In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“It’s very, very clear, often, who is going to lose from trade agreements, investment agreements. It is less clear who is going to benefit because the beneficiaries will only emerge in the course of the future and they don’t know yet that they are going to win. So the losers clearly know what they are going to lose, but winners don’t know what they are going to win. And that really pushes the question, “Why should we do this?”

– Harold James

Kevin: Our guest today, Dr. Harold James, has been an expert in looking at globalization and the history of national cooperation worldwide. We have been talking over the last couple of weeks, Dave, about this Transpacific Partnership, trying to get our heads around something that actually has been quite secretive, and I think Dr. James can probably bring some light to this issue.

David: Again, that is an issue which many people have been concerned with. We don’t have full clarity on what it is. Most of the information that we have had on the Transpacific Partnership was leaked information from Julian Assange from WikiLeaks, so it has been sort of as things have been released in small pieces and then as parts of the agreement have been revealed, now we have some insight.

So, perhaps with a bit of a historical context, Harold James, it is great to have you back on the program with us. There are topics that you have researched and written on over the past 15 years which make you the right person to explore trade and tariffs and the partnerships being proposed today, which might either increase the former, or reduce the latter. Drawing on your expertise in political economy, let’s frame the discussion on the TPP, the TransPacific Partnership, and the TransAtlantic Trade and Investment Partnership. We will probably focus more on the TPP as it is already agreed on by the participant countries, but frame that for us.

Harold: Sure. The problem is that there has been a very, very efficient system of dealing with trade and manufacture, and basically, that is a system that goes back to the 19th century, that goes back to some treaties in the 1860s that are really very, very old. But that deals with just manufactured goods. And we think of manufactured goods as important, but in fact, most of what the world is doing now is to do with services, and so this whole apparatus for dealing with manufactured goods just doesn’t include the service sector.

And the thought behind TPP and also the Atlantic version of this, the TTIP, is that the trade agreement needs to be extended in order to include the traded services. And also you had trade and services as something that the United States is good at, but in order to sell our services we need to cooperate more with other countries and reach agreements with other countries.

David: You have said in some of your writing that tariffs are a traditional means of bargaining across frontiers. What are we bargaining for through the TPP and TransAtlantic agreements?

Harold: We are hoping that we get more access to other countries’ markets. There are some goods that are involved, as well. One of the famous items that has been the subject of controversy for decades in TPP is the access to the Japanese food market. Japan has a highly protectionist regime and they have a particular culture, clearly, that is focused around the way that they produce and grow rice, and they don’t want to admit foreign rice, including U.S. rice. That is the kind of thing we’re trying to open up.

But it is also to do with financial services, telecommunication, electronic commerce, intellectual property – all of those areas are areas where the United States has really big advantages and I think opening up the trade now in the Asian countries and in Europe in the future, is something that most American businesses think of as very advantageous to themselves.

David: When you look at U.S. hegemony, we have really not been a leader, as the British were, by force. We preferred influence, perhaps, over control. And I think of the TPP perhaps as an outworking of a new international relations strategy, formalizing some sort of exchange of money for power, muscling into spheres in Asia which might otherwise be dominated by less friendly world powers. We do have this advantage in financial services and intellectual property. Are we trying to solidify who we are as a hegemon?

Harold: I think you are right in identifying that as one of the motives and it is one of the reasons that TPP is politically controversial because it looks on the face of it as if it is a kind of coalition that excludes China. And if we are really worried about the growth of China and if China’s neighbors are worried about the military security threat from China – TPP includes Vietnam and Japan – those are countries that are clearly quite worried about the growth of Chinese influence and they are thinking of ways of protecting something against growth in China. There is, indeed, a security element to it.

David: Would you view the BRICS summit as something of a counterweight to TPP, then?

Harold: Yes, that’s a different kind of initiative, and one of the curious things in the world today is the way in which monetary negotiations and trade negotiations go in different directions and they are conducted in different ways. The story with the BRICS summit and now with the China Infrastructure Bank is that China is really building up a kind of financial alternative to the Breton Woods system which corresponds very much to the model that you are thinking of, a model that was very heavily dominated by the United States.

