Me First - the economic symptoms of de-globalisation
Late on Friday 21st October, the Japanese Ministry of Finance (MoF) intervened in the foreign exchange markets, selling dollars to buy yen in order to prop-up the Japanese currency. Earlier in the day, stocks rallied and bond yields fell in the US as an article from Fed-whisperer Nick Timiraos of the Wall Street Journal suggested that the pace of US central-bank rate hikes would moderate1.
The market being what it is, there were those suggesting that because these two events happened on the same day, they clearly constituted coordinated policy action. Ignoring the fact that the MoF intervened on the 22nd September and likely again this past Monday 24th October with no apparent leaks from the Fed in the WSJ , we must also overlook Fed Chair Jay Powell’s repeated statements that his focus is solely on US inflation rather than wider global issues. The markets are pining for the Fed to change course, and even coincidences like Friday’s are being treated as signs of that happening.
But unlike 2008 when the global financial crisis (GFC) saw nations coming together at the first meeting of the G-20 in November (and again the following March), 2022 is a year in which the centrifugal powers of de-globalisation appear to be in the ascendancy. Those looking for a coordinated global policy response to the current crisis most likely need to manage their expectations.
The last great collapse of globalisation happened in the 1930s. Despite a severe global recession and hyperinflations in a number of central European countries, politicians and bankers after the First World War made a pretty strong effort to recreate the status quo ante bellum, particularly with the desire to return to the gold standard and the free-trade system which it had underpinned.
Britain linked the pound back to gold at the pre-war rate in 1925, but found itself torn between the interests of bankers in the City (who wanted a strong pound to allow the return to the day when London was the world’s financial capital) and workers and industry (who wanted a weaker pound as this would help exports and thus increase employment and wages).
The general strike of 1926 was a direct consequence of the fiscal restraint and tight monetary policy forced on Britain by a return to gold. Not only was this destabilising, but the City grandees also found that their pre-war financial dominance had been hollowed-out by capital destruction and bad debt (especially from Russia following the revolution in 1917) as well as by a global economy still destabilised by an excess of debt left over from the Great War, itself a major source of suspicion and discord between the great nations.
Riven by domestic economic crises and shorn of its ability to act as the world’s banker, Britain left the gold standard in 1931. While an early devaluation of sterling saved Britain from the worst of the Great Depression, it was nonetheless an act symbolic of an era in which self-interest dominated mutual benefit. The term used at the time was ‘beggar thy neighbour’, and devaluation and tariffs were the tools of the trade.
By the 1930s, Britain could no longer perform its role of keeping the global trading and financial system running, and the US was either unable or unwilling to step into the breach at that stage to take over from the British. The hole left where Britain had once promoted free trade started to be filled by autarky (economic self-reliance) and dirigisme (state economic planning).
Back in 1992, the American political philosopher Francis Fukuyama wrote a book about the triumph of western democracy called ‘The End of History and the Last Man’. At his own admission, Fukuyama jumped the gun a bit, and thirty years on, the supremacy of the Western ‘rules-based system’ is clearly being called into question.
2022 has seen the US and its Western allies in an increasingly open and multi-variate conflict with Russia over Ukraine. It has also seen America’s relationship with the Kingdom of Saudi Arabia deteriorate exponentially. Also in 2022, the Biden administration and the Democrats have doubled-down on the trade war with China, restricting technological cooperation with China (the Chips Act et al). This has happened just as Xi Jingping has consolidated power within the Chinese Politburo and revealed a far more defensive policy tone befitting the marginalisation of some of the more globalist members of China’s ruling elite2.
The US wrangling with any one of Russia, Saudi (and OPEC more generally via the NOPEC bill) or China is a big deal. Doing so with all three at the same time is seismic, and while markets have been dominated in 2022 by the Fed and its rate hikes, it is the undercurrent of geopolitics which is arguably a more important factor in shaping the future than the next Fed pause, pivot or whatever. Harder to monetise yes, but clearly far more significant.
Comparing decades in history is a bit of a fool’s errand - the more one delves, the more on finds differences which contradict the obvious and simplistic analogies which first spring to mind. War, economic dislocation, political instability, inflation (and deflation) describe the ills of the 1930s and it seems increasingly those of the 2020s too, but that does not mean the two decades should be compared directly.
One thing the 1930s did show though was the money system itself - based on gold - no longer worked as it once had, and it was Britain’s abandonment of gold in 1931 which really marked the end of an era when globalisation and free trade had been a shared goal.
In 2022, the Western allies have confiscated Russia’s foreign financial reserves after it invaded Ukraine. At the same time, the Fed has pursued what might best be described as an ‘America First’ monetary policy on inflation - one which through dollar strength appears to be crushing many other economies, both developed and developing. Taken together, and taken with the Saudi spat which appears to be driving the Kingdom closer to China, the weaponisation of the dollar, both at home and abroad, is clearly raising the question of how useful it is to have one country’s currency (ie the dollar) as the global reserve currency and principal currency of global trade.
Measured in dollar-trade volume, 2007 was the peak of globalisation. The financial crisis which followed saw a massive US bailout of its banking system which caused other dollar users, especially those abroad, to call into question the money system itself, particular the role of the US dollar as a reserve currency. The feeling was something had clearly broken and needed fixing, but the cogs of monetary reform move slowly.
No less a figure than Zhou Xiaochuan, Governor of the People’s Bank of China, raised the issue of an alternative to the dollar as the global reserve currency as far back as March 2009, just as the post-GFC recession was at its nadir (Zhou link).
Along with American capital to rebuild the world after 1945, it was the Bretton Woods agreement of 1944 which created a new global monetary system based on the dollar which helped to create the stability that had proved so elusive during the inter-war years. It finally acknowledged American economic supremacy over Britain, and even after the peg to gold ended in 1971, the dollar remained the bulwark of the global financial system during the era of globalisation which followed the fall of the Berlin Wall and the end of Soviet communism.
When one is thinking about a resolution to the world’s current problems, it’s not just about having the right people in place. A good globalist like Rishi Sunak might rock the boat less than a Liz Truss (or a Boris), but the resolution of the sort of problems which de-globalisation throws up involves serious debate and shared agreements about the nature of money and the money system itself.
Given its preoccupation with Fed rate policy and the level of the S&P 500, the market isn’t even on the right page for that kind of stuff yet. It would also seem that for Washington, the dollar is a tool of war, and therefore its role is not really up for debate at present, at least not in the West. More de-globalisation it is then?
Nick Timiraos, Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes, WSJ, 21/10/2022
Lingling Wei, China’s New Guard Bodes Change for Beijing’s interaction with the West, WSJ, 24/10/2022