert, and soon see the green valley ahead of you. You are about three hours into the journey when you reach the first town at the bottom of the valley.

Then you cross the river, and a few more hills, as you make your way up another valley off to the west. After about an hour, this valley brings you to several wine growing estates…and then, you head up to the high plains at the end of the valley…which is where the ranch is located.

Finally, you reach the ranch house – five hours after leaving the airport. You get out of your car; you breathe deeply in order to try to get enough oxygen to stand up straight – you’re not used to being at nearly 9,000 feet. And then, you admire the majesty of the place. You are in a huge, wide valley (it takes nearly an hour to ride across it on horseback)…with sharp peaks on either side.

And, looking back to where you’ve just come from…back down the valley where the wine estates are located…you see only the wide open spaces…with a range of purple mountains in the far distance, and a snow capped peak – the Nevada de Cachi – at their center. Up here…we are closer to the stars.

Are we closer to the gods, too?

The gods are always imagined to be in high places. The Greeks put their gods on Mount Olympus. The Incas, too, seemed to imagine that their gods liked altitude. When they offered their children in sacrifice, they put them out on the high desert just northwest of here…where they froze and dried…and where a couple of them were discovered just a few years ago – well preserved for hundreds of years by the cold, dry climate.

And so we wander around amongst these mountain redoubts…searching for something. What it is? We aren’t sure. But, sometimes, you just have to travel with no destination in mind. You don’t always get where you hoped to go, but often you end up where you ought to be.

Thus begins another Daily Reckoning ramble.

On Sunday, we went to mass at our own little church. Each of these ranches has its own church. The local people are practicing Catholics. A priest makes the rounds, presiding over services here one time per month. Padre Rafael came this Sunday.

The people who live on the ranch themselves built the church only a couple years ago. It is constructed of stone (which is abundant) and topped with local wood (which is scarce). The entire roof of the church, as well as the altar itself, is made of cactus wood. Cardone cactus is a protected species. But the huge cactus plants are many around here, and when they die, you are allowed to cut them up. There are many dead cactus trees lying about; from what we can tell, it looks as though they did not all die of natural causes.

The local people live in an almost cashless economy. They trade goats for grain. They grow their own corn and vegetables. They live high in the hills, with no transportation other than horses and their own gamey legs. Still, somehow they managed to raise enough money to pay for the parts of the church they could not find on the ranch. There are tiles on the floor…paint on the walls…and pews to sit on. They all had to be paid for – with money. How did they get it? For years, Maria, Jorge’s wife, baked little cakes and sold them at a market an hour away. They also found arrowheads in the hills and sold them to tourists for a peso each.

“You must come to the service,” Jorge explained. “You are the new dueño of the ranch. The people want to see you.”

We got to the church early, not knowing what to expect. Francisco introduced us to the priest…and the parishioners. Padre Rafael was from Spain, a member of the Augustine order, devoted to teaching to the poor and bringing them the word of God, as interpreted by the Church of Rome. He was relaxed and easy to talk to.

The parishioners were all darker, shorter…more Indian. In fact, they were probably all pure Indian, descendants of the same Hualfine tribe that used to run things around here. They were timid. The adults seemed almost reluctant to look at us…and astonished when we introduced ourselves.

The children, on the other hand, couldn’t take their eyes off of us. They turned around to stare. None smiled. They looked as though they were Inca’s in the 15th century, seeing Europeans for the first time. That could not be, strictly speaking, true. Francisco and his family have been there for generations. But Francisco is very dark haired, and dark skinned. The schoolteacher, too, though European, is very dark-skinned. Even Padre Rafael has dark hair, though the skin of the shepherd is much lighter than that of his flock.

In contrast, we must have seemed very strange.

Catholic churches in Europe tend to be almost empty. The few people who attend are generally old and decrepit, so close to meeting their maker that they feel they need to put out their hands.

Here it was just the opposite. The church was full of children – who must have walked an hour or more to get here. Their mothers were here too. One stout woman nursed her baby in the pew opposite us. Then, the child would squirm away and begin running down the aisle. Other children cried and shrieked. It was often difficult to hear the service.

Padre Rafael seemed to take his role as a teacher seriously. He halted the service after nearly every Bible reading in order to explain the text in terms that people could understand. That, too, was a change. We have heard some of these passages hundreds of times. This was the first time anyone took the trouble to explain how they fit into the whole story.

Children fidgeted…a guitarist played an odd Latin rhythm to accompany some of the hymns…the priest explained…and then an awkward group came forward to have a baby baptized. People dressed casually…but they were neat and clean. The mother nursed the baby at her breast, even as it was being baptized.

At the end of the service, Padre Rafael turned towards us and thanked us.

“As you know, the previous owners of the ranch contributed money that helped make it possible to build this church. The new owners also said they would contribute money so we can complete it.”

Juanita introduced us to her mother. We were surprised. Juanita is only in her early 20’s. The woman she presented to us looked as though she was at least 70…she could have easily passed for Juanita’s grandmother. The old woman did not hesitate. She slid her hand up behind our neck, pulled us towards her and kissed us on the cheek.

The next day we began our longest ride. It would take all day, so we packed provisions – sausages to grill over the fire…and a bottle of wine. We rode for about three hours…up, up, and up some more, over mountains, across valleys, through streams…picking your way along the rocks, squeezing between large boulders, plodding along dusty trails. Finally, we came to a broad valley, with green bushes and a swift moving stream running through the center.

