Deglobalization & Digital Currencies
The coronavirus pandemic slashed to smithereens extended global supply chains and the trend towards deglobalization will have significant impact on the dollar, inflation and digital currencies.
Tamara Smith took a long lick of her spoon, the cold, creamy goodness of the semi-sweet chocolate pint of ice cream now finished, she looked longingly at the now empty paper container of Häagen-Dazs.
Satiated, she smiled to herself and turned over to her boyfriend Tim,
“I can’t believe they flew this in all the way from France, no wonder it tastes so good.”
Tim, not bothering to look up from his newspaper replied nonchalantly,
“You know that’s made in New Jersey don’t you?”
“Wait, what? I thought Häagen-Dazs was from France.”
“Nah, it’s made in Jersey, everybody knows that. It’s just marketing.”
Tamara examined the empty carton more closely, true enough. “Made in U.S.A.” and it even had the address of the ice cream factory in New Jersey printed on the side.
Her lip upturned in mock disgust,
“Well, it’s still good, besides, at least it’s made in America.”
“Yeah and probably one of the last few things that’s still made here.”
And Tim was right of course.
As Tamara looked around their 800-square foot apartment in New York’s trendy SoHo district, she noticed that there was hardly anything around their home that was still made in the U.S.A.
But all that could change thanks to the coronavirus pandemic.
Think Global, Not
Even before the pandemic swept across the planet, the forces of globalization were already under threat.
The open system of trade and commerce that had dominated the global economy for decades had already taken a body blow from the financial crisis of 2008 and the Sino-American trade war, but now it’s on the ropes, reeling from a knock-out punch by the coronavirus crisis that has sealed borders and disrupted the flows of international trade.
By May, over one-fifth of all transpacific container shipping had been cancelled and even as economies reopen, we shouldn’t be expecting a quick return to the days of unfettered trade and free movement.
The coronavirus pandemic will exacerbate populist trends, politicize travel, stymie migration and hasten an already developing bias towards nationalism and self-reliance.
This inward-looking lurch will enfeeble the global economic recovery, at a time when global co-operation is needed more than ever and has the potential to engender geopolitical instability and factionalism.
To be sure, this is hardly the world’s first attempt at globalization — previous attempts did not go well and often ending in global conflict.
But the latest attempt at globalization was probably the furthest, heralding several epochs of integration, with China becoming the world’s factory and with borders more open to the flow of people, goods and information than at any other time in human history.
But after the 2008 financial crisis, most banks and some multinational firms pulled back.
Trade and foreign investment relative to GDP stagnated and populism reared its ugly head, with strongmen from Jair Bolsonaro in Brazil, to Donald Trump in the United States, Rodrigo Duterte of the Philippines, to Hungary’s Viktor Orban, all capturing their capitals.
U.S. President Donald Trump leveraged worries over the disappearance of blue-collar jobs in America to levy trade tariffs on China, casting suspicion on the Middle Kingdom’s brand of authoritarian capitalism as anathema to the western world’s cultural, economic and political mores.
Even before the coronavirus pandemic started with the first sneeze, America’s tariffs on imports from China were at their highest levels since 1993 and American and China, which had long cooperated on technology, started to decouple their tech industries.
And while the damage to global trade may not be universal, the scars may be permanent.
Food is still getting through of course and Apple still insists it can make iPhones in China, but global trade may shrink by as much as 30% this year.
To make matters worse, the underlying anarchy of global governance has been put on display by the pandemic, with even traditional allies such as the United Kingdom and France, squabbling over quarantine rules and China threatening Australia with punitive tariffs for demanding an investigation into the origins of the coronavirus.
And despite some instances of co-operation during the pandemic, such as the U.S. Federal Reserve’s loans to other central banks, to ensure that the dollar was still widely available, America has otherwise turned its back on the world, with chaos and division damaging its international prestige.
But even without the highly visible missteps of global leaders, public opinion was already shifting away from globalization.
People have been disturbed to find that their health depends on the ability to import medical equipment and whether or not their bellies would be filled, on migrant workers to harvest crops.
And this is just the beginning.
Although outside of China and some other authoritarian states, the flow of information is largely free, the movement of people, goods and capital is not.
And because trade will suffer as countries abandon the idea that firms and goods should be treated equally regardless of where they come from, the push to bring supply chains closer to home markets is palpable.
Japan’s coronavirus stimulus package includes subsidies for companies that repatriate factories back to the home islands, European Union officials speak of “strategic autonomy” — which is a thin guise for nationalism.
The United States is urging chipmaker Intel to relocate plants closer to home and those hopeful that the digital economy will help make the world a global marketplace, should note that sales abroad of Amazon, Apple, Facebook and Microsoft combined make up just 1.3% of global exports.
Locating production closer to home means that companies which used to be able to rely on cheap sources of labor, lax production laws and rudimentary environmental protections, will now have to confront the prospect of labor unions, minimum wages and increased costs.
