With all the Economic Doom and Gloom around in the West, it was a real pleasure to become British Gold Cup Bridge Champions in 2010. The team of Zia, Gunnar Hallberg, Robert Sheehan, David Burn, Fredrick Bjornlund all played magnificently for team Gillis. It's also ironic that the Cup is made of the Yellow Metal.

39.25 Year Cycle Kicking In.

The first chart is Gold in terms of the Euro. The 2nd chart is a 30 year Spanish Government Bond.

The 39.25 year cycle (November 2010) mentioned 2 blogs ago is really kicking in. Irish, Italian and Spanish Bonds are collapsing and Gold is making new highs against the Euro. This is a debt crisis first and foremost. Restructuring will inevitably mean that many governments will not pay the full amount of their debt back.Protect yourself.

The discord among G20 is of greater concern than fears of capital controls and protectionism

Manchester Liberalism was an early 19^th century school of thought that combined belief in free-trade and consensual politics. Rooted in the work of Hume and Smith , and championed by Cobden it lead to the repeal of the corn laws in 1846 and the Cobden-Chevalier treaty for free-trade in 1860.It opposed mercantilism .The Washington Consensusarising from the economic leanings of Thatcher and Reagan advocated free trade, liberalising markets and capital flows, privatisation and falling barriers; however, America’s determination to effect open trade and promote the world economy had been evident since the late 1940s.This paper will argue that the effectiveness and willingness of both Britain and America to influence other countries with free-trade policies (namely the Manchester school and Washington Consensus) was conditional not just on their hegemon status but also when they acted in a cooperative manner with trading partners. In other words, when Britain and America were not cooperative, world trade and business would suffer from protectionism, myopia and lack of leadership.

The 1^st era of Globalisation from 1870 to 1914 was championed by Britain as the Hegemon. Britain’s ability to have minimal tariffs when the international average was 15%demonstrated her being a “strong state”. Government had overcome landed-interests to reduce tariffs, promote free-trade and raise revenue with more equitable higher income- taxes. America in this period had tariffs set considerably above the 15% average. America’s share of Customs revenue to total revenue was 51% from 1870-1910 compared to Britain’s 22%. America was not anti-free-trade per se but in a labour scarce economy preferred openness in immigration to the removal of trade barriers. As Irwindemonstrates, customs revenue was an efficient way of collecting taxes in a country (like America) which had a low population density. Her influential land-owners were able to pressure the taxation of imports over the direct taxation of their land.

The 1980s Washington Consensus that suggested lower tariffs, and almost demanded capital account liberalisation, was seen as the policy mix to best promote world trade. This mix was not necessarily true 100 years earlier. Estevadeordal, Frantz and Taylor showed that the decline in transport costs alongside a well run monetary system were more trade-creating forces than lowering tariffs. They demonstrated that the correlation between high growth and high tariffs was misleading. Britain played a major part in both reducing transport costs and supporting the Gold Standard. Before the steam ship, Britain’s superior navy ensured safe-cargo and her mature insurance market kept insurance rates to a minimum. The steamship and the opening of the Suez Canal led to dramatically lower transport costs and quicker journeys. The pre-eminent position of the City of London to discount bills, transact in sterling (rather than bullion) and most importantly, to be fully committed to the Gold standard , was the 2^nd key to increased trade .Lopez-Cordova and Meissner showed that 2 countries on the Gold Standard were likely to trade 60% more than 2 countries who did not. Therefore the success of trade between 1870 and 1913 owes as much to the commitment that Britain gave to monitoring the Gold Standard and lowering transaction costs as to her actual trade policy. This cooperation was matched by other countries’ policies acceptable to their own political interests; America was open to immigration, Northern European countries joined the Gold Standard to standardise their currency regimes and Asian countries lowered tariffs on imported British textiles. Britain, in turn, recycled her Gold through the capital account investing in crucial infrastructure (particularly railroads and canals) in primary producing countries.

