Comment 35: North Korea's nuclear weapons and the danger to the globalization process (Oct. 9, 2006)

The globalization process has been running in earnest for more than two decades. As discussed in many places throughout this web site, for example, in Articles 1, 2 and 2A, the essence of the globalization process is the cross border movements of capital, and goods and services, but with the movement of labor lagging far behind due to geographical and political restraints. It has also been pointed out that the foundation of the current globalization scheme is the run away trade deficit of USA; without it the whole globalization process will collapse and the whole world will plunge into a deep recession or even a depression. However, many economists and observers of the global financial, equity and commodity markets are persistently ignoring those new ingredients injected by globalization. When asked about the movement of currencies in open forums, they either refuse to answer or present a joke-like answer that the currency movements will only make international tourists uncomfortable. Those experts try to claim that the run away US trade deficit will disappear by itself without any adverse effects on the global economy in order to calm down the general public whose common sense tells them something awful is going to happen with such gigantic US trade deficits. Those experts hang on to the old economics that ignore or wrongly prescribe the effects of trade balances and the movement of currencies on the global economy. Such pre-globalization economics, ironically called the "modern economics", naturally not only loses its predictive power but also make its believers focus on wrong issues confronting the present day global economy.

As mentioned before that the globalization scheme is founded on the run away US trade deficit, the run away US trade deficits are in turn supported by the cross Pacific Ocean trades. During a peaceful time, cross Pacific Ocean trades are regulated by the value of US Dollar against the currencies of Pacific Rim countries. Until very recently the exchange rate between US Dollar and Japanese Yen was the driving force that caused US trade deficit to go up and down, and thus US economy to boom and retreat. For example, the vast devaluation of Dollar vs. Yen in 1985 caused the first phase of run away US trade deficit of Reagan administration to stagnate and shrink in 1987, igniting the infamous stock market crash of 1987. For those experts that ignore the effects of currencies and trade balances the crash seemed like a random act of gods and stirred up a massive panic among them. It should be noted that the movement of trade balance usually lags the movement of currencies by roughly two years.The second momentous series of events was triggered by the super low interest rate policy of Japan in 1995. That interest rate policy of Japan ignited the first round of "Yen carry trades" that pushed Dollar sharply higher and US trade deficit exploding skyward, starting from 1997. The exploding US trade deficit from 1997 translated into the late 1990 economic boom of USA. However, the zooming Dollar sank the economies of Asian countries that foolishly pegged their currencies to Dollar and thus lost the status as surrogate exporters of Japan. When the ripple effect of Asian financial crises spread to Russia and Mexico, Dollar fell hard against Yen in 1998 and again in 1999. The sharp fall of Dollar thus triggered the shrinkage of US trade deficit in 2000 and burst the stock market bubble. Again the experts that were ignorant of the effects of currencies and trade balances were blindsided by the whole series of events, and the investors that followed those experts' advices sustained heavy financial losses. In recent years the structure of the globalization has changed due to the emergence of China. Now US trade deficit with China becomes a significant pillar supporting the run away US trade deficit, and thus the whole globalization scheme. When we talk about the danger of nuclear weapon proliferation to the globalization process, we must assess the danger of damaging the pipeline of goods flowing from China to USA. Once this issue is made clear, it becomes obvious that North Korea's nuclear weapons pose a far greater danger to the globalization process than the issue of Iranian nuclear energy since the former poses a much larger threat to US-China trade relation. However, western financial circles are complacent about the effect of North Korea's nuclear weapons and only focus their attention on Iran and its threat to oil and Israel. It is the purpose of this comment to study the issue of North Korea's nuclear weapons and to see how it may sink the whole globalization scheme in detail.

The technology of nuclear weapon is more than 60 years old. As time passes, every technology becomes easier to be reproduced in various places outside the place of the original attempt. Currently the second tier and even the third tier industrial powers probably can produce nuclear weapons if they have strong determinations. We never doubted the probability of North Korea possessing nuclear weapons, though some in USA have dreamed that all the statements from North Korea are just bluffs so should be totally ignored. The unmistakable nuclear test of North Korea on Oct. 9, 2006 probably has wakened up those dreamers. Current financial sanctions of USA and Japan have apparently caused severe economic pains on North Korea so it is going to extreme to gain a bargaining chip by the nuclear test. China has passed on the message that North Korea is conducting the nuclear test in order to force US and Japan to abandon the sanctions. It is unconceivable that US and Japan will back down from the financial sanctions. On the contrary USA and Japan will impose more and more sanctions against North Korea. North Korea also possesses substantial missile technology. As tension escalates, North Korea probably will send more missiles flying over the land of Japan, send nuclear warhead armed missiles flying over Japan and let them explode in the middle of Pacific Ocean, or even threaten to sell nuclear weapons and technologies to third parties. Rather quickly USA will be cornered into a situation that a final decision about North Korea must be made. One choice is to surrender to North Korea's nuclear black mail, abandon all sanctions, allow South Korea to send whatever amount of money as demanded to North Korea, strengthen North Korea's military arsenals further, and eventually allow North Korea to swallow up South Korea and threaten Japan directly. The other choice is to stage preemptive military strikes against North Korea. In the latter scenario a new Korean War will certain to erupt. With the high tech firepower of USA, it is also certain that USA can defeat North Korea. However, it has become obvious that China, as the biggest benefactor of North Korea, is either unwilling or unable to restrain North Korea, but it is also unconceivable that China will idly watch its long time communist ally, North Korea, be destroyed by US military action. Thus a US-China military confrontation will be likely to follow. The US-China military confrontation will escalate to Taiwan, and disrupt the pipeline of goods from China to USA severely, even not to stop the flow totally. Sudden disruption of imports from China cannot be remedied for quite a while by rebuilding export industries in the unaffected regions like Latin America and Africa. Thus US trade deficit will plunge, US consumers will be deprived from inexpensive consumer goods, the massive pool of lending based on US trade deficit will disappear, and US will sink into a deep recession. On the other side, export industries of China will be shut down, and any party that has invested in China will sustain heavy losses. Especially hard hit will be "Taiwan merchants" that have moved their manufacturing facilities in wholesale to China, and oversea Chinese that are speculating real estates in Shanghai. A USA (Japan)-China military confrontation over North Korea will be certain to spread to Taiwan. China will try to invade Taiwan and disrupt the oil-lifeline of Japan that passes through Taiwan Strait. On the other hand USA will probably try to disrupt the oil-lifeline of China that passes through the Maraca Strait. The military conflict between USA and China, if triggered, has a very high chance to escalate into a nuclear holocaust. That is why we regard the threat of North Korea's nuclear weapons on the globalization far outweighs the threat from Iran's nuclear ambition and deserve close attention of all the market participants.