Think of “rebooting” as reloading an operating system afresh, and “unwinding” as reversing the operating system’s construct. The current global operating system (i.e. World Order) is “all used up” and in its end stage. The Great Reset has been much talked about, in the “reboot” sense. But what if that is the wrong paradigm? What if instead, “unwind” is afoot? Since the current World Order is shaped by — more than anything else — globalization, let’s start there.
Globalization (an open, global economy) stems from economic motivations.— to bring about cheaper goods and services faster. As Peter Zeihan puts it, a globalized world is one in which “anyone can go anywhere any time to interface with anyone to source anything and produce anything to be sold anywhere just-in-time, all without military escort”. The most recent incarnation of Globalization, which shaped the current World Order, started in the mid-1980s hand-in-hand with de-industrialization and financialization in the U.S. Fueled by a concurrent bourgeoning credit industry, U.S. consumers were able to purchase cheap Chinese goods for 30 years under Globalization. But by the mid-2010s, net benefits from Globalization have peaked (and further lessened by later supply shocks induced by Covid and the Ukraine War) for the following reasons:
- The return on past offshoring investment has proven disappointing: China’s consumer market never lived up to the expectations of U.S. corporations which invested heavily there. China’s aging demographics presents an even worse outlook. And China has its own idea of a New World Order which conflicts the U.S.’s. The appeal of continued Globalization is fast vanishing for the U.S.
- The U.S. military’s ability to “patrol the world” and make possible frictionless transport for Globalization is now stretched too thin (especially with China’s relentless saber rattling in the E and S China Sea). It is getting too costly for the U.S. to sustain Globalization.
- The capital required to make Globalization possible is now shrinking with the retirement of the youngest Boomers (it’s burdensome enough for the Fed to monetize domestic government deficit spending on social programs; it can’t monetize globalization as well). Globalization is no longer “self-financed”.
- The Ukraine War and China’s rolling Covid lockdown permanently disrupted the frictionless global transport system. Dislocations introduced in (multi-step) supply chains let the inflation genie (created by reckless money creation by central banks since 2009) out of the bottle. The whole purpose of Globalization is to bring about disinflation. It no longer is.
Time has come for the U.S. (and the West) to now de-globalize (“unwind”). “Re-shoring” — transitioning from Just In Time (for efficiency) back to Just In Case (for effectiveness) — now redirects capital flow from global to regional destinations. This makes Eurodollars (the funding currency in which just about every country is over-indebted in and needs more of) scarce and more expensive around the world (hence the rising U.S. Dollar Index). But to the extent Eurodollars are repatriated to the U.S., the increased quantity of money exacerbated inflation in the U.S. (so the rising Dollar hurts the entire world, safe for helping U.S. imports). Looming global recession (from dislocations induced by the Ukraine War and China’s rolling Covid lockdowns) further reduces trade (and capital) flow to service existing debt (this situation will worsen with imminent Russian shut-off of gas flow to Europe). To complete the perfect storm, the Federal Reserve is closing the money-creation spigot after leaving it wide open for 13 years, and raising the cost of capital (interest rates) in a draconian fashion to boot. This combination will almost certainly cause insolvencies around the world at all levels, — state, enterprise, and households. Put another way, ginormous levels of debt created around the world will finally be destroyed through loan defaults or paybacks (deleveraging). A huge deflationary wave awaits, while inflation currently reigns (de-globalization is inherently inflationary, not to mention cumulative “hyper-print” for over a decade).
Modern history has shown that whenever a prevailing economic order is “all used up”, nations go to war as a “reset” mechanism. Well, de-globalization is in effect stealth World War 3, in the form of currency (and trade) war. The weapon of choice is the U.S. dollar (hence the term Dollar Wrecking Ball). One can actually track the increasing potency of this weapon by monitoring the progress of the reversal of a 40 year downtrend (since the Plaza Accord in 1985) of the U.S. dollar index (measured against a basket of other currencies). In just 6 months since the reversal which started Dec 2021, the index has already skyrocketed to a 20-year high:
Self-sufficiency (therefore security) takes precedence over “cheaper goods and services faster” in wartime. EU countries’ galvanized reaction to the Ukraine War are clearly based on security and not economic rationale. In the U.S., galvanization takes the form of both sides of the aisle agreeing on national security as a priority (Apple is the poster boy of re-shoring here). De-globalization around the world will take 5–10 years to complete and yield benefits. Meanwhile, inflationary pressure will persist from lingering effects of dislocations. Question is, will the aforementioned deflationary wave (more than) offset that? Energy (and food) prices are the bellwether to watch.
