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Globalization: a warning from Brexit

Britain is the latest victim of the money trap


“Yesterday’s vote speaks to the ongoing changes and challenges that are raised by globalization,” President Obama said yesterday in his first comment on the UK referendum. He is right.

The “Out” vote should be viewed as part of the geo-political fallout of the financial crisis and the failure of governments and bodies such as the IMF to deal with it fairly.  The success of Donald Trump in becoming Republican candidate for the US presidency is also part of the fallout. So is the rise of anti-establishment parties in Europe. In the absence of radical action based on correct diagnosis, the geo-political shocks will continue.

Note: Mr Obama did not say that “globalization is not working”. He said it raises challenges. It is working – badly.  Under present rules, the system guarantees unfairness, rising nationalism, a retreat from markets and a popular rejection of globalization itself.

Britain is only the latest victim of the money trap; the sad fact that, as I describe in my book of that name, a process that should be benign – i.e. globalization – has become an engine of destruction.

The political earthquake that has struck Britain and the EU can easily occur elsewhere. The faultlines run through all major economies.  The reason? The absence of rules, standards and institutions to ensure that the process of globalisation serves the general interest rather than particular interests.

Thus globalization is seen as an amoral free-for-all. The wealthy and powerful grab the gains, leaving the rest in the gutter.

Where have we gone wrong? The correct diagnosis locates the malaise in the rules governing the public and private uses of money. As currently instituted, the monetary system suits the rich and powerful. In turn, they have huge influence on the media and on ruling economic ideologies.

Brexit is not just about Britain. It is not just about Europe. It is a warning to every country.

Globalization under current monetary rules serves the short-term interests of governments and banks

Current rules carry no penalties for misbehaviour by powerful individuals, financial corporations and nation states.

Politics everywhere has become a form of crony capitalism.

At the international level, it is a system without a mechanism to ensure countries adjust their balance of payments to bring about a sustainable international pattern of payments. A few lucky states (like the US) can run extravagant payment deficits. They live beyond their means. They do not save enough. Others (like China) pile up external savings and extravagant reserves. They save too much. It is a system in which a few large central banks flood markets with their money without regard to the instability they cause in patterns of capital flows and exchange rates.

Widely fluctuating exchange rates are the curse of the current mode of globalization. They encourage massive self-sustaining capital flows, fuelling booms and busts without any underlying economic justification.

Money, which should stand above the fray of day-to-day politics,  is manipulated by governments and financial interests.

Globalized markets are rigged to provide cheap money for governments. Under current arrangements, governments run up excessive debts on the pretext of stimulating demand. Banks, even after the reforms of the past few years, have litle incentive to serve the general good by lending to sound, productive enterprises. In the euro zone, zero interest rate policies combined with the cost of meeting capital requirements (as high as 15% or 16%) mean many banks cannot make a reasonable return on ordinary business lending. Bankers are still provided with a state subsidy – in the form of guarantees to deposits – and confidently expect they will be rescued when they collapse. So they lend against property or keep their money at the central bank. The financial system has been patched up when it needs radical surgery.

The masses who voted to take Britain out of the EU were not primarily responding to fears about immigration. Britain has a long been a relatively tolerant and hospitable country. It remains so. The Brits know that, even outside the EU, the UK will continue to accept a continued flow of immigrants. Of course, concern about immigration was an issue; but it attained the salience it did because of fears and resentment about other issues: despair about the length of the recession and the slow recovery, anger about long-term stagnation in living standards for people on or below median incomes,  resentment about being left behind by economic change and the basic unfairness of the system – in short, anger about the way “globalisation” has been working. Those are the underlying reasons Leave voters decided to give London and Brussels a kick in the pants.

Similar emotions motivate dissatisfied voters in the US and the EU.

In short, they are a protest against the long-term effects of the money trap – the way the global system is working under its current rules.

For comments and proposals on how to reform current rules by other authors, see here; for my own, see next article and my retrospective look at “The Money Trap revisited“.