David: As we look here in the United States, Labor says no, Sanders says no, Trump says no, Clinton said yes to the TPP as Secretary of State, but has retrenched that position. I am curious – is it the centrist right that likes it? Is it the centrist left that likes it? Who promotes it? Who likes it? Why?

Harold: Well, I would have thought, indeed, that this was a kind of classical story of openness, that the center right and the center left like it, and the fringes of both parties, both ways of thought that have mobilized to defeat it. But what you are saying is right. I was surprised the Hilary Clinton came out and really reversed her stance from just a few years ago, because she was talking about this agreement in Australia, in Adelaide, in November 2012, and saying that this was the gold standard in trade agreements. I think she was right about that then. Why is she not saying that now? It is because both parties are really being pushed at the moment to the more extreme positions.

David: We have the issue of protectionism, which often runs hand in hand with unemployment. Is it safe to predict pockets of protectionism in those parts of the world that suffer the most from unemployment, or in the modern globalized economy? Is currency devaluation sort of the better choice over tariffs and protectionism?

Harold: This is another of those areas where the trade issues and the money issues intersect because in the wake of the financial crisis and the great recession many countries or areas of the world have worked out that the easiest way to get a stimulus is to get some kind of currency devaluation, so the Japanese worked that out very clearly with Abe-nomics. The Europeans are really doing that, in effect, now that the quantitative easing of the beginning of this year has really had the effect of driving down the euro against the dollar, and it has produced quite a strong revival in Europe. So all over the world you are seeing countries devaluing.

But there is one country that really can’t do that strategy so well, and that is the United States. So we are kind of trapped in the situation where other countries manipulate their currencies against us. And one of the things that is leading, I think, to the buildup of reaction against TPP is the way in which the TPP doesn’t include any currency manipulation agreement. In theory, the IMF could do something like that, but the IMF hasn’t really touched that kind of issue in the past, and is really unlikely to be effective in doing that in the future.

David: Just this issue, again, going back to Asia before we move too far away from it, the TPP is a part of our “Asian pivot” according to the current White House. Is the TPP almost like setting a pick in basketball, more of a regional blocking move against Chinese expansionism?

Harold: The thinking behind it – and it’s not framed as an explicit anti-Chinese move – the idea behind it is actually that China at some point will see that this is such an important area to enter into that China will negotiate in the same way as China negotiates with the WTO. It is kind of basically an extension of the WTO principles. But then that requires, really, an opening of China, and particularly, intellectual properties is one that concerns many American enterprises, but financial services is another area where there is possible gain from the point of view of the United States.

David: There is also this one belt, one road, project which is fairly ambitious. And the question would be, will the existing world order, whatever that means, allow for the Chinese to complete a project which puts them at the center of 65% of the world population in terms of being a trade hub?

Harold: Clearly, it is something also that since the euro crisis has been developing that many Europeans look to China as a way of helping them out with Chinese investment. Britain at the moment just this week has engaged the very high-profile action of trying to welcome Chinese investment. There is the sense that people are doing things, Britain is doing things, Germany is doing things, Europeans on the whole are trying to negotiate with China and the geopolitics of the world is shifting in a dramatic way. And that is why I think it is so important to think of TPP as something that provides a kind of counterweight to the Chinese way of doing things, but it doesn’t exclude China. At the same time it actually creates, in the end, incentives that China has to play along with a view of the world that we feel comfortable with.

David: There are, and perhaps this is sort of at the fringes of criticism, but there are concerns about the extra support that the TPP gives to corporations. There have been loud objections to the TPP, in fact, claiming that corporations or mega corporations, are catered to in the agreement, and that it is nothing more than an attempt at sort of – how should we say it – maybe a transnational corporatism. How would you respond to that?

Harold: It is one of the areas where there is clearly going to be a lot of discussion and criticism and that is part of, particularly, the left wing critique of TPP. It focuses on some areas, in particular, the protection of intellectual property, particularly pharmaceutical, and there is clearly a question here of in the public interest to have pharmaceutical countries that do research and prepare and produce new pharmaceuticals, new drugs.

And for that some kind of protection for some period of time is important. If you can do generics immediately, then nobody is ever going to innovate. But if you can keep your hold of the production process for a very, very long time you are going to keep prices artificially high, and so the debate is how long that would be. My understanding of it is that the original term of the protection for the pharmaceutical industry is considerably reduced in the version that is now under consideration and so there has been a concession there for the critics.