Most of those costs will eventually be borne by the consumer, raising the specter of what many had hitherto considered unlikely — a return of inflation.
But we cured inflation didn’t we?
As multinational firms relocate closer to their main markets, whether because of political pressure or trade barriers, many of the benefits of globalization, such as cheap goods from foreign manufacturers will be lost — at a time when governments are nursing massive debt and central banks are pumping monetary stimulus into economies.
By some estimates, the U.S. has grown its monetary base by as much as US$1.7 trillion, hoovering up assets with new money and America’s base-money-to-GDP ratio may grow by as much as 9% in the second quarter of 2020 alone — the largest such rise in decades.
Under normal, globalized economic conditions, the increased flow of liquidity into the financial system would not have a significant effect on inflation, but combined with a trend towards deglobalization, it’s less clear.
And the concern is more real than perceived.
According to analysts, multinational firms may cut their cross-border investment by as much as a third this year —which means less overseas manufacturing bases, or research and development facilities.
And diminished cost, regulatory and tax arbitrage opportunities, will mean higher costs for businesses, which will necessarily be passed on to consumers, potentially fanning the flames of inflation.
Analysts at Morgan Stanley and legendary hedge fund manager Ray Dalio have all flagged inflation as a legitimate concern.
And while similar forecasts for inflation after the financial crisis when central banks’ balance sheets also ballooned with assets, proved to be entirely wrong, this time really might be different.
In contrast to the financial crisis, money is now flowing directly into the pockets of consumers.
As bizarre as it may sound, at the height of the coronavirus pandemic, Americans’ total incomes actually rose by 11% thanks to emergency support from the government and indirectly from the U.S. Federal Reserve, even as overall wages fell by 8% with 20.5 million workers losing their jobs.
More money in the pockets of consumers means that inflation is much more likely this time than after the financial crisis.
The specter of inflation has led more than a handful of hedge fund managers to wander into assets that would otherwise have been dismissed, including gold and Bitcoin.
As recently as last month, top macro hedge fund manager Paul Tudor Jones wrote in a market outlook note,
“The best profit-maximizing strategy is to own the fastest horse.”
“If I am forced to forecast, my bet is it will be Bitcoin.”
And while Tudor Jones may be one of the first big hedge fund managers to embrace what until now has largely been snubbed by the financial mainstream, he is unlikely to be the last.
Tudor Jones said that he was motivated to take a hard look at Bitcoin after considering the implications of massive fiscal spending and bond-buying by central banks to combat the coronavirus pandemic.
But Tudor Jones is no stranger to Bitcoin, having doubled his money in Bitcoin’s first run in 2017, but this time he says that he evaluated Bitcoin more as a store of value and decided that it passes the test based on four characteristics, trustworthiness, liquidity, portability and purchasing power.
And it is the portability and purchasing power of Bitcoin that may see it beign extended to function as a medium of exchange.
Banking with Bitcoin
Because no country outside of the United States is self sufficient in all of the resources that are necessary for modern life, global trade will not entirely dry up, but it may look very different from its pre-pandemic halcyon days.
Against a backdrop of deglobalization, there is more than an outside chance of the rise of new assets which will fuel what global trade remains — and one of these is Bitcoin.
As production costs rise, prices can and will rise in the long run — one of the main benefits of globalization was the ability to exploit economies of scale — the entire world was a market and a factory at the same time.
But without globalization to cushion the blow of increased production costs and against a backdrop of loose monetary policy, more money will chase more expensive goods — the perfect recipe for inflation.
And at a time when global money flows are most crucial, the U.S. has instructed its main federal pension fund to stop buying Chinese shares and countries representing as much as 59% of global GDP have all tightened their rules on foreign investment.
That means that companies whose production lines are mainly cross border — a vast majority of Fortune 500 companies are represented in this category — will increasingly find it difficult to base production overseas or agree on a currency for commerce.
Because America is one of the few countries that can meaningfully turn its back on the rest of the world and has increasingly demonstrated a willingness to do so, the dollar becomes less attractive as the currency franca for global commerce.
But Bitcoin might.
International trade is still for the most part dependent on dollars, but ever since the financial crisis, there has been a push to wean the global economy away from the dollar, to limited effect.
That might change in the wake of the coronavirus pandemic.
With the U.S. mired in its own domestic woes and countries turning insular, repatriating their overseas production bases home to cater to rising unemployment and social unrest, the pressure to adopt a dollar alternative will increase.
And while governments will no doubt push their own national currencies as dollar replacements, Europe’s shrinking to its own national borders and China’s secrecy and bullying means that good alternatives lies somewhere between the realm of fantasy and fiction.
To be sure, such a view, that Bitcoin will one day become a tool for international commerce could be derided as also being somewhat speculative.
But consider that Bitcoin is programmatically deflationary, can cross borders without the approval of regulators and doesn’t rely on the resilience of political institutions for its validity and there’s more than an outside chance that it could one day form the basis of international trade and become a major traded currency.