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The Rise of the Global Economy

By: Steve Johnson

4/17/2008 - 67 Comments

After World War II, world leaders were not about to let another dictator create an extreme form of nationalism. 

To reduce the risk of history repeating itself, they joined together with policies and economic conditions that would discourage war between nations. 

The idea was to create trade agreements to couple together the economies of independent nations – which increased GDP in exchange for lowering the risk of war, because a nation is much less likely to go to war with another nation whom their economy depends upon.  This movement led many nations into ‘free trade’ agreements and reduced trade tariffs with neighboring nations. The biggest ‘free trade’ treaty was signed by President Clinton and came into law in 1994. NAFTA (North American Free Trade Agreement) eliminated the majority of tariffs between products traded among the US, Canada and Mexico.

To prevent (or at least minimize) future conflicts, allied nations led by the United States, formed the United Nations in 1945. The UN is an international organization whose stated aims are to facilitate cooperation in international law, international security, economic development and human rights issues – in the hope that it would intervene in conflicts between nations and thereby avoid wars.

The European Union (EU) can be traced to the European Economic Community formed in 1957 by the Treaty of Rome between six European countries.  The EU was created first and foremost as an economic union. Creating and maintaining the EU’s single market has been a primary goal – ensuring free movement of people, goods, services and capital.  In 1999 the twenty-seven member state EU introduced the common currency, the euro.  With almost 500 million citizens the EU generated an estimated 31% of the world’s GDP in 2007.  The euro was created to compete with the dollar, which had become the currency of the world as 23 nations pegged their currency to the dollar as the increasing demand for oil grew throughout the world and oil is traded in dollars.

There is No Going Back

The complexity and history of policy changed and trade agreements which have coupled the economies of the world over the last several decades cannot be quickly decoupled.

To reverse economic globalization, tariffs would have to be put into place to block free trade between nations – which would result in a large recession as each nation could no longer export products they build or import the many products they consume at very low prices.  Each nation would have to stop the flow of free information available on the Internet which is shared by the world. Prices and energy costs would skyrocket, resulting in new elected leaders who would be forced to fix the problem. The new leaders would re-open free trade. We cannot go back – it will never happen. The best thing all nations can do is move forward with;

• A strong educational system,
• A strong small business tax policy,
• Produce competitive products (resulting in high exports) and
• Create a strong currency policy

America had all four of these in the 90s, but now only has one – a strong small business tax policy. China is in the best position to succeed in the global economy – but not without its own problems of a bubbling stock market, high inflation and a lot of people to feed. 

Education is the foundation of a strong nation in the global economy of today. America needs to overhaul its educational system and it will – because the leaders will eventually realize why we are losing ground in a recession with a sinking currency and very little products to sell to the world.  The once strong America educational system is no longer producing highly educated workers – and therefore cannot be paid high wages.

Lending Risk was Trusted with Partnering Nations

In 2000-2006, the global economy continued to grow because of the coupling of the once independent nations of the world in the hope of stabilizing the world markets and improving the economic conditions of emerging nations.  But, during the globalization process, major financial institutions around the world lowered their standards for evaluating risk when evaluating loans from other nations that they trusted because of their new free trade agreements. 

When a loan was sold several times across several nations, the financial institutions no longer had any reference to determining the risk of the loan. All they had was a security institution from another nation rating the risk of the loan.  If the rating was wrong, the loan was worthless – and as it turns out, a lot of ratings were wrong.  So the risk of bad loans was spread across the financial institutions of the world, creating a ‘house of cards’. 

The Government’s Role

The globalization process of ‘free trade’ agreements like NAFTA changed the economy of America from a once-proud exporting nation, to the world’s biggest importer – as the entire manufacturing sector moved to other nations with lower paying workers in China and India.  In only 15 years, from 1992 to 2007, the US balance of trade deficit surged from $84 billion to $700 billion.  Today, most of the jobs in America are in the service sector – as we server one another.   But, this is about to change.

The global economy is pushing the standard of living in the United States lower.  The US Government is run by elected officials who don’t like to bring bad news to the people because they wouldn’t get re-elected.   So, in an attempt to keep the US economy from lowering its standard of living, the US Government did what they could.  They lowered the interest rates and printed more money to encourage spending.  These practices of ‘easy money’ created the dot-com bubble in 2000 and eventually the housing bubble in 2006.

It is perfectly normal for industries to go through economy cycles – of which the economy is constantly adjusting for.  Every industry of the economy has up and down cycles, but the housing and credit bubble of 2006 are not isolated to a nation. They have been spread out around the world – leading to a world-wide recession that could take ten years to recover from.

The Second Phase

Globalization will not stop, but the second phase will adjust for these mistakes by increasing the power of the already created world organizations like the World Bank and International Monetary Fund (IMF). In a global economy, these organizations will need to take on more responsibility to ensure stable prices and control currency fluctuations. They may even need to take over the security rating agencies so that lending risks can be globally trusted and not based on any single nation.

Nations that have suffered during the learning curve will need to eat their losses and create new policies to strengthen their currency, education and ultimately their production. America will probably suffer the most, as its standard of living and currency is reduced to its level of productivity. 

America will be devastated when the world completely pulls out of the dollar, bringing very high inflation and a deep recession. The dollar will likely lose its place as the world reserve currency and America will be forced to return to its days of high exports, as the weak dollar will help rebuild the manufacturing sector.

The Third Phase

The third phase will lead to a global currency or a combination of monetary unions as the efficiencies of reducing the number of currencies in the world and the need to reduce the risk of currency exchange fluctuation becomes vitally important to stabilize the global financial crisis. 

The trillions of dollars gained by reducing the number of currencies will be too hard to resist. And the reduced risk in currency fluctuations will protect the many businesses that have moved into international markets. Every nation will have a vested interest in protecting its businesses from currency fluctuations that could destroy their market and sacred jobs. 

Follow up article 1: Is Outsourcing the Cause of the Recession?

Follow up article 2: The Financial Crisis Will Quicken the Expansion of the Global Financial System

Follow up article 3: Calls For New Global Monetary Authority

Follow up article 4: The Push for a Global Socialist Economy

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