“This is where we used to bring the cattle in the dry season,” Jorge told us. “It stays pretty green up here. But it is so hard to get the cattle up here. They lose as much weight getting here as they gain from the green grass. We use it a little, but not very much.”

Jorge and Francisco were already making a fire by the time the rest of us got off our horses. The horses were tied to the shrubby bushes, but there was no need. They were worn out. They just stood where they were left and made no protest or any attempt to get away.

Edward and Henry went over to the river.

“There are trout in the river, but you have to catch them by hand,” Francisco said. The boys thought he was joking. They jumped from rock to rock, checking out the pools of water for the fish.

“Hey, here are two of them,” Edward yelled.

The boys studied the fish…trout, about a foot long. The fish must have noticed they were being watched…they hid under a rock and were never seen again.

So, the boys set off upstream, looking for more. When the spotted one…they kept quiet.

“Francisco, we found a fish,” Henry came running back to report.

Francisco went with Henry. After a while, the three of them came back…with a squiggling trout in Francisco’s hand.

“Francisco put his arm in the water,” Edward explained, clearly impressed. “He didn’t jump at the fish. He just slid his hand up underneath it. And then he grabbed it.”

The gaucho took the knife from behind his back, cut open the fish and cleaned it in the river. A moment later, it was sizzling on the grill. And only a few minutes later, it was ready to eat.

“I’ve never seen a trout so pink,” said Elizabeth. “It looks like a salmon.”

We had eaten more expensive meals. But never a better one.

Now for the news…we turn to our currency counselor…


Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:

“Overnight, China posted their first quarter GDP. I’m chuckling right now, because once again the economists, and market observers got China all wrong!”

For the rest of this story, and for market insights, see today’s issue of The Daily Pfennig


And More Views:

*** Chris Mayer, reporting from Gaithersburg, Maryland:

“I headed over to the Empire Salon to hear Kevin Phillips deliver a talk on his latest book: American Theocracy: The Peril And Politics Of Radical Religion, Oil And Borrowed Money In The 21st Century. The Salon meets regularly in Washington D.C. where one can practically hear the beating heart of empire and feel its tremors in the ground. They look to hash out the implications of American Empire. In Phillips they had the man for the job.

“Phillips is a former Republican strategist turned fiery critic of the Republican Party’s metamorphosis under George W. Bush. He has also dedicated much of efforts in studying leading economic powers of the past – Great Britain, Spain, the Dutch and Rome in particular. Phillips has come up with some yardsticks to gauge the decline of these powers. All past empires suffered through the following. And all of the below ‘seem to be intensifying under the George W. Bush administration.’

“1. As the empire topped out, there was a popular sense that something was wrong – loss of jobs, increased violence, moral decay and more.

“2. An intensification of religious fervor (See the rise of the mega churches in the ‘red states.’)

“3. Conflicts between faith and science (witness the Evolution-creationism ‘debate.)

“4. Imperialism and global overreach. (See the Iraq War, which Phillips called ‘the most poorly thought out war in U.S. history.’)

“5. Decline of industry and the rise of finance (as Phillips says, ‘moving money around as opposed to building things.’)

“6. The burden of excessive debt. No need to comment here.

“The other interesting wrinkle Phillips tackles is the role of energy. Past empires mastered an energy source and as the importance of that energy source diminished, they could not make the adjustment. America’s addiction to increasingly expensive oil will play a role in its downfall, Phillips says. ‘The U.S. is not going to make it with another energy regime.’ It is oil or bust.

“Finally, attendees got a surprise when congressman and presidential hopeful Ron Paul showed up. He made a few remarks, which brought cheers from the gathering: ‘I’m not running based on what I’m going to do for you. I’m running telling you what I’m not going to do. I don’t want to run your life. I don’t want to run the economy. I don’t want to police the world.’

“Are the American people ready to walk without a shepherd? Many will decide in 2008. Somehow, there is little suspense as to the answer.”

*** We started attending the Empire Salon in D.C. over a year ago, right around the release of our book, Empire of Debt.

(Don’t have a copy of Empire of Debt? You’re in luck! It’s now available in paperback, perfect for stuffing in a beach bag and taking it on vacation with you this summer. Get your ultimate beach read here:

Empire of Debt – Be the Smartest Person on the Beach

*** And for those of you who have been wondering how our documentary (which is centered around the themes that we write about both in these pages and in Empire of Debt) is going…we are plugging along, slowly but surely.

In fact, we’ve had quite a few amazing interviews for the yet-to-be titled documentary lately. While we don’t want to give TOO much away (we’ve got to keep you interested and on the edge of your seat somehow), your editors and the documentary crew recently traveled to Nebraska to speak with the Oracle of Omaha.

All there is to say, for now, is that it was an experience that we will not soon forget.

We’ll be bringing the full scoop on the Buffett interview early next week, in the inaugural issue of our latest e-letter, The 5 Min. Forecast.

“Brevity is the soul of wit,” wrote Shakespeare long ago…and we’re inclined to agree. If there’s one thing lacking in your daily deluge of e-mails, financial media and other distractions, it’s brief, concise judgment.

That’s why we’ve created The 5 Min. Forecast. … to cut through the incredible glut of “news” by providing you with a quick and dirty round up of the most essential ideas and not-so-common knowledge on a daily basis – in five minutes or less.

Stay tuned…