Globalization becoming the economic scapegoat of protectionists.

December 5, 2016

By: Bobby Casey, Managing Director GWP

globalization protectionismProtectionism has become the newly embraced talking point of the political class. The disturbing part is, this marks the era of free trade and globalization becoming economic scapegoats.

Never mind what the truth is: any two things that happen at the same time automatically are causally intertwined! This is the new line of “reason” passing for economic logic. It’s disturbing because it is, like many flawed policies, rooted in fear, not reality.

For as common as it is in American, and really global, economics this word isn’t used nearly as much as it should be: Apoplithorismosphobia. A mouthful, isn’t it? It is the actual word for “fear of deflation”. But why do we have it? It’s not like inflation has done much other than create new bubble and bust cycles.

I don’t pretend that deflation comes without consequences. All market corrections entail some tumult. But so does any correction of a bad trajectory. It requires uncomfortable choices and breaking of bad habits. The dire effects of deflation are more a reflection of how deep an inflationary hole we dug ourselves into.

Deflation rights the course of real value. More importantly it is one of the best safeguards against government expansion. Quantitative easing has been the biggest “tool” in funding the growth of an already bloated state. Claudio Grass wrote about this in his contribution “The Beauty of Deflation”, but for the purposes of this installment, I want to focus on trade and employment.

The constant bromide we hear is: Blame the rich! The rich got us into the mess, they can’t get us out!

The amount of wealth someone has is absolutely NO indication of their character or economic ideologies. There isn’t some threshold people achieve where they wake up to find their morality and ethics have utterly abandoned them. There are certain types of people who are absolutely self-serving rent seekers, but they can be found in all strata of the socio economic continuum.

The political class, however, has saw fit to keep inflating the dollar. That keeps our debts cheap and affordable and our economy falsely stimulated. It’s like life support in a manner of speaking because the assumption is, if we pull the plug on the Federal Reserve’s printing presses, the economy would collapse and die in short order.

The truth is, what we really stand to see is a close in the gap between rich and poor.

I’ve seen people draw some astounding conclusions based on increases in freer trade and lower tariffs. Everyone from Donald Trump, to Bernie Sanders, to even Hillary Clinton have jumped on the protectionist bandwagon.

Globalization suppresses wages!

Globalization steals jobs from Americans!

Globalization will make it impossible for Americans to survive!

The truth is, there have been several activities going on that serve as a counterweight to the inflation policies of central banks; and all of which have been vilified by central planners who subscribe to Ben Bernanke’s faulty ideas behind indefinite printing.

  1. Trade. Lowering tariffs lead to growth in import and export to the point where it comprises a greater portion of nations’ GDPs. It’s also served to grow economies and improve standards of living.
  2. Saving and moving money offshore. Taking money out of circulation obviously doesn’t assist inflation.
  3. Illegal immigrant employment and other black market employment arrangements. Because these workers are off the books, everyone saves, including the end customer. It’s considered an unfair advantage in the price wars, but it’s not unfair. It’s just what inevitably happens when you criminalize voluntary arrangements.

Were it not for these things, inflation would indubitably have gotten even further out of control than it already is.

Deflation corrects the value of goods, services, and money. This is a good thing! If all you have is inflation then you inevitably wind up with a movement like “Fight for 15”. While I disagree with it entirely, I can’t say I don’t understand it. I do! They don’t understand the root problem which is why their idea to virtually double the minimum wage makes no sense as a real and sustainable solution. Inflating wages alongside everything else isn’t a solution to the problems begotten by inflation. That SHOULD go without saying, but I’m beginning to see that perhaps it doesn’t.

Fight for 15 is basically chasing the dollar down the drain (in terms of value) or up the cliff (in terms of volume). IF policy makers and central banks around the world didn’t engage in quantitative easing, and allowed the effects of globalization to run its course, they would’ve realized a closing in the wealth gap of rich and poor, seen an increase in saving, and an increase in interest rates which ultimately would restore a little value to the USD.

Free trade has been one of the greatest forces for economic growth, but it is the target of blame for why there is a growing disparity between rich and poor. It’s like being that kid at the wrong party at the wrong time, and it gets raided. You didn’t do anything wrong, but you’re about to get charged with a bunch of stuff that went down at the same time you were there.

The reality is a bit different:

From 1990 to present, tariff rates around the world have declined continuously in a worldwide push to liberalize trade. As a result, trade has surged. The share of imports and exports in GDP increased from a global average of 38% in 1990 to 54% in 2005. While the causal link between tariff rates and trade is straightforward, there has been another and perhaps more surprising development. In the same period inflation fell from an average of 26% to a mere 4%, a trend called ‘Global Disinflation’.” (Source: Economonitor)

Apoplithorismosphobia is understandable when you’ve been pushing and participating in: a zero or negative interest rate policy, anti-saving rhetoric, and an economy run entirely on debt. Deflation would bring down that house of cards in a New York minute. But what that is really saying is, the central banks that insist upon 2% inflation year over year are promoting irresponsibly fiscal habits and codependency on the state.

I’ll take the struggle of freedom over the comforts of servitude any day.

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