Thread by @ByrneHobart

1/100 Let's talk about globalization! It has "global" right there in the name, so it's obviously about every country. But really, globalization is about just one country. Unfortunately, we don't know which one. Either America or China, for very different reasons.

2. Globalization is synonymous with America in the sense that it describes how the world changed from 1946 onward, i.e. after America conquered all of the world except a weird communist rump state, which inevitably collapsed.

3. Not only did communism collapse due to internal contradictions, but it only survived due to *external* contradictions. The Soviets were sucking serious wind in the 70s, and managed to get back on their feet by selling oil. (Much more on oil and globalization to come...)

4. So, one version of globalization is that it's the system America imposed on the world, probably by accident. A bunch of smart Americans got together to decide how the postwar order should look. Everybody else counted up our aircraft carriers and warheads and said "Okay, sure."

5. But there's another version. The China version. China is a more literal force for globalization in that it's the axis on which "developing" countries rotate into being "developed" instead.

6. China's big competitive strength is in assembling: putting together a bunch of components, and shipping out a finished product.

7. Think iPhones. You get designs emailed from Cupertino, chips designed in Santa Clara and built in Hsinchu, optical components from somewhere in Japan, displays from somewhere in Korea. They all get shipped to Shenzhen, and turned into iPhones and Galaxies.

8. All this effort requires physical infrastructure, which means concrete, copper, iron; it also requires power, i.e. coal, oil, and natural gas. All that stuff flows into China, from the lowest bidder. And what comes out is consumer products, mostly for people in the rich world.

9. In other words, China is a great big machine for turning aggregate demand in the rich world into demand for end products in whatever country is best at producing them. For high-tech products, it's whoever planned ahead; for raw materials, it's whoever got lucky.

10. In other words, China helps the world be whatever it used to be, only more so. It makes Saudi Arabia more of a petrostate, Japan more of a tech component monopolist, America more of a consumerist paradise, etc.

11. And why? Blame Americans again. Specifically Malcolm MacLean and other assorted entrepreneurs, who made containerized transportation a reality.

12. Ocean-based transportation has always been the cheapest option. Containerization made it roughly an order of magnitude cheaper. (Details: amazon.com/Box-Shipping-C… ). This amounts to a de facto tariff cut—the biggest in history.

13. Containerization brought the world closer to a Ricardian ideal, in which every country would specialize in whatever they did best, and free trade would ensure utility-maximizing transactions among free agents. Just one problem...

14. "Ricardian" generally refers to the *outputs* of Ricardo's theory. But his *premises* were deliberately restricted. He says that his theory assumes capital is not mobile.

Capital wasn't very mobile when he was writing. That has changed.

15. Another Ricardian assumption is consistent returns on scale. In his model, 1/10th of the investment produces 1/10th of the output. In a labor-intensive economy where the highest-tech products are mass-produced shirts, that's basically true. But it's not true today.

16. If you adjust Ricardo's models, it doesn't destroy the case for free trade, but it sure complicates it. Now, a country running a surplus can also build up an unassailable edge in exports.

17. They start out competing on cheap labor, but reinvest their profits and, as their labor cost advantage diminishes, they get an advantage in capital instead. And, even worse, an advantage in capital-*plus*-tacit-knowledge.

18. America used to make lots of furniture. Furniture has a low value-to-weight when it's cheap, and requires craftsmanship when it's fancy. China initially competed on price. But they sold a lot, and moved up the quality scale. Now they sell $96bn of furniture per year.

19. This is not strictly a bad thing. Part of the natural progression of economies is that they start out with cheap labor doing low value-added stuff, and eventually accumulate the capital and expertise to do better.

20. But as long as this is possible, it's possible for any country to get ahead merely by having a longer time-scale than the countries it competes with. If American firms need to show profits each quarter and Chinese firms need to show profits in a decade, China gradually wins.

21. But this can be a "win" in the "winner's curse" sense. Sometimes your ten-year plan is a plan that comes to fruition when it's a decade out-of-date.

22. Still, it's a useful framework to keep in mind: when capital is mobile and there are economies of scale, accepting a deal that sounds good in Ricardian terms can be bad. If not for you, then for your descendants.

23. And capital is very mobile. In the early 2000s, China surpassed the US as the single biggest recipient of foreign direct investment. This is a worthy tangent.