America’s U turn on tariff policy was evident soon after the 2^nd World War with the establishment of GATT and a desire to see some European trade barriers come down; however she did not advocate that total free trade be imposed everywhere. Her cooperative position was evident with the Marshall Plan and the creation of the EPU as the necessary institutional support to bring Europe out of its economic devastation. Ruggie showed that America was not so dogmatic that her free trade-policy should be replicated as a quid pro quo for aid. For example, France was allowed protection for agriculture, Britain a more interventionist government in building the welfare state. The growth of the European Union from a coal and steel alliance between Germany and Belgium to a fully integrated currency union was always endorsed by America, but at no time did America insist on laissez-faire free trade. America’s position was always pragmatic and respectful of the European desire for a larger welfare state. America used her dominant position not to eulogise free-trade but to run Bretton Woods (and overcome the problems of lack of convertible currency) help Europe and benefit her mass-producing home industries. The large plants which had helped the allies in the War still needed an export market when they switched from armaments in 1945.In the post war period the “Washington Consensus” was indeed consensual.

The interwar period was the opposite. Both Britain and America resorted to more insular policy and withdrew from the International Political economy. Although Britain imposed the deflationary policy of re-joining the Gold Standard supposedly to promote world trade, it has been argued by Baines and others that it was also trying to move resources and labour from the old and inefficient businesses of coal, ship building and textiles to the more modern sectors like power, motors and durable goods. This was called “Rationalisation”. In September 1931 when Britain withdrew from the gold standard, not only did she break with 200 years of Gold convertibility she also imposed higher tariffs at the same time.

After the First World War, America did not use her new premier economic position in a cooperative way. Firstly she withdrew from the political economy by neither attempting to rebuild a safer Germany nor by arguing against the dangerous level of reparations set at Versailles. From 1926, America and France chose to hoard their Gold rather than recycle it through the capital account. In 1929 USA and France had over 50% of the World Gold reserves and after the 1929 Crash, America imposed even higher tariffs (Smoot Hawley) and did not help the allies until Pearl Harbour.

The misleading correlation between higher growth and higher tariffs is also prevalent from the 1980s under the Washington Consensus. The USA did successfully persuade many western countries to join GATT as well as Bretton Woods. GATT an international institution aimed at the promotion of free trade did effect an impressive decrease in tariffs from 34% in 1980 to 12.6% in 2000 and world exports as a percentage of World GDP rose from 11% to 18.8%. However, the increase in trade had less to do with tariff reduction than assumed. Baier and Bergstrand demonstrated that 67-69% of Trade Growth in that period could be explained by GDP growth but only 23-26% by tariff reductions.

The growth in world income is the major part of America’s contribution to free-trade, not her supposed adherence to free trade per se. Since the 2^ND World War, America has contributed to world growth with Marshall Aid, the EPU (to overcome problems in currency convertibility) GATT, Bretton Woods and a strong military presence. She has been a large importer of world products and facilitated new countries which had been restricted under the iron curtain. During financial crises of 1987 and 2001/2 she added liquidity. In other words, unlike the 1914-1939 period, the USA since 1945 has largely tried to be cooperative as Britain was in the 19^th century. America tried to be the “Leader of the Orchestra”. However, since 2008 there have been less consensual policies .America is critical of Chinese currency manipulation and is retaliating with QE and the latest round of GATT, the Doha round, has broken down. If there is to be a continuation of the Manchester School and the Washington Consensus, a “Shanghai View” ,say, later this century, then the lesson for China is that simply advocating free-trade is not enough. China would need to use its Hegemon status to cooperate with the rest of the world and create new institutions to successfully manage the economic well- being of the world as well as her own primary economic position.

Simon GILLIS 4 XI 2010

Baier and Bergstrand: The Growth of World Trade; tariffs, transport costs and income similarity.

Baines. The 1920s P Johnson (ed.) Twentieth Century Britain; Economic, Social and Political Change

Estevadeordal, Frantz, and Taylor: The Rise and fall of world Trade 1870-1939

Hatton and Williamson (2005).A dual policy paradox: Why have trade and immigration policies always differed in labour-scarce economies?

