It is not possible to coherently discuss the "New Normal" economy without discussing financialization--the substitution of credit expansion and speculation for productive investments in the real economy--and its sibling: globalization.
Globalization is the result of the neoliberal push to lower regulatory barriers to trade and credit in overseas markets. The basic idea is that global trade lowers costs and offers more opportunities for capital to earn profits. This expansion of credit in developing markets creates more employment opportunities for people previously bypassed by the global economy.
Though free trade is often touted as intrinsically positive for both buyers and sellers, in reality trade is rarely free, in the sense of equally powerful participants choosing to trade for mutual benefit. Rather, “free trade” is the public relations banner for the globalization of credit and markets that benefit the powerful and wealthy, not the impoverished.
Financialization and mobile capital exacerbate global imbalances of power and wealth.
Trade is generally thought of as goods being shipped from one nation to another to take advantage of what 18th century economist David Ricardo termed comparative advantage: nations would benefit by exporting whatever they produced efficiently and importing what they did not produce efficiently.
While Ricardo’s concept of free trade is intuitively appealing because it is win-win for importer and exporter, it doesn’t describe the consequences of financialization and the mobility of capital. In a world dominated by mobile capital, mobile capital is the comparative advantage.
The mobility of capital radically alters the simplistic 18th century view of free trade.
What do we mean by mobile capital? Capital--cash, credit and the intangible capital of expertise--moves freely around the globe seeking the highest possible return. Globalization is the ultimate expression of capital’s prime directive: expand profits by seeking the highest available return on capital invested anywhere on the planet.
In today's world, trade cannot be coherently measured as goods moving between nations, as capital from the importing nation often owns the productive assets in the exporting nation. If Apple owns a factory (or joint venture) in China and collects virtually all the profits from the iGadgets produced there, this reality cannot be captured by the simple trade model described by Ricardo.
Trying to account for trade in the 18th century manner of goods shipped between nations is nonsensical when components come from a number of nations and profits flow not to the nation of origin but to the owners of capital.
Based on the antiquated model of trade between nations, the Apple iGadget creates a $200 trade deficit between the U.S. and China when it lands on an American dock. But this doesn’t account for the fact that components for the device were manufactured in five different nations, or that the majority of the value of the device is in the intellectual capital: the software, the interface and the design.
Once these factors are considered, it’s been calculated that as little as $10 of the value of every Apple product actually ends up in the Chinese economy. Virtually all the profit flows to Apple in Cupertino, California, not to joint venture partners in China or the workers who assembled the components in China.
Expanding profits by moving production to locales with lower labor costs is known as labor arbitrage. Arbitrage is the process of exploiting the difference in prices of labor, currencies, goods, services, assets, interest rates or credit.
In today's globalized version of "free trade," mobile capital can arbitrage the varying costs of labor, currencies, interest rates, taxes, environmental regulations and political favors by shifting capital between nations.
In the global economy, trade is not conducted between equals; those with access to the unlimited credit of financialization can outbid domestic capital for assets, labor and political favors.
The mobility and scale of capital give it outsized influence in small, credit-starved local markets.
Mobile capital, with its essentially unlimited line of credit, can overwhelm the local political system, buying favors and cutting deals to limit costs and competition. Local elites are soon co-opted, and people starved for cash income are easily recruited as labor.
Local assets--priced for the local economy where credit and cash are both limited--are snapped up on the cheap by global capital, and sold for immense profits.
Credit--scarce in traditional self-sufficient economies--offers maximum leverage to global capital, which can borrow money in distant markets at low costs and use the cash to outbid local buyers to snap up local resources that are still cheap compared to the resources in other globalized markets.
The influx of credit also fuels a destabilizing explosion of credit-based consumption in the local economy, causing people with little experience with credit to become over-indebted.
As the over-indebted default, their land and other possessions are confiscated by offshore lenders, further impoverishing the local populace and enriching global capital.
Where is the "free trade" in a world in which the comparative advantage is held by mobile capital? And what gives mobile capital its essentially unlimited leverage?
Central banks, which issue nearly-free money to banks which funnel the cash to corporations and financiers, who can then roam the world snapping up assets and arbitraging global imbalances with low-interest money.
There's nothing remotely "free" about trade based on capital flows generated by central bank liquidity.
This mobility of capital is an enormous benefit to the owners of the capital, but it creates extraordinary instability for those who are not mobile. When mobile capital encounters anything that reduces profits--higher taxes and rising labor costs, competition or restrictive regulations--it closes factories and fires workers in that locale and shifts to another locale with greater opportunities for high returns.
The workers left behind have limited means to replace the lost wages, and the local state often has few resources to repair any damage left by the exploitation of resources. The advantage of mobility is reserved for capital, and to the relatively limited cohort of workers who can immigrate to other nations to find work.
This illustrates two key characteristics of financialized globalization: perpetual instability and a never-ending cycle of boom and bust as capital sparks rapid development in one locale and then moves elsewhere once profits decline.
The scale of global capital is difficult to grasp; trillions of central bank-issued dollars, euros, yen and renminbi are sloshing around the global economy, seeking low-risk profits.
Capital has no loyalty to anything but its own expansion, and the damage it leaves in its wake is of no concern to the owners of capital.
There are even less visible consequences to the globalization of markets, capital and labor. Once goods and services are priced globally, local supply and demand no longer set the local price. As a result, measuring inflation and deflation locally is meaningless in a globalized economy.
This globalization of price--for goods, services, credit and currencies--continually creates imbalances that fuel a perpetual instability that gradually impoverishes every sector other than global capital, which being mobile, can exploit the imbalances for its own profit.
Who benefits over the longer term from the permanent instability and boom-and-bust cycles of this arrangement? Only those close to the credit spigots of central banks.
This essay was drawn from my new book, Why Our Status Quo Failed and Is Beyond Reform, which Gordon T. Long and I discuss in a new 34-minute YouTube program.