Globalization dissected

Monday, 2 February 2004

Hugo Salinas Price

(This article is translated into English from the original Spanish, by its author. The original article at this website, is “Disección de la ‘Globalización’”. Some slight modifications have been made to the English version.)

The globalization of the world economy which we have been experiencing these past decades has not been a sound and inevitable process, nor is it a result of the forces of supply and demand in a liberalized world that impose painful but beneficial changes on the economies of the world, to the benefit of mankind.

All to the contrary. Globalization is a vicious and destructive process, that adversely affects national economies all over the world. It is not a natural process by any means, but one based on illusion and fraud. Globalization is not producing a more harmonious and more productive world, but a world of distortions and malinvestments that accompany the elimination of local production everywhere.

Globalization today is not a virtue, it is a vice.

Most people think of globalization as the productive unification of humanity, in such a way that those who produce more efficiently predominate in their fields in world markets and benefit the world with lower prices. Free trade is thought to be the natural road to world prosperity, inevitably, and the globaliphobics, those who oppose globalization, are regarded as extremists and agitators who are against progress.

Those who accept globalization as inevitable and beneficial, would be right if conditions in today’s world were the same as those which prevailed back in the XIXth century or in the early XXth century. Unfortunately, globalization today is taking place under circumstances totally different from conditions in that now remote past.

What is happening today is that the U.S.A. is enjoying a great privilege: its currency is the world reserve currency, in other words, it’s the universal money, and the U.S.A. is flagrantly abusing this privilege and flooding the world with dollars which are nothing more than digits which its computers can produce at no cost. In exchange for these dollars of no intrinsic value – they are a sort of irredeemable voucher – the U.S.A. acquires everything it needs in the world, without any limit. The commercial deficit of the U.S.A is over $500 thousand millions of dollars a year!

Ships arrive at U.S. ports loaded down with merchandise and many of them make their return voyages empty, because the U.S. is no longer selling enough stuff overseas in an amount equal to its imports. The U.S. has been living an orgy of unlimited consumption, thanks to the fact that its currency – a digit with no substance – is accepted as payment all over the world.

As a consequence of the one-way travel of U.S. dollars to destinations around the world in search of cheaper products, U.S. industry has been hollowed out. American industries, once an awesome powerhouse of production, have followed the dollars abroad, to locate in the countries that sell the cheapest. U.S. unemployment is over 10% of the labor force, because official statistics ignore the employed who have stopped looking for work in toting up unemployment figures.

Reality has caught up with Americans. A privilege cannot be abused indefinitely. Consequences show up, sooner or later. That privilege was obtained by the U.S. in 1944, at the Bretton Woods conference: the dollar would be a reserve currency, alongside gold. In 1971, Nixon reneged on the gold promise and the dollar was left as the world’s currency: irredeemable and nothing more than a simple digit.

Globalization in the old days meant that all nations limited their imports to such volumes as they could pay for with their exports. If imports exceeded exports, the difference had to be paid in gold. If exports exceeded imports, the balance was collected in gold.

“Chinafication” harms China itself and the rest of the world, too.

It is only a minor exaggeration, to say that China threatens to become the only manufacturer in the world, of everything for everyone, just because it does not demand payment in gold for the balance of its exports not covered by imports. It is enough to send dollars to China, and the purchase operations by buyers around the world are considered paid.

The situation is truly absurd. China will manufacture everything the world wants to buy – no one can equal their labor costs. (For example, a recent buyer interested in tennis racquets was taken one night on a tour of a Chinese factory producing them. He was ushered into a pitch black building. The light was turned on, and there he saw hundreds of workers working completely in the dark, stringing tennis racquets. No lights were normally on, to save on electricity costs.) All factories in the world are potentially at risk from Chinese competition. In the U.S., once a manufacturing superpower, factories are firing workers or closing. Enormous Kodak, an icon of industry and technology, is firing 15,000 workers. A very bad omen, among many others.

If the world continues on this path, China looks set to absorb a goodly percentage of all production on this planet. In exchange, it is willing to receive in payment, dollars and more dollars; simple digits.

Dollars are not wealth

Dollars are a means of acquiring wealth, but they are not wealth in itself; nor is receiving them really and truly, collecting. But, no matter! The Chinese do not appear to give much thought to this question. They are pleased to receive dollars and more dollars, and to add to their stash. For what purpose?

All the while, as China produces goods for the rest of the world, most of its population lives in poverty, because in return for their exports, the Chinese are not receiving imported goods, which are the things which raise a nation from poverty. The proof that they are not receiving imports in a volume similar to their exports, is that they continue to accumulate massive amounts of dollars in their reserves.

The trend is irrational. On the one hand, Americans are happy to receive imported riches from the whole world, while their factories close and their population is increasingly unemployed. And on the other hand, the Chinese amass incredible amounts of dollars while the people remain in poverty, because all those dollars represent goods which they have not received in payment – real payment – of their exports.

How was it in the old days?

When international balances were settled in gold, as used to happen in the XIXth century and in the early XXth century, what is going on today could not take place. Nor would today’s irrationality be possible, if international accounts were still settled with the hated gold. (Hated by most governments around the world.)

Under the previous, old system, if China wanted to sell its goods at bargain prices, there would come a moment when the U.S. would have to stop buying, as the flow of gold out of the U.S. and into China would produce a scarcity of gold in the U.S. and drive up interest rates, which would slow down imports until an equilibrium was restored between exports and imports.

