Pettis on Globalization

Michael Pettis reposts one of his old Foriegn Affairs articles.  Some intriguing insights into the underlying mechanics of capital and technology over the past two centuries:

What today we call economic globalization — a combination of rapid technological progress, large-scale capital flows, and burgeoning international trade — has happened many times before in the last 200 years. During each of these periods (including our own), engineers and entrepreneurs became folk heroes and made vast fortunes while transforming the world around them. They exploited scientific advances, applied a succession of innovations to older discoveries, and spread the commercial application of these technologies throughout the developed world. Communications and transportation were usually among the most affected areas, with each technological surge causing the globe to “shrink” further.

But in spite of the enthusiasm for science that accompanied each wave of globalization, as a historical rule it was primarily commerce and finance that drove globalization, not science or technology, and certainly not politics or culture. It is no accident that each of the major periods of technological progress coincided with an era of financial market expansion and vast growth in international commerce. Specifically, a sudden expansion of financial liquidity in the world’s leading banking centers — whether an increase in British gold reserves in the 1820s or the massive transformation in the 1980s of illiquid mortgage loans into very liquid mortgage securities, or some other structural change in the financial markets — has been the catalyst behind every period of globalization.

If liquidity expansions historically have pushed global integration forward, subsequent liquidity contractions have brought globalization to an unexpected halt. Easy money had allowed investors to earn fortunes for their willingness to take risks, and the wealth generated by rising asset values and new investments made the liberal ideology behind the rapid market expansion seem unassailable. When conditions changed, however, the outflow of money from the financial centers was reversed. Investors rushed to pull their money out of risky ventures and into safer assets. Banks tightened up their lending requirements and refused to make new loans. Asset values collapsed. The costs of globalization, in the form of social disruption, rising income inequality, and domination by foreign elites, became unacceptable. The political and intellectual underpinnings of globalization, which had once seemed so secure, were exposed as fragile, and the popular counterattack against the logic of globalization grew irresistible.