24. Two directions to take this. First, should rich countries receive lots of investment? In the case of the US, we get a lot because we're the de facto world reserve currency (more on this later, perhaps). And because we have a good tech sector, rule of law, and liquid markets.

25. Second, there's a dog that didn't bark: China received enormous FDI, but where are the Chinese investment billionaires? American and European companies invested in Chinese JVs, but few American and European investors got rich. (See amazon.com/Mr-China-Memoi… for much more)

26. At least initially, the people who got rich were close by: investors in Taiwan and Hong Kong did well buying Chinese factories. This is telling. It's a global world, but being physically and culturally adjacent is still the only way to collect what you're owed.

27. Much later, Japanese and American investors did clean up, by investing in Chinese tech companies. Mostly Internet. Some of this was because the American companies had established a template very recently, so American investors—who have short memories—remembered what worked.

28. There's a famous macroeconomics joke: "There are four kinds of countries: developed, developing, Japan, and Argentina." China also deserves a spot; it's notable in one sense for being weird and in another for being hyper-normal; it really did converge on richer countries.

29. But in one sense, China is more meaningful as an indicator than as an actor. The country responded to circumstances (starvation, then containerization, then increasingly globalized trade, then increasingly globalized finance).

30. They have done a pretty good job, but it's a very reactive job; China's policies since Deng took over were always prudent given what was happening, but "what's happening" is endogenous to the system.

31. So if you're trying to understand China's behavior *today*, consider them a bit player who has realized that they're getting old and this is their last chance to steal the show and make it big.

32. I have talked about American and globalization at length before. Check palladiummag.com/2019/11/13/fac… for more details

33. The short version is that we backed into a role as global hegemon; we were the hardest country to bomb/bombard in world war two, and we joined relatively late.

34. (One weird thing about world war two is that when we declared war on Japan, it was an open question whether Germany would get involved. The world lucked out when Hitler somewhat arbitrarily decided to declare war on us.)

35. (Which also affects the moral dimension of the war. What we decided to do was retaliate against Japan after they retaliated against our oil embargo through a maybe-accidentally-sneak attack. Not hugely important, just useful for raising the cynicism waterline.)

36. During the war, America convened a conference to discuss what the postwar economic and monetary world order would look like.

This was extremely alpha.

37. Like, imagine if, in 1942, Japan and Germany had held a conference to decide what American railway gauges would be after we surrendered. The Bretton Woods conference not only defined the role of the dollar until 1971; it defined the term $wag forevermore.

38. Anyway, the system we decided on was that all currencies would maintain a peg against the dollar, and the dollar would maintain a peg against gold. This is short-term stable and long-term unstable.

39. So we created a set of institutions and norms to protect it: the IMF, the World Bank, and so on. We sort of co-opted the BIS, but it's unclear to me if they thought the new setup was some oddball idea from nouveau riche Americans or was the way things would be thenceforth.

40. Either way, we wound up with a system where everything was quoted in dollars, and everyone had an incentive to use dollars.

41. Which created an obvious problem. Everyone... wanted to have dollars. So they accumulated dollars, which meant a) we ran a trade deficit, and b) we had dollar liabilities, redeemable in gold, which by the early 60s exceeded our gold on hand.

42. Now, if you're a normal CNBC type, you might think that once the US has made promises to deliver X ounces of gold, and has fewer than X ounces on hand, it's time to short. If you had decided this, you would have been about a decade too early.

43. Because while nobody wanted to be the last to request gold for their dollars, nobody* wanted to be first, either; dollars were more convenient than gold.

* Except France

44. Now, here's the very weird part. Throughout the 60s, we engaged in increasingly elaborate monetary, fiscal, and foreign policy contortions to maintain the Bretton Woods system.

45. Then, in 1971, we abandoned it.

46. And, ever since then, the dollar has been...

... still, overwhelmingly, the most important global currency, and the de facto denominator for the value of every asset on earth.

47. If you start from the premise that the dollar is the one currency backed by tangible assets, and Nixon announces it won't be any more, you'd expect a collapse.

48. But if you start with the premise that it's the most-used currency for some reason, and the reason changes, it's still the most-used currency. Switching costs are too high.

49. Plenty of people move to city X for school, live there in their 20s for work, stay in their 30s because they don't want to relocate their kids, and so on; big decisions have sticky implications.

50. And choosing a currency is among the stickiest. You're measuring your assets in it, and your liabilities, so anyone who does business with you has to think the same way. To use another currency is to make an unhedged bet.