Beyond “unwinding” the world economically, de-globalization will also rebalances geopolitical power by shifting from a mindset of interdependency (based on trust) to that of nationalism (rooted in self-sufficiency). The U.S. is blessed with all the elements (e.g. secure borders, arable land, water source, etc.) of self sufficiency. It can quickly revitalize itself from de-globalization. Japan made a conscious choice of being a permanent ally (it cleverly moved a big chunk of its manufacturing base INSIDE the U.S.) so it will quickly adapt to the transition as well. Europe will have a tough time weaning itself from dependency on Russia (a strategic error especially by the Merkel administration). Unbearably high energy prices will make re-shoring difficult for Germany ,— Europe’s production engine. And having the Green Party as part of the ruling coalition takes away the (cheap) coal and nuclear alternatives. As well, Europe is deeply integrated (many of the thousands of parts in making a German automobile come from other countries all over Europe) so any one country’s shutdown due to energy shortage affects the entire continent’s economy (via its most productive country). And incidentally, the effect will be inflationary, from supply dislocations. To boot, Germany suffers from collapsing demographics just like China. The resultant weak domestic consumption market forces it to be an export nation struggling against the headwind of a dwindling global market (both from aging demographics AND de-globalization). Pundits suggest possible power shift from Germany (whose trade balance has now gone negative, not seen since 1991; and its cost of electricity has surged) to France. Italy is already showing signs of political and social shakiness from economic strain, can the rest of PIIGS be far behind? But among major economies, China will by far suffer the brunt of de-globalization, according to researchers of demographics and geopolitics. Accordingly, Asian countries relying both on America’s military and China’s economy are at risk of losing both in the coming years.
Prior to the Ukraine War, the popular world view was the inevitable demise of the U.S. dollar regime (from decades of “over-printing”), bringing U.S. hegemony to an end. Along with that go the “Falling West and Rising East” and “multipolar world” memes. Most people envision a declining U.S. Dollar index (against other currencies) as the precursor of the “end”. As of now, the opposite is happening, — that as all other debt-based fiat currencies collapse (from “over-printing”), capital flee to the U.S. for safety, driving the U.S. Dollar up. This particularly hurt commodity (especially energy) import countries (notably China), and they in turn are desperately working on freeing themselves from the stranglehold of this Dollar controlled global economy. Sanctions on Russia clearly accelerates bilateral pacts of non-Dollar purchases of energy around the world. If such pacts succeed, Eurodollars (roughly 8X the quantity of onshore U.S. Dollars) will repatriate like a flood. This will cause hyperinflation and be the trigger for the US Dollar’s demise. (But the equity market will probably spike with Eurodollar inflow before ultimate crash, — much like how the equity market of Venezuela and the Weimar Republic surged with hyperinflation. In that sense, the equity market will be the Supernova before the dead star.)
When a currency rises, all other assets denominated in it fall, which spells asset deflation (put another way, the current “everything bubble”, 13 years in the making since 2009, will finally burst). Alas, the “U.S. Dollar Wrecking Ball” wreaks havoc domestically as well. But this bubble burst may not be as bad as 2008's (many pundits predict a worse one than 2008). Back then, central banks had to bail out the global banking system. This time, insolvent corporations are most at risk and central banks could care less. Hopefully, on the other side of wreckage, a virtuous save-and-invest cycle (featuring continually rising interest rates) will emerge to revitalize a manufacturing base. If so, the next 1st Turning will indeed be a bright and exciting one for Millennials and Gen-Zers in the U.S.
Sadly, the biggest losers on the planet of the Globalization and De-globalization round-trip are third world countries (read: Africa). These countries have been exporting natural resources and importing food and finished goods in the “good times” of (expansive) globalization; they have not built up a “value-add” industrial base and thus are the least self-sufficient. In a regionalizing world (contractive by nature), they will fall on very hard times. They will default on borrowed money for infrastructure build (witness Sri Lanka), and lose what little “collateral” they have, — even their sovereignty. Worse, they may face famine when the global wave of food shortage hits (possibly as soon as Q4 this year).
