ACT 4 - The Origin of Global Trade

Last episode I explained how the United States became dominant superpower after WW2 thanks to their unfair advantage, which is having double the navigable waterways as the rest of the world combined.   Over the next few episodes I will continue to share how the history of the US has impacted Canadian investors, and how we can draw on lessons from history to chart a course for the future. 

 

When the wars were over, the US started the United Nations and associated entities like the IMF and world bank. That is why the UN is headquartered New York City. The US bribed everyone to be on their side against the communist Soviet Union by promising to secure the world waterways and allowing all countries to sell goods to anyone else.  Everyone has been getting rich since 1945 by trading with each other in relative peace provided for by American lethal overwatch.  The US has been importing goods from the rest of the world and paying for for those goods with US dollars, which was backed by gold.

 

An event in 1971 called the Nixon shock rocked the world. The US went off the gold standard and could effectively print dollars at will. The US dollar became a true fiat currency.  The US also coerced OPEC to accept only US dollars as payment for oil, and I’ve linked an excellent article about this period in the show notes if you’re interested in the details of this history. 

 

Most countries are net exporter of goods but the US is a net importer of goods. The Americans do not need to be importing, but they have hog tied themselves with shipping laws like the Jones Act that encourages import of foreign goods. The Jones Act requires goods shipped between U.S. ports to be transported on ships that are built, owned, and operated by United States citizens or permanent residents. This makes shipping domestically and domestic consumption more expensive, incentivizing imports from other countries where wages are cheaper.  At the stroke of a pen they could make domestic trade a lot cheaper and curtail imports but they don’t. They have been deliberately using their consumers to bribe up an alliance that eventually won them the Cold War.   

 

The US has been the winner in this arrangement because they now can monetize their debt, and for decades they have been importing all the finished goods (TVs, cars, computers) from places like China, and exchanging these finished products for their fake US dollar monopoly money.  

 

After decades of this, the U.S. has all the finished goods, China and the rest of the world has the monopoly money.   

 

 

You might be asking yourself, why does the world put up with this arrangement? 

 

One answer is countries have been getting rich from this arrangement faster than their wealth has been eroded by American money printing. That may still be true, but with the accelerated rate of money printing aka QE since 2008, it may not be true for much longer. 

 

Another answer is that the countries of the world have no choice. Almost all international trade (85% of it) travels on the open ocean, and the US keeps trade safe by policing the world’s waterways with its massive and technologically  superior navy, including and it’s devastatingly powerful fleet of aircraft carriers.  Smaller ones are called jump carrier.  The larger ones are called supercarriers. It takes 8 jump carriers to destroy one supercarrier. There are 21 of the smaller jump carriers in the world of these 11 are American.  There are 12 Supercarriers, and all of them are American. China owns 2 of the smaller jump carriers, both are former Casinos. The point is Americans own 96% of long range global firepower, and at the current rate of global navy buildout, the combined nations of the rest of the world will not have a navy equal to the American Navy’s strength until about 200 years from now.  They also own the largest Airforce in the world. In fact, the first, second, and third largest airforces in the world are 

The US Airforce

The US Navy, and

The US Army Who has the largest military is an important thing to remember.  Through the course of human history, violence is the true gold standard, thus whomever is capable of the most violence holds the all power.  If your rich crazy neighbour who has 96% more guns than you is very friendly, is keeping you safe from bandits, and is eagerly buying everything you make with handwritten IOUs, you’ll probably stack those IOUs high feeling really good about yourself. After all, what other choice do you have? 

 

That’s it for geopolitics this week, and tomorrow we will take a break to  answering a question from a medical professional about buying his own office building. On Monday I will return to macroeconomic themes, namely at how the end of globalization as we know it is coming, and how I think about how to prepare for it.