51. In a way, the story post Nixon Shock is that we used definite optimism to bootstrap ourselves into an indefinite optimism. There is nobody making the dollar the global default currency today, but it remains the default because so many assets are quoted in it.

52. Such as, say, oil. Oil is a really interesting product, and I highly recommend amazon.com/Prize-Epic-Que… for much more information.

53. Oil is a case study in why norms around currencies persist. For example, one European airline I used to follow, Wizz Air, switched their bank account from Euros to dollars because (they said) fuel is quoted in dollars so it reduces their risk.

54. (The real reason was that they weren't going to hit their pretax profit guidance, but they realized they'd have a chance to if their cash earned 2% instead of 0%, and they took it, hoping the currency risk wouldn't blow up in their faces.

Anyway.)

55. If you're religious, you might think of oil as God's way of keeping things interesting. It's a very useful product if you want to convert a small amount of mass into a lot of energy and don't have the space for a nuclear reactor.

56. But—and here we get to the "keeping things interesting" part—much of it is in land controlled by religious fanatics, communist fanatics, assorted gangsters, and of course the nefarious Norwegians.

57. Oil is cheap to transport. As a rule of thumb, it costs about a dollar to move a barrel of oil from any port anywhere on earth to any other port.

58. And it's an essential input into driving cars, which is the world's most popular way to LARP as a mid-century American, i.e. it's a symbol of blithe cheerful prosperity.

58b. this notification is my telos

59. So oil is a proxy for economic growth. It's an uneven one, because it's consumed in different ways: in the early 1900s, Standard Oil was very worried that kerosene consumption had peaked. Cars bailed them out.

60. In the US in the mid-twentieth century, we actually used oil power plants for a lot of our electric grid. This seemed prudent back when the US was the world's dominant producer, and when we actually had quotas to prevent domestic overproduction.

61. But in 1972 the Texas Railroad Commission finally eliminated its oil quotas, and we still couldn't produce enough. And then in late 1973, the Saudis launched an oil embargo to protest the Yom Kippur War.

62. This blew a giant hole in America's collective P&L, because, as it turns out, oil is extremely inelastic on the margin. When gas prices double, you might buy a car with better mileage... in five years, when your current car conks out.

63. You might telecommute, but it's 1973. A fax machine is high-tech. You're just gonna suffer for it.

64. OR ARE YOU? Saudis, remember, are selling oil for dollars. Which means they have dollars. What can you spend a dollar on in Saudi Arabia? Well, you can invest in more oil, but you'll flood the market. You could buy goodies for your populace. Or you can invest in dollar assets

65. They chose the last option: while they were raking in dollar profits, they were lending that money straight back to American financial institutions. This somewhat buffered the US from the impact of higher energy prices.

66. (This was a much bigger deal in the 2000s, when financial markets were more liberalized and the incremental impact of more demand for dollar assets was lower mortgage rates, which led to higher equity cash-outs and higher consumer spending.)

67. One of the paradoxes of globalization is that when it's imbalanced, these imbalances—all driven by different national endowments in natural and human resources, as well as different policies—actually bring countries together.

68. When the US has a trade deficit with a country, it has a problem. But solving that problem *is also a problem*, since it means some combination of less domestic consumption and less overseas employment.

69. Globalization is a meta-stable system, in which every pairwise divergence in outcomes is a pairwise convergence in interests.

70. At least, as long as both countries operate on the same timescale. Of course, they never do. The US has relatively short election cycles, while other countries tend to have more stability at the ruler level and less at the regime level.

71. I.e. fifty years from now, there probably won't be a Trump in the White House, but there will certainly be a US President. Whereas 50 years from now, MBS may not be in charge, and if he's not, there's a good chance that the Kingdom of Saudi Arabia will be no more.

72. Another paradox is that these natural endowments only benefit countries insofar as they can take advantage of the outputs of institutions in other countries. See for example the argument that Aramco is a successful Silicon Valley startup:

https://twitter.com/jsmian/status/1204298059921993728

73. So we've talked about the US, the Far East, and the Near East. What about the Rest of the West? What does globalization mean for Europe?

74. Europe has been a very interesting laboratory for globalization, in that they've been ahead of the game in terms of multilateral institutions and are now ahead in witnessing the collapse of these institutions.

75. The European Union evolved from the European Coal and Steel Community. "Community" is always a euphemism, and in this case it was a euphemism for extended cease-fire.