Irwin (2002): Interpreting the Tariff –Growth Correlation of the late 19^th century.

Irwin (draft 2010) “Did France Cause the Great Depression”?

Lopez-Cordova and Meissner: Exchange Rate regimes and International Trade.

Maddison (1995): Monitoring the World Economy

Matoo and Subramanian: Currency undervaluation and Sovereign Wealth Funds.

Overy (2005): Why the Allies Won.

Ruggie 1994: Trade, Protectionism and the Future of Welfare Capitalism

Williamson (2000): What should the World Bank think about the Washington Consensus?

Hatton and Williamson (2005).A dual policy paradox: Why have trade and immigration policies always differed in labour-scarce economies?

Hobson. The Wealth of States.

Hatton and Williamson. ibid

Irwin (2002): Interpreting the Tariff –Growth Correlation of the late 19^th century.

Estevadeordal, Frantz, and Taylor: The Rise and Fall of world Trade 1870-1939

Lloyds had specialised in maritime insurance since the late 1600s.

Lopez-Cordova and Meissner: Exchange Rate regimes and International Trade.

EPU. An institution that overcame the problem of a shortage of hard currency in post-war Europe. Countries settled their trade monthly at the BIS allowing multilateral trade and with the aid of US credit.

Ruggie 1994: Trade, Protectionism and the Future of Welfare Capitalism.

US mass production of arms was partly sent to GB and Russia. 1/6 of Russian arms were American under the Land-lease scheme. Refer R. Overy (2005) : Why the Allies Won.

Baines. The 1920s P Johnson (ed.) Twentieth Century Britain; Economic, Social and Political Change (1994)

Britain did withdraw convertibility during times of War. This was an acceptable contingency of the Gold Standard. (1814 Napoleonic War, 1914 WW1) but always intended to re-join after hostilities ended.

Irwin (draft 2010) “Did France Cause the Great Depression”?

Maddison (1995): Monitoring the World Economy

Baier and Bergstrand: The Growth of World Trade; tariffs ,transport costs and income similarity.

39.25 Year Bond and Gold Cycle

May 1775

August 1814

Late 1853

February 1893

June 1932

August 1971

November 2010 ?

These dates are all 39.25 years apart and are all starting points for rising bond yields ( falling bond prices ) and rising gold prices. In some cases the moves were quick and sudden in others, the dates were starting points for long trends.

May 1775.Boston occupied by British Troops.Start of the revolutionary War.Continental currency introduced.(which would become worthless) British Bond yields climb from 1775 to 1780 by over 2%. i.e. 3% to 5.3%

August 1814. Napoleonic War. Bullion convertibility is suspended. From that point the Rothschilds accumulate Gold and nearly corner the market and Consols collapse until Waterloo.

Late 1853. The low deflationary point in the depression leading up to civil war. Gold convertibility is suspended in 1857. By 1869 Gold has climbed from $19.37 to $162.4.

Feb 1893. Philadelphia and Reading Rail Road company collapses; start of the 1893-1897 depression. Gold leaves the USA and in order to buy it back the government issues high coupon bonds

June 1932. the low point in the Dow and the market starts "pricing in" the devaluation of the dollar against Gold. 1933 Gold revalued by 70 pct from $20.67 to $35.00 Government bonds start declining in mid 1932

August 1971. Breakdown of Bretton Woods. Gold soars from $35 to $873 in January 1980. Bonds decline for longer, not bottoming until 1981

November 2010. QE2 marks the point that printing money is not just to save the system but is an active central bank policy. Government bonds start declining,particularly in countries without a printing-press(but it may be a slow process in the US). Gold moves to $4.000 per ounce?

GOLD vs STOCKS

If you refer to the chart below, it is time to look again at the stock market in terms of gold. This time it is the Dow since 1925 rather than the S+P.

As the market goes down, that means that the stock market is declining relative to Gold. The trend line is just below 5. The interesting question is ( if we get there and I believe we will ) does that mean 10.000 Dow and 2.000 Gold or perhaps 7.500 Dow and 1.500 Gold.

