Rabo: Globalism Dying, US Mercantilism Rising
Michael Every: A great variety of moron symptoms appear
Michael Every should hope Mercantilism works until something better comes along. Because Globalism is dead and there ain’t nothing better on the horizon just yet.
Intro: Much of this Global Daily post from Michael Every discusses Mercantilism from the perspective of American policy right now. We have added some perspective at bottom since Mercantilism is a concept discussed in this space many times prior to anyone we know including the FT and others.
RABO: A great variety of moron symptoms appear
Market Comments
Authored by Michael Every for Rabobank
The old is dying and the new cannot be born; see the great variety of morbid symptoms appearing as a result; and the greater variety of moron symptoms.
AI is not the new tech bubble, honest, even if there appears to be a staggering degree of artificiality in the intelligence it’s showing to us. (Presumably, it’s ‘impossible to tell’ if this Daily is ‘as bad as Hitler or Stalin’, because it contains statements some readers may not agree with.)
At the start of year three of the Ukraine War, President Macron just presided over a meeting of EU powers, stated, “We will do everything needed” to stop Russia winning, yet delivered no new weapons, while also declaring there was no consensus to send in EU troops on the ground, “but in terms of dynamics, nothing can be ruled out.” Really? Because I can rule that out right now.
In the Red Sea crisis, as flagged, analysis by Sea-Intelligence shows the need to move empty containers back to producers has grown 2.5 times faster than that to move full containers out. That isn’t good for global logistics, just as it wasn’t during Covid. Neither are reports of a shortage of oil (and LNG) tankers due to longer routes being taken. Meanwhile, the Houthis may have cut key Asia-Europe internet cables: Moody’s, who say Suez is having no inflationary impact, even as half of UK businesses are feeling its effects, will only notice when they can’t order lunch at a swipe. (Stick to UNCTAD’s ‘Navigating Troubled Waters’ on this issue.)
And on lunch, a US fast food chain is to experiment with surge pricing models: its burgers will now get more expensive at mealtimes. I’m sure the BLS team are onto this trend, if it spreads, and will show it means lower prices, when adjusted for eating when not hungry, right?
But let’s not get distracted by micro-Gramscis of hot air, Houthis, and hunger-pangs when the kilo-Gramscis are in understanding what a changing geopolitical and geoeconomic order means.
A Financial Times op-ed says ‘our global trade system is in desperate need of an overhaul’, repeating my old argument that Ricardo’s free trade comparative advantage theory itself admits it won’t work in a world of mobile global capital, which we censor, as we do Smith arguing the “invisible hand” actually keeps investors’ money circulating domestically. Yes, our system is now more imbalanced thanks to China, even as a global bifurcation away from it is underway. But there will be no joint overhaul, and things will likely be resolved via Western protectionism. In short, Trump started a trade war; Biden extended it; Trump, if he wins, now threatens a return to full US mercantilism. If you work in economics and/or markets and you don’t understand what that means, you are in desperate need of an overhaul.
In narrow terms, the market is again seeing America First means Dollar First regardless of narratives about gold, or BRICS, or, as I put it to Jim Rickards, of countries throwing bricks of gold at each other. That’s even more the case if the Fed isn’t rushing to cut rates. After more comments from Schmid noting, “further disinflation will need to come from services,” that, “we may need to cool demand further to tame price pressures,” and that moderating US wage growth was needed to get back to 2% CPI, not only should we look to the RBNZ meeting tomorrow, but try to imagine if the next set of US payrolls and CPI prints come in hot again. If the three 25bp rate cuts our aheadof-the-curve Fed watcher Philip Marey --and, belatedly, the market-- expects for 2024 then get pushed back from June, how close to, or after, the US election can the Fed move without being seen as political?
Yet US mercantilism, alluded to by the FT, shakes every market box and every asset tree. On this front, Michael Pettis, asks ‘Can Trade Intervention Lead to Freer Trade?’ and “Doesn’t an expansion of global trade always benefit the countries that participate in international trade and, more generally, the global economy?” He answers, “No,” before showing why this is so, logically.
Only capital controls, not tariffs, can stop foreign purchases of US assets to prevent mirroring trade surpluses: that’s the Ricardo (and Smith) argument in another form.
The US should only impose tariffs on mercantilists while holding to free --but balanced-- trade with likeminded countries. That would shake Japan and Europe and mean global bifurcation, as the FT yesterday notes, ‘China plans to reshape trade on its own terms’.
If the US acts like this, the dollar’s global reserve currency status would be broken. Yet that doesn’t mean it would collapse. Nothing could replace it, and in a mercantilist world where it’s harder to get trade dollars --with massive offshore Eurodollar debts to repay-- the buck would remain essential, and more expensive.
Pettis also makes clear Wall Street would suffer in this scenario, which US capital controls obviously entail. That’s as Bloomberg notes ‘Xi Crackdown on ‘Hedonistic’ Bankers Fuels Industry Brain Drain’, which sounds like the common prosperity so many on Wall Street tried to sell me as ‘regulatory reform’; and ‘Beijing warns China’s US$63 trillion financial sector: serve the real economy and enrich lives’, as state media tells the financial sector to focus on supporting the real economy and refrain from “fake financial innovation,” or Marx’s “productive” over “fictitious capital”… and so more mercantilism. Meanwhile, both the US and Europe governments are begging their financial sectors to invest in the real economy, particularly in defence goods, not to speculate on assets: clearly, things will have to change if the West is to keep up.