Then again, if a foreign country attempted to undermine and destroy a domestic industry with cheap goods, by means of subsidies, import tariffs were applied. Tariffs are an obstacle to free trade, but subsidies are also an obstacle. The ideal in the XIXth century was to eliminate or reduce such obstacles, and it was a good ideal. However, the greater part of international trade was harmonized and integrated by means of the self-regulation of national economies that was provided by the system of liquidation of international accounts, in gold.

“Sins carry with them their own punishment”

Gold has been abolished from international trade. There is no limit to the imports of Asian products, other than the amount of dollars you have available. Of course, Americans have unlimited amounts of dollars available, since the U.S. manufactures dollars. (The European Union would like to have a cut of this privilege of the U.S., that’s why the Euro was created. Europe would love to have the rest of the world accumulate Euros.)

Mexico has some pretty large dollar reserves. We are contracting the U.S. disease. Kodak’s closure of its Guadalajara, Mexico, plant is an example of the progress of the disease. The same illness that has gutted U.S. industry is at work here, in Mexico.

Some time ago, American industries relocated in Mexico. But, not any more. Now they are moving again, to China, because that’s where it is cheaper to produce.

Mexico has an ample supply of dollars, so we can also import from China, from Hong Kong, from Korea, from Singapore – from wherever the price is lowest. And our Mexican industries are also choking.

We have plenty of dollars, because we export oil. Exaggerating somewhat, we could say that we sell oil – a natural resource whose supply is finite - for dollars; then we export the dollars to Asia, and import goods which, when they arrive for sale in Mexico, weaken the ability of our factories to survive. What is going to happen to us, when the oil runs out?

There is no automatic regulator of international trade.

We have to say once again: gold – that “barbarous metal” according to J.M Keynes – was the great regulator of international trade. It protected local industries, because there was always a natural limit to imports, no matter how cheap they might be, because of the simple fact that the balance remaining between imports and exports had to be paid in gold, and the quantity of gold that any country had was limited and jealously guarded.

That is precisely the difference between the beneficial globalization of the XIXth century, the era of the great boom in international trade, and our own times. Globalization today is causing enormous damage, and as long as the countries that accept payment in dollars (or euros, for that matter) continue to receive these irredeemable vouchers, international trade is out of control and eating out the guts of local production in the countries that have dollars or euros to spend.

The world economy cannot go down this road indefinitely. There must come a moment when everyone, even the Chinese, realize that there is no point in accumulating dollars that are really not needed. Those countries that decide to accept euros as an alternative, will be no better off: they will simply stack up piles of unneeded euros, and continue to flood the rest of the world with cheap merchandise. And their reserves, whether in dollars or euros, will necessarily devalue as time goes on, while their populations have to relinquish the benefits of their exporting capabilities.

Who is going to bell the cat?

Is the European Union going to declare someday, that it will no longer accumulate dollars, and that those dollars that come its way, will be sold for gold, on the spot, the only alternative? They have not wanted to do that as yet, conscious of the fact that if they do not accumulate dollars, they will have to restrict drastically their sales to the U.S. market, and the political cost of unemployment that such a measure involves, is too heavy for the E.U. to bear.

In any event, a debt collapse is approaching in the U.S., because the excessive creation of dollars in recent years has been done with an unbridled creation of debt. Debt on the part of consumers, on the part of corporations, on the part of the Agencies of the U.S. Government dealing in mortgages. And let us not omit, on the part of a Federal Government whose deficit is blossoming in the best Third World style.

When, not if, debt collapses in the U.S. – through bankruptcy or inflation, it makes no difference – the ability to import from the rest of the world will have to diminish. That will tend to reestablish some parity between imports and exports. China and the rest of Asia too, and Europe thrown in for good measure, will be thrown into chaos when their export market collapses.

What we shall probably soon see – Lou Dobbs talking about Protectionism shows which way the wind is blowing – is a drastic movement toward Protectionism in the U.S.: tariffs on imports, to provide some breathing room for local industry. Labor in the U.S. is becoming restive - alarmed, as well it should be,  by the spectre of imports from Asia. Protectionism will arrive, and soon.

But Protectionism deals with a symptom, not with the fundamental problem. It will cause many internal stresses within the U.S. Externally, it will favor the loss of reserve status for the dollar as world currency. Aspirin is no good for dealing with pneumonia. However, Protectionism is something that people can understand. Most people do not understand international monetary problems, nor do these problems interest most voters.

Hurry! Hurry! Hurry!

With or without a new international monetary order, things are going to change. They may change in an orderly fashion and with as little pain as possible, if the change comes about as a result of a new international conference to deal with the creation of a new international monetary order. If the change does not come this way, it will be drastic, disorderly and with no previous warning, like the tremendous earthquake that hit Mexico City in September of 1985, and killed – no one knows how many thousands.

The duly accredited monetary “experts” around the world are members of an very exclusive club and they avoid at all costs, anything that might endanger their relations within the high circles of finance, national governments and supra-national organizations: the FED, the IMF, the BIS and other bureaucratic organizations. In such circles it’s bad taste to talk about what really has to be done. Perhaps because what has to be done is so simple:

Gold must once again be the means of international payment. Deficits in the trade balance must be paid in gold. Credit balances must be collected in gold.

No other solution will do. Change will come, but it does not appear likely that the change will be one that is voluntarily agreed to by world powers. What the world will look like, after the change arrives, is hard to imagine. It is my guess that the world will not again resemble the world we have known, for many, many years, if ever.

How can individuals prepare for such a change? Amid all the changes we shall witness, we know only one thing: gold and silver will never cease to be a store of value. Among all preparations, we must keep that eternal fact in mind.