It’s possible that later in the decade, the trend-line is broken and the Dow falls (or gold goes ballistic) to very long-term support at 2.

Both the 1929-1932 and 1966-1982 bear markets were 86 pct in real terms.

The Great depression saw stocks fall by 89 pct but deflation reduced the real loss to 86 pct. The fall in the late 60s and 70s was only 50 pct but inflation added the real loss to 86 pct.

For perspective, if this bear market started in 2000 and we have seen the S+P fall by 28 pct with inflation of 30 pct, then the net real loss has only been 50 pct. (.7*.72)

In other words, for a comparable loss to the 1920s and 1970s , there needs to be a further 72 pct loss. (.72*.7*.28 = .14)

It is my opinion that the lessons of the 1930s are clear. Deflation is the worse outcome. Central Banks will try to reflate enough to keep the market at least steady ( although that might ultimately require 20-40 trillion of QE as total US Dollar debt alone is $58 Trillion).

Therefore if 72 pct of inflation can be engendered and the stock-market remains at around 10.000 ,the real price of Gold in comparison to the 1980 high of 873 will increase from 2.300 USD per ounce to 4.000 USD per ounce.

This strikes me as plausible, although such ideas rarely come true.

DOW JONES priced in GOLD

Is the Bank of England being disingenuous?

In the UK CPI has been considerably higher than the allowed 2 pct. In fact its over 3 pct at the moment with RPI close to 5 pct.And yet time and time again, Mervyn King has suggested that due to the weak recovery, inflation will fall below target and there is no need for interest rate hikes.It is probably correct to keep rates at 0.5 pct but its not necessarily true that CPI will fall below 2 pct. Simply put, The Bank doesn't care about inflation any more. QE2 in USA, B of J Yen intervention, and the Bank not being tough are all strong clues that the world is changing from Central Bank Inflation targeting.Maybe they will start targeting property prices if the real estate market starts a bear trend again. The one thing the Central Bank can't say is that it doesn't care about inflation.Don't sell your Gold.You might need it one day

Deflation first, then possibly inflation

The deflationary pressure in Europe and the USA is clearly increasing. Banks in Europe are becoming more reluctant to lend and $ libor is edging up too. The fear of inflation is still prevalent despite contrary evidence; why is this?

There is an assumption that monetising debt is de facto a route to inflation, but that is not necessarily the case. Referring to government orchestrated debt buying, Von Mises wrote in Human Action “The first stage of the Inflationary process may last for many years…..it is not too late for the government to abandon its inflationary policy”.

Monetising debt (or QE) is not an automatic route to the (hyper) inflation that many people fear. Firstly the banks need to use this new cash and be prepared to lend it out within the fractional banking system. They are not doing that. They prefer to hoard the money as reserve requirements are being raised and they are fearful of the current economic conditions (with good reason). Secondly, even if banks were prepared to lend the money, consumers must be prepared to borrow more and leverage their own balance sheets. That is equally not happening. In fact the saving rate in the US is increasing as people pay down their mortgages.
In short, the velocity of money has collapsed and money available for exchange is contracting (M3). The money created by recent QE is merely plugging holes in the banking system. This is unlikely to change until Real Estate starts increasing, consumers chose to leverage themselves and quickly increase borrowings.

In the medium term, debt pay- down will drive assets lower and the dollar higher. It may also even drag gold down, but gold will not fall nearly as hard as Real Estate or the Stock market. Interest rates are set to stay low as there is a drive to cash. The reason the dollar stays strong is because it’s the reserve currency. Borrowers who cannot raise money in their own currency usually chose the dollar instead. As assets decline quickly in a disinflationary environment, the need for cash increases and de facto the need for dollars to pay down debt.

The end game of this crisis may well be a reflationary nightmare. Don’t worry about that now. In fact when it comes, it will be so horrendous that central banks may be forced to expand their balance-sheets by 50 x not the current 3 x.