Indeed, former ECB President Draghi recently noted, “Many profound changes have taken place in the last few years in the global economic order. These changes have a variety of consequences, one of which is clear… that we’ll have to invest an enormous amount in a relatively short time in Europe,“ underlining the need for “bold action to cover the cost” of the green, digital, *and* defence transitions. That’s trillions of Euros a year – covered how, exactly? And US maritime expert John Konrad favours disbanding the US army and rebuilding the US Navy and merchant marine to cement its global economic power, while removing income taxes and relying on tariffs for revenue, as was originally the US model.
So, yes, the old is dying and the new cannot be born; and we have a great variety of morbid symptoms appearing as a result. And if you think none of these will happen in whole or in part, and perhaps soon, or that you can play both sides forever as it does, then you are suffering from a great variety of moron symptoms.
For an example, McKinsey has been dragged into a scandal after it was revealed it helped counsel China on a mercantilist industrial policy initiative that raised tensions with the US, while presumably also working with US firms and politicians to downsize and offshore American production, as it the industry norm. The firm is now being threatened with the potential loss of US government contracts, while how much of a future it, or any Western management consultant, holds in a China focused on the real, not fictitious or hedonistic, economy remains to be seen.
Comment: US Mercantilism Ain’t The Problem
Michael Every’s Daily is very good we think. The pushback (if you want to call it that) comes from believing US Mercantilism to be the problem. Truth is, it’s the best way forward given the circumstances.
Unipolar monetary globalism ain’t coming back. Multipolar Globalism based on a decentralized model can be its successor after the BRICS get set up, but until then; Everyone should go to their neutral corners and take care of themselves. Hopefully without upsetting neighbors. What could be better than Global capitalism anyway?
If Michael is using Marx as his guide, Socialism is “better” than Global Capitalism. We don’t think he believes that. Does he? (Hi Tom Luongo!!)
So, absent the new improved Global Capitalism we all want, Mercantilism is the best thing for everyone right now.
Michael warns of the risks of Mercantilism. He’s not wrong. He is also biased, as are we. Here is our bias:
Mercantilism is what keeps us from killing each other until the new “good” thing happens. Globalism is dead and there ain’t nothing better on the horizon just yet. Until then, hoping for a resurgence of globalism in a self-interested world is unlikely to happen for a generation. Self-sufficiency is king until it returns
Regarding Micheal’s title: “A great variety of moron symptoms appear”
He is, we believe, referring to the stupidity inherent in thinking this new US Mercantilist model will work without a hitch in a global world. We believe it has to work.
He believes as globalism dies with nothing yet born better to replace it, then things can get ugly. He is again right.
Yet, something *has* replaced it; Mercantilism. While it ain’t perfect, it is better than World War.
Mercantilism as Placeholder
Nobody said Globalism’s replacement had to be better or even *new*.
That, we contend, is the ultimate conceit of post-enlightenment humanity: Specifically that we are *always* progressing and improving teleologically.
That is what got us into this mess in the first place.
That is why the BRICS are doing what they are doing.
That is why Gold is resurging as money again. Some things cannot be improved upon.1
Thinking Globalism will return or that something better is coming tomorrow is hopeful and premature.
We want to believe that. We truly do. We believe the arrow of humanity is pointing upward. But that arrow does not point in a straight line. Thus, to ignore the cyclicality of things is to ignore history itself.
Globalism, an artifice of complexity, does not solve all problems. It exacerbates some while solving many.
Globalism’s diminished returns
Tainter Collapse of Complex Societies is a seminal work on this very issue the world is undergoing:
“In the evolution of a society, continued investment in complexity as a problem-solving strategy yields a declining marginal return.”
The world has a teleological drift upward. It also always regresses to the mean within that drift. Globalism, economic complexity personified, must retreat once in a while.
Tainter’s Collapse….
All markets return to their moving averages. All societies return to their mean.
Put differently: Globalism represents the world at its most complex to date. When that Global economy recedes because of lost trust, it also shrinks physical manifestations of Global Complexity (e.g. supply chains) as a function of that lost trust along with it.
When economic complexity shrinks, nations reorganize into simpler, more regional economic relationships. Business stays local. Trust extends only to those you can see from your window.2
Ultimately, Complexity Collapse ends when complex societies decompose into their smallest self-sustaining functioning version that society believes in. Whether that smallest functioning version be a region (East/West now), nation-state (e.g post Austro-Hungarian empire), a smaller ethnic nation (e.g. post Yugoslavia) or a tiny tribe (e.g. Hutu/Tutsi) remains to be seen.
Right now we have collapsed into regional functionality. Nation-state would be next if it continued. Frankly, it could continue if supply chains are not rebuilt along regional lines properly.
Mercantile Stop-Gap
Mercantilism is providing a Stop-Gap against that right now. Without mercantilism, complexity will collapse even further into warring nations, warlords, and tribal conflict.
In fact, Mercantilism saved Europe from itself once upon a time. Read: How Mercantilism Brought Europe’s Fragmented Economy Together for more on that.
Mercantilism is not the problem at all. It’s the logical straw to grasp at given the world’s deteriorating situation. But it’s not the last straw. And it is not the shortest straw. It is the best straw right now.
The bottom line is: Michael Every should hope ( as we do) Mercantilism works until something better comes along. Because Globalism is dead and there ain’t nothing better on the horizon just yet.
If Michael’s fears are realized, it can get much worse.
It Can Get Worse
Here’s the kicker. If we do not find some comfort in Mercantilism until something better does come along and if economic complexity continues to collapse, Feudalism is next, as Marx understood.
Marx said:
Early Societies » Feudalism » (Mercantilism) » Capitalism
Right now that timeline is moving in reverse.
Right now it simply looks like a healthy retracement (given the import of what happened in Ukraine and the ME) even though it feels horrible for the WEST. But it might not feel so bad in the EAST yet. Nevertheless, it can turn ugly quickly and must be worked at constantly.
See you on the other side of this mess Michael.
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