76. The original purpose of the European Coal and Steel Community was to unite the German and French steel supply chains. For the purpose of economic efficiency? Ha! No, just to prevent World War Three.

77. The idea was that, if you extrapolated from the 19th century onward, a) wars required an increasing ratio of materiel to men, and b) they usually started because France and Germany hate each other.

78. The ECSC was meant to lengthen the refractory period between those times when Germany and France insisted on going at it and making everyone else join in.

79. Its purpose has since changed.

80. There are two modern ancestors to the ECSC: the Eurozone (places that use the Euro as a currency) and the EU (places that have—I cannot emphasize how bizarre this is—agreed to be ruled from Brussels).

81. I don't know what the EU is actually for. That's fine; nobody involved in running it seems to know, either. It's just a sort of default for decisions that ought to be sovereign but that nobody has bothered to make.

82. I do know what the Eurozone is for. It's a vast conspiracy to suppress the value of the Deutschemark in order to make German exports more competitive.

83. The result of this system is that Germany runs big trade surpluses and most other Eurozone countries run persistent trade deficits. To net this out, German savers put their money into banks and life insurance companies, which lend to other parts of the Eurozone.

84. This doesn't make a lot of sense, because those loans won't really get repaid unless either a) there's immense political will in eg Greece and Portugal to transfer lots of money to already-wealthy Germans, or b) those countries develop German levels of efficiency and savings.

85. Neither outcome is likely, so basically Germany's role in the Eurozone is to accumulate assets in the form of debts that have yet to be written down, but will inevitably be written down. I honestly don't know why they do it.

86. Maybe Germany learned something from Luther's 95 Theses, the Communist Manifesto, Mein Kampf, etc.: beware of anyone with strong opinions who writes them in German. Maybe they've embraced mass passivity. Or maybe they're just bad at lending. Who knows?

25a Clarifying this: where are the *Americans* who became billionaires investing in Chinese assets? Lots of money changed hands, but did the investors get rich? People who bought the outputs sure did, eg Walton, Bezos, Apple shareholders.

87. And speaking of widely-distributed opinions, I haven't even touched on the sociocultural aspects of globalization. I'm very fortunate: wherever in the world I go, there will be people who know English, many of whom are super excited to talk to a native speaker.

88. We anglophones have given the world many good things, like a common global language and Shakespeare. We have also given them the lyrical stylings of, I dunno, Drake? Maybe not a great trade.

89. But this is the sort of globalization that most people reading this experience *as globalization*. That when you have a programming question, you ask Stack Overflow, a Finnish CS grad student will argue with a Malaysian teenager over whose answer is more Pythonic.

90. That's really cool, but also deeply scary, because as transportation and communication costs decline, there's a level playing field. And we in the rich world are, by global standards, spoiled rich kids; nature's chosen losers in every fair fight.

91. We can compete head-to-head, but we'll probably lose. The world's poorest 95% has more skin in the game, and when the game is fair they'll play to win.

92. So we can consider the historical approaches that the spoiled rich have used to mitigate the pains of fairness: 1) making the world a less fair place, and 2) making science an extremely engaging hobby.

93. A surprising number of 19th-century discoveries are named after lesser English gentry. There is a lesson there.

There's also an escape hatch.

94. Because science, art, literature, and philosophy, by their nature, scale like crazy. Once you've found the formula (if you're a physicist) or totally overturned the formula (if you're a painter), everyone sees it.

95. When success is defined as fame and peer recognition, gentlemen scientists will starve unless the "gentleman" part involves a steady income from a trust fund.

96. But that's not quite the case today, because of the relentless commercialization of so much creative and scientific work. If it's good in theory, it will get applied, and when it's applied, people get rich.

97. So, in this increasingly scary world, we can take comfort in Paul Graham's Bus Ticket Theory of Genius: paulgraham.com/genius.html

98. We denizens of the rich world are not going to starve if we pursue our weird and esoteric interests, even if doing so is not in our immediate economic interest. And they might lead to something useful enough to be lucrative.

99. Global trade as a share of GDP rose throughout the 19th century and peaked in 1913; it didn't reach that level again until 1979. "19th century through 1913" was also the peak period of awkward Brits singlehandedly inventing new gadgets and academic disciplines.

100. Today, the results of that kind of invention are increasingly likely to be mediated through software, which means they're increasingly likely to make the creators rich. So: be worried, be prudent, be prosperous.

And that's globalization! The end.