With over USD 500 trillion of outstanding derivatives a breakdown in the banking system in a few years might precipitate the need for a new currency but in the meantime deal with a declining real estate, declining wages and a declining stock market

Brown’s Gaffe; British Politicians underestimate the UK public

There is an interesting phenomenon in the UK that the public do have an excellent grasp of how serious our fiscal deficit is. In fact since 2008 they have been several steps ahead of what the politicians have been trying to paint over. Last night Mrs. Duffy made possibly the correct observation that taxes will rise and stay high for 20 years. 20 years; quite.

Unfortunately others like Mr. Mandelson warn us that comparisons with Greece are merely attempts to engender fear. I don’t think so. Unlike 1945-1951 where War debt was seen as worth paying for, the public might not accept the mismanagement of the Economy and incompetence of the banking sector.

Stay with Gold.

I'm reluctant to call the market, but I think that Gold is a clear cut buy.

The market is not paying enough attention to the IMF's volte face. For 30 years since Reagan and Thatcher the IMF have slavishly followed the Washinton Consensus; namely that the pursuit of growth is best achieved through deficit cutting and trade liberalization. The IMF now advocate the delay of deficit cutting. Give politicians a chance to resist a hard choice and they will take it gladly. Every year , slow growth will be used as the excuse to avoid the painful medicine.

Similarly , inflation targeting, the mainstay of central bank policy since the 1990s.It is being questioned. We are in a period where deficits won't be addressed and inflation will be encouraged.

Gold, Gold Stocks, commodity stocks are all a clear cut buy

Did Globalization lead to the end of government control of the economy?


At the end of the 20th Century there were approximately 400 million[1] workers in the leading 25 Industrial countries. If the proportion working in farming and services had been the same as 100 years earlier, rather than the current 20 million in agriculture and 270 million in services, there would instead be 190 million in agriculture and only 100 million in services. (The Manufacturing proportion has remained the same at 27 pct of the workforce). This dramatic shift exemplifies globalization. The rapid spread of technology, foreign direct investment and trade combined with the opening up of capital markets has changed the nature of labour to a more urban and skilled work force. Assets, particularly financial assets, are owned by different corporations all over the world. Globalization has perhaps moved faster than changes in government policy and the institutions that monitor, influence and regulate these markets. As the current world economy suffers under a weight of debt and unfunded liabilities, it is possible that the consequences of globalization may have been too rapid for governments to adequately negotiate the current economic difficulties.

The last period of Globalization between 1870 and 1914 saw a brisk increase in trade and migration. Britain was both the industrial and financial leader. Most of the trading nations operated under the Gold Standard and the core countries of Britain, France and Germany cooperated to ensure that the system worked efficiently. World exports[2], as a percentage of GDP, almost doubled from 1870 to 1913 and foreign assets more than doubled. Transportation costs fell dramatically and migration to the new world was an economic consequence of the shortage of labour and high wages outside Europe. The inter war period reversed many of these gains. The economic devastation of the Great Depression and 2 World Wars was accompanied by 2 breakdowns in the Gold Standard both in the post war period and then again between 1931 and 1936. Most significantly ,World Trade[3] collapsed and the ratio of exports, as a percentage of GDP, was only marginally higher in 1950 than it had been in 1870. In this light, the Globalising period from 1950 until now seems even more remarkable. It started with scarce capital and a new monetary system based on semi - fixed exchange rates. Over 60 years World Exports[4] have more than tripled and real GDP per person has grown by over 3.25 pct among globalising countries. HDI[5], perhaps a better measure of living standards, has jumped by 20 pct to 0.95. And yet, despite these gains, globalisation is questioned and governments in the western world seem unsure how to deal with the current problems. Government deficits , unfunded pension liabilities , popular disquiet with immigration and a world-wide weakness in real estate and mortgages appear to have left governments little room for manoeuvre. After so much success, why such pessimism?

