by Ansel Lindner, Bitcoin Magazine:
Two forces have dominated the globe economically and politically for the last 75 years: globalization and trust-based money. However, the time for both of these forces has passed, and their waning will bring about a great reset of the global order.
But this is not the global, Marxist kind of Great Reset promoted by Klaus Schwab and those who attend Davos. This is an emergent, market-driven reset characterized by a multipolar world and a new monetary system.
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GLOBALIZATION IS ENDING
The first reaction I usually get to my claim that the age of hyper-globalization is ending is flippant disbelief. People have so completely integrated the environment of the dying global order into their economic understanding that they cannot fathom a world where the cost-to-benefit analysis of globalization is different. Even after COVID-19 exposed the fragility of complex supply chains, like when the U.S. very nearly ran out of surgical masks and basic medications or when the world struggled to source semiconductors, people have yet to realize the shift that is happening.
Is it that hard to imagine that the businessmen who designed such fragile, overcomplicated production processes didn’t properly weigh the risks?
All that is needed to break globalization is for risk-adjusted costs to change a few percentage points and outweigh the benefits. The pennies saved by outsourcing numerous tasks to numerous jurisdictions will no longer outweigh the possibility of complete collapse of supply chains.
These concerns about fragile supply chains did not disappear as horrible COVID-19 policies ended. Now, they have shifted to concerns about trade wars and real wars. U.S. trade sanctions against China, the Russian conflict with NATO-proxy Ukraine and subsequent sanctions, the seemingly-erratic U.S. position on Taiwan, the coronation of Xi Jinping and his Marxist revival, the Nord Stream sabotage, the clear split of international consensus in the UN and even the weaponization of these international institutions, and most recently, the Turkish ground offensive versus the Kurds — all these things should be interpreted as a rise in costs.
Gone is the time when complex supply chains were robust against typical risks. The risks today are much more systemic. Sure, there were skirmishes around the world and disagreements among parliaments, but great powers did not openly threaten one another’s spheres of influence. Risk-adjusted costs and benefits to globalization have radically changed.
CREDIT DOESN’T LIKE CONFLICT
Very closely related to deglobalization of supply chains is deglobalization of credit markets. The same factors that affect business peoples’ physical, risk-adjusted costs and benefits are also felt by bankers.
Banks don’t want to be exposed to the risk of war or sanctions wrecking their borrowers. In the current environment of deglobalization and rising risks to international trade, banks will naturally pull back on lending to those associated activities. Instead, banks will fund safer projects, likely fully-domestic or friend-shoring opportunities. The natural reaction by banks to this risky global environment will be credit contraction.
The deglobalization of supply chains and credit will be as closely linked on the way down as they were on the way up. It will start slowly, but pick up speed. A feedback loop of rising risk leading to shorter supply chains and less credit creation.
THE CREDIT-BASED U.S. DOLLAR
The prevailing form of money in the world is the credit-based U.S. dollar. Every dollar is created through debt, making every dollar someone else’s debt. Money is printed out of thin air in the process of making a loan.
This is different from pure fiat money. When fiat money is printed, the balance sheet of the printer adds assets alone. However, in a credit-based system, when money is printed in a loan, the printer creates an asset and a liability. The borrower’s balance sheet then has an offsetting liability and asset, respectively. Every dollar (or euro or yen, for that matter) is therefore an asset and a liability, and the loan that created that dollar is both an asset and a liability.