Section 5. The Self-destruction of the Globalization Process (Revised, February 15, 2013)

The globalization process based on the runaway U. S. trade deficit is destined to self-destruct. Let us explain the process of self-destruction here.

Characteristics of the bubble based on the runaway trade deficit

The bubble based on the runaway trade deficit has a self-motivation to become bigger and bigger. Let us start from the currency market manipulations. As export oriented countries suppress the value of their currencies vs. U. S. Dollar through various currency market manipulation plots, the producers in those countries gain price advantage over competing U. S. producers. If those U. S. producers insist on competing with foreign made goods, their profit will plunge, their stock prices will sink, the management teams will be sacked by stock holders and be replaced by management teams that favor outsourcing production lines to those export oriented countries. As the result, U. S. trade deficit will expand further, and the pool based on the flow-back trade deficit dollars will become larger. Then Wall Street speculators can leverage further to blow bigger bubbles. Bigger bubbles make Wall Street speculators richer and push the stock prices of those outsourced companies higher. By this mechanism more and more U. S. businesses are encouraged to surrender to foreign competition and to outsource their production lines. Thus a cycle is formed to push the runaway trade deficit expand further and further.

In contrast to the self-motivation for a bubble based on the runaway trade deficit to grow, if by any reason the speed of the growth of the bubble slows down, the bubble will quickly unravel. We should remember that the bubble is generated by the trade deficit that allows Wall Street speculators to borrow heavily to buy into "something". If by some reason the growth of the trade deficit slows, the growth rate of the amount of money flowing into the hands of speculators slows down, too. This means that the price of "something" will not be able to rise as quickly as before. Slower rise of the prices means less profit for the speculators. However, speculators incur substantial amount of borrowing cost (higher the leverage, larger the borrowing cost). If price increase of "something" slows down to certain degree, some speculators, under the burden of borrowing costs, will not be able to hold on to "something" any more. Thus the dumping of "something" starts. The dumping will induce more dumping to unravel the bubble quickly.

Why the runaway trade deficit based globalization process must fail

A bubble builds up as U. S. trade deficit zooms up and the bubble collapses as the trade deficit wanes. However, the collapse of a bubble does not mean the end of the globalization itself. As the economy recovers from a recession induced by the collapsed bubble, the runaway trade deficit will return and another bubble emerges. To understand why the globalization process based on the runaway trade deficit must eventually self-destruct, deeper analysis, as discussed below, of the disastrous effect of the runaway trade deficit is necessary.

As the job outsourcing and the resulting relentless expansion of the trade deficit ensure, Wall Street speculators have more money to borrow, and are able to push the bubble bigger and bigger. Thus those engaged in this game make huge profits. On the other hand more and more manufacturing jobs are eliminated through outsourcing. The former workers in the manufacturing industry that lost their jobs must find jobs in other fields. Since the higher wage level in The U. S. than the trade surplus countries like China is the major factor of job outsourcing at the first place, it is easy to see that the jobs lost are the higher paid ones than the replacement jobs. This means that the average income of the middle class will not grow fast1, 2, 3. Now here is a dilema. On one hand the runaway trade deficit based globalization process needs to expand trade deficit more and more, otherwise the growth of the bubble will stall and then the bubble will collapse. On the other hand, the biggest factor of the runaway trade deficit, that is, the buying of foreign made goods by the middle class will wane due to the lackluster growth of the average income of the society. Let us see how this dilemma is resolved.

The way to resolve the dilemma of lack of income of the average family to buy more and more foreign made goods to enlarge the runaway trade deficit is to lend more and more to consumers. Naturally Wall Street speculators, now including big commercial banks, are at the position to borrow from the pool generated by the returning trade-deficit dollars and lend to consumers. In essence Wall Street speculators have become the middlemen in this cycle of money flow; trade deficit, dollars returning to U. S. market, borrowing by Wall Street speculators, lending to consumers, consumers buy more foreign made goods, and more trade deficit.

Once we understand the importance of lending to consumers in the process of the runaway trade deficit based globalization process, it is easy to see that the lending to consumers picks up steam during the bubble. How about when the bubble bursts? Of course, the activity of lending to consumers will slow down. But this does not mean the debt load of consumers will decline when the bubble bursts, since consumers have no ability to pay back those debts from the very beginning. It only means that when the bubble bursts, the debt load of consumers will not grow further. It becomes obvious that when the next bubble builds up, consumer lending will pick up again, and the debt load of consumers will grow further. As bubbles come and go, consumers' debt load just keep growing. Can the debt load of consumers grow indefinitely? Common sense tells us that consumers will not be able to carry ever increasing debt load, and at certain point the thing is going to snap in the form of massive consumer default. Since Wall Street speculators are serving as the middlemen to borrow from the pool generated by the runaway trade deficit and to lend to consumers, as the mass default of consumers hit, Wall Street speculators will also be wiped out and the whole globalization process will inevitably self-destruct. That was what had happened during the "Great Recession" of 2008 to 2009. After the self-destruction, the global economy has entered into a totally different phase as will be discussed in Section 10. Now let us see through the actual data how the debt load of consumers had grown and finally the globlization process had self-destructed explicitly.

In the picture at the right, the data of the growth of consumer debt load are presented. The blue curve is the annual ratio of household debt outstanding over the nominal GDP. It should be noted that the nominal GDP is the compilation of GDP before the adjustment of inflation. Since the outstanding household debt is also not adjusted for inflation, their ratio will take the factor of inflation out of our discussion. From the blue curve we can see how the household debt has grown through the ridiculous runaway-trade-deficit based globalization process. It is also worth to point out that, for a while, ever increasing debt load of consumers superficially looks like a magic formula to allow consumers to spend beyond their ability of production. That is exactly one reason of introducing runaway trade deficit to please consumers and thus make politicians in power popular as discussed before.

The red curve in the graph at the right is the annual ratio of the trade deficit over the nominal GDP. It shows that the red curve leads the blue curve. That is, the trade deficit builds up first during the bubbling phase, and it induces the growing consumer debt load with some time delay. When the bubble bursts as the trade deficit wanes, the consumer debt load just stop growing but never decline until the self-destruction of the globalization scheme due to the massive consumer default.

At this point we have completed the review of what is the purpose to let The U. S. have the runaway trade deficit, how the runaway trade deficit leads to repeated bubbles, and why the runaway trade deficit based globalization process must self-destruct eventually. In the next section we will show that once we have understood that the runaway U. S. trade deficit is the underlying force of moving the whole economy, it becomes simple to foresee when the bubbles will bursts and the disasters will strike.

References:

1. Comment 29: Economic realities behind the gloomy mood of US public. Chih Kwan Chen, forcastglobaleconomy.com (April 24, 2006)

2. Comment 29A: Addendum to Comment 29: How to bridge the gap between household income survey and personal income per capita. Chih Kwan Chen, frcastglobaleconomy.com (May 5, 2006)

3. article 18: RUNAWAY US TRADE DEFICIT BASED GLOBALIZATION: The Cause of Intensified Income Disparity. Chih Kwan Chen, forcastglobaleconomy.com (July 30, 2012)


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