The new monetary system of Bretton Woods had to cope with both the economic collapse of the period and the social implications of a world war that had left even the victors demanding change. Britain had lost her industrial and financial pre-eminence and Europe as a whole was short of capital. The Marshall Plan, with surprisingly little aid, kick - started the European economy. This was facilitated by the EPU in dealing with credit in a world short of foreign exchange.

The new monetary order required and allowed compromise. Ruggie[6] described it as “Embedded Liberalism”. It would contrast the nationalistic tendencies of the 30s with a multilateral character but it would not embrace the laissez-faire liberalism of the 1st Gold Standard. There would be compromise. The USA allowed Europe her choice of greater social welfare and strong protection of agriculture. Domestic policy that granted safety nets for the disenfranchised, greatly increased spending on health and benefits and capitalist cooperation with the unions was the new pragmatic backdrop of the period. The Golden age that followed until 1973 witnessed average European growth[7] of over 4 pct. The social contract that workers would forego excessive wage increases in order that capital could be reinvested was the mainstay of a virtuous economic circle. The workers believed the promise of delayed economic benefits. Both capitalists and workers trusted each other. Government spending[8] rose as her part of the contract, by an average of over 5 pct of GDP from 1937-1960 in the 5 countries France, Germany, Sweden, UK and USA . Despite the economic problems that followed the Golden Age (inflation, high unemployment, strikes and wage disputes), the Globalising countries still kept a steady pace up until 2007.

Standards of Living were rising for the majority but it is only since the downturn in 2008, and the subsequent deterioration in government finances, that there has been universal recognition that policy might be ineffectual or out dated. Ruggie had suggested that concerns of trade wars and protectionism, particularly in the 1980s, were misplaced. He feared that it would be government’s inability to maintain her share of the social contract that would be the greatest threat to prosperity and open trade. Krugman[9] validated this view . He observed that continuous reference to “poor competiveness” , whether in terms of exchange rate policy or trade openness , was either a means of deflecting from the real problem of poor productivity growth or perhaps an ignorance of it. His conclusion is that “national living standards are overwhelmingly determined by domestic productivity”.

Poor productivity is at the heart of policy inaction. As “migrating” agriculture and manufacturing labourers move to the service sector, living standards are in jeopardy of falling because services have the worst sector- productivity rate. It is here that Government policy faces a dilemma. In order to increase the productivity rate of the service sector , the workforce needs to be re-skilled to a higher level. The comparative advantage of the Globalising countries lies in design and highly skilled work. However , in order to pay for this advanced education , it will require cuts in health care and perhaps pensions. That is unlikely be endorsed by the electorate. It’s a timing dilemma. Short term losses to living standards are required for longer-term economic gains, but voters will choose shorter term benefits.

The difficulty in accommodating sectoral change in the workforce is only one area of policy inaction. Coincidentally, governments need to fund themselves as well as their citizens’ retirements. Are they capable of it? At the end of previous long waves of economic growth, there have been market crashes that have required major policy adjustments to rectify the market failure. As Eichengreen , Bordo and Irwin[10] show, the Canal and Railroad investment manias of 1825 and 1873 required new accounting rules and greater contractual transparency .The agriculture depression of the 1870s resulted in tariff increases and generalised protectionism. After the 1929 Crash, Glass –Steagall was introduced to prevent commercial banks dealing in securities and both GATT and the IMF were institutions devised to implement the new monetary system. The collapse of the Gold Standard and the Great Depression needed a complete change, not just an overhaul. Martin Woolf[11] suggests that although Globalization in the long term may be inexorable, over the short term, corrections and pauses are inevitable. The contemporary market crash in US real estate and its mortgage market is a crash with a global complexion. Unlike the 1870s era, capital markets are open, countries use fiat currency and credit is plentiful within a lightly regulated system. US mortgages are split up, and repackaged , and owned all over the world. Low interest rates following the 2001-2002 recession led to Real Estate speculation. The monetary policy of the 2000s is suggestive of government losing control. In the USA, the administration applied pressure to the FED to accommodate the busting of the technology bubble with an inappropriately low interest rate. It would appear that fear of popular disapproval prevented the much needed deleveraging that should have occurred after the bubble. In Europe, monetary policy is applied singularly by the European Central Bank. Interest rates that might have been appropriate for Germany and France , were not for Ireland and Spain who were experiencing real estate and construction booms. In the current reversal, interest rates are now too high for these countries. Their governments have both lost the ability to lower rates and ease policy through the exchange rate.

Government borrowing is also unusually high. The Western governments have found that the drop in tax revenues since 2008, combined with the monetary injections into the banking system, have left them competing with each other for domestic and international funding .Greece[12], for example, despite rigorous deficit criteria codified in the Maastricht Treaty, has overextended herself and now needs to borrow at 2.8 pct higher than Germany. It is interesting to note that the IMF[13] has warned countries of cutting spending too early. The Washington Consensus of trade liberalization and fiscal reform has been expounded since the early 1980s as necessary requisites for growth and higher living standards. Is procrastination on deficit- cutting a clue that the IMF recognises Government inertia and inability to implement the necessary policies to ease the debt burden. Only in 2009, the IMF forced Hungary to retrench and cuts its deficit and such an abrupt change in policy reflects the bewildering complexities that the IMF and governments face in choosing what to cut and where to invest in order to attract capital and win votes.

Aging population is a demographic phenomenon which can partially be explained by the benefits of globalization, but it also threatens to undermine government policy. Rising living standards , the breakdown of the nuclear family and a long spell of economic prosperity has been reflected in fertility rates in Europe dropping well below the replacement level of 2. The ratio of persons[14] aged 15-64 to those aged over 65 is projected to drop from over 4.3 in 2000 to under 3.0 by 2025 and threaten the ability of government to provide pensions and health provision. During the Golden Age there were two coincident misunderstandings. a. Fertility rates would stay above the replacement level of 2 and consequently population ageing would not be an issue and b. The failure to recognise that improvement in health would greatly increase life expectancy. In Britain the Labour Party reneged on its commitment to increase the retirement age of certain workers in the public sector. Continental Europe is in a more serious position as private pensions are quite rare unlike Britain. It is clear , that at some point, retirement ages will need to rise dramatically and/ or pension benefits be cut in real terms. However, the inability to take any decisive action thus far reflects how governments have been unable to undo the policy mistakes and misunderstandings of several decades ago.


The Losers of Globalization

Low productivity in the service sector, high government debt , unfunded liabilities ( particularly in pensions) , an ageing population requiring health care and ,not least, the bursting of a real estate bubble have left government with complex problems. However, central to these 5 issues lies perhaps the core dilemma. How can these problems be solved equitably? Or, put another way, how are the losers compensated so that they do not bear an overwhelming burden? The losers , inter alia, are low- skilled workers, the elderly who do not have private pension provision and property owners who entered the market late, particularly in the USA. Perhaps in the future, the greatest losers will tragically be the younger generation if these problems are merely ignored.

Two of the greatest periods of Globalization, 1870 -1914 and 1950 - 1973 had one noticeable similarity; they were periods of cooperation. In the first period Britain ,in particular, acted benignly as the hegemon and facilitated the monetary system and trading environment to work efficiently. Equally the “Golden Age” was cemented by the trust between capitalists and workers in ensuring the best allocation of capital. Unfortunately, in today’s climate, we see the reverse. World Trade liberalization has stalled in the Doha round and discriminatory[15] free-trade areas (FTAs) have replaced the brief period of “Open Regionalization”[16]. The Copenhagen conference was not just marred in terms of lack of progress on climate change , but was damaged by the conclusion that USA and China had little to discuss in terms of economic cooperation. As in Davos and G20 meetings, their antipathy is clear and disquietening. Japan’s own Golden Age has been halted by a 20 year period of infighting between rival factions, notably the Central Bank and the Finance Ministry. An unfortunate example of the(multi) prisoner’s dilemma; the government lacking ability to enhance cooperation.

In a period of cooperation, losers have a better chance of being compensated . Between 1870 and 1914 , countries who would not have been able to access capital or would have had high transaction costs , were included in the “orchestra”. In the Golden Age, manual and semi skilled workers were promised a completely new level of welfare , education and health-provision. The working classes were so confident that they were not society’s losers that they were prepared to defer wage increases and abstain from disruptive bargaining.

Today’s losers are not so confident. The banking sector , which was the biggest player in the real estate boom through leveraging its balance sheet with direct property loans, mortgage-backed securities and real-estate derivatives , has required a bail-out of unprecedented proportion. Despite punishment taxes on banks, all workers will have higher fiscal demands to fund the bail-outs.The poorest paid will proportionally have the most to pay. The unskilled and the young are actually facing cuts in education at the time they most need an increase and a chance to re-train. The countries most in need of liberalization are watching the larger countries choose NTAs.

The 2nd half of the 20th century has seen an unparalleled increase in prosperity among western industrializing countries, East Asia and others but also a new and larger group of dispossessed; an underclass. Alongside the winners , there has been a growing group; the undereducated, sub Saharan countries and the Afro American community in the USA (who are the predominant losers in the sub-prime crisis.) In order to pay for higher education, lower worker retiree ratios and an ageing population governments will need to retrench and reallocate. Unfortunately those they wish to tax can change domicile (multi nationals) , or simply form a quorum large enough to vote against that change .Governments have run out of money. With over 50 pct of GDP allocated by European governments, there is not much scope for increase (Sweden went as high as 63 pct and since needed to retrench).

The necessary market mechanism to reallocate capital is several steps behind the pace of globalization. This in itself is a symptom of loss of control. In particular, Governments are unable to apply macro economic policy as many nations have unified monetary policy or fixed exchange rates. Equally, fiscal policy is constrained by the convergence of tax rates (which itself is a consequence of monetary harmonisation) and voter appeasement. It is also hampered by multi- nationals with their choice of domicile and voters reluctant to bail out the financial sector. (The regulators of the open capital-market system were unable to recognise the real estate bubble and were reluctant to restrict balance-sheet leverage).Immigration to overcome the age-imbalance of a population is unpopular and market liberalization has been reversed in favour of discriminatory blocs. If governments are unable to embrace the losers and overcome this current period of non-cooperation then it is possible that loss of control will lead to a reversal of the World Economy that may partially reflect the chaos of the 1930s.

Simon GILLIS 10 iii 2010


C.H.Feinstein. Structural change in developed countries during the twentieth century.

N.Crafts. Globalization and Growth in the Twentieth Century.

J.Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.

P.Krugman . Competitiveness, a dangerous obsession .

M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago.

M.Wolf Is Globalization in danger?

R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti

D.Baines N Cummins M Schulze Population and Living Standards

D.Baines European Demographic Change since 1945 in Schulze Western Europe.

M.Bordo H Rockoff The Gold standard as a “Good Housekeeping Seal of Approval”

J de Long B Eichengreen The Marshall Plan: History’s Most Successful Structural Adjustment Programme

N Crafts. The Great Boom 1950-1973 Schulze Western Europe

P Temin. The Golden Age of European Growth Reconsidered.



[1] C.H.Feinstein. Structural change in developed countries during the twentieth century
[2] D. Baines . Class Lecture Notes
[3] Ibid
[4] N.Crafts. Globalization and Growth in the Twentieth Century
[5] Ibid
[6] J. Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.


[7] N.Crafts. Globalization and Growth in the Twentieth Century
[8] Ibid
[9] P.Krugman . Competitiveness, a dangerous obsession.
[10] M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago
[11] M.Wolf Is Globalization in danger?
[12] March 4, 2010 . Most recent Greek Government Bond issue
[13] IMF policy paper February 2010.Strategies for Fiscal Consolidation in the Post-Crisis World
[14] OECD, Employment Outlook 2007: Weighted average of France, Germany, Italy, Spain, Sweden and UK
[15] R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti
[16] Ibid