David: Yes, it may only be a theoretical concern, but with some historical basis, it was the interest groups that set the framework for corporatism in the 1920s and 1930s, as you have written about, the RDI, the German – oh boy, I won’t even try to pronounce it – but also the Federation of British Industry and others that contributed to major international trade agreements. And again, it is sort of the parameters of these trade agreements being set in the process of building coalitions and political interests around these special interest and pressure groups that lent itself toward – well, I mean, corporatism is the nice way of putting it, but what, again, perhaps maybe is a leftist critique, some sort of corporate fascism.

Harold: Right, and that was particularly, I think, true of the world of the 1930s. There were these big international cartels and they produced goods that were not beneficial to consumers, for example, if the light bulb producers agreed to have light bulbs that wouldn’t last as long as they should because they want to build new light bulbs all the time. There were plenty of instances of that and, in a sense, that was the view of the world that prevailed in the aftermath of the Great Depression and where tariff boundaries are put up and companies then reach these informal agreements, and since then, I think you really need now, there needs to be some kind of counterweight to that, and the counterweight is exactly the idea of trade openness.

So competition generally acts as a kind of brake on this corporatism, which I completely agree is crippling and you don’t want the world to move in that direction. That’s why this is a judgment call about how long, for instance, you protect a particular patent, but the judgment call has to be weighted in the direction of competition at some stage, otherwise you are going to really stop the motor that produces novelty and innovation.

David: Perhaps you could help me with this. Is there a transnational monitor, a regulator, an adjudicator, for these sorts of trade deals, and do they, in any way, compromise an existing rule of law?

Harold: I think this is more a European accusation for the negotiations on the TransAtlantic Trade and Investment Partnership. The Europeans are going to be opened up to products, say, genetically modified food products that democracies don’t really want and the protection of investment that is built into these treaties is going to be used as a device to overcome objections that Europeans might have against particular American products.

In Asia there is something of the same debate about the labor production measures that are put into TPP, that labor protection looks like a good idea to people in rich industrial countries. Sometimes people in poorer countries say it’s a kind of protectionism. So you get these pushbacks in the countries that we’re negotiating with.

David: If you are familiar with Juan Zarate’s book, Treasury’s War, in which he describes sort of a new era of Treasury Department involvement in foreign policy – a very interesting idea just based on his time at the Treasury.

Harold: It’s a brilliant book, yes.

David: Is it possible – kind of relating back to the TPP – is it possible that in homogenizing trade relations, capital flows, and control over data transfers, all part of the TPP, again, the U.S. is merely putting itself in a better position to direct its foreign policy agendas?

Harold: That’s exactly why there is going to be the pushback and all these issues are kind of bundled in the popular imagination and the political imagination and the democratic debate in other countries. For instance, the issue of the big U.S. telecommunications companies and whether they are involved in the illegitimate surveillance of citizens in other countries – that is exactly feeding into a bit of resentment.

I think now in the wake of the corporate scandal in Volkswagen, that will also feed into the anti-TTIP sentiment in Germany because they believe that their jobs are at stake. The fact is that they’ve clearly manipulated their product in a really outrageous way, and they need some kind of response to that, they need some kind of punishment, but people in Europe are going to see it as costing European jobs.

David: It seems we might have missed an opportunity. I know all these agreements take time to settle on, but it has been in the process now for five years and we are now in a very different place than we were. Perhaps when the conversations were in their infancy post the global financial crisis, there is less coziness, perhaps, than there was, when trade was on the increase, everyone was making money. And it seems we are, to some degree, shifting away from globalization and witnessing resurgence in national self-interest. Does that bode well for either the ratification of the TPP or moving forward with the European version?

Harold: I completely agree with that diagnosis. Since the financial crisis there is much more of a focus on national agendas. There is a worry about losing jobs to globalization. That was already there before the financial crisis, but clearly, the shock to employment drives that kind of feeling. And I think these periods of trade opening and then closing again. There is always an issue, it is very, very clear, often, who is going to lose from trade agreements, investment agreements. It is less clear who is going to benefit because the beneficiaries will only emerge in the course of the future, and they don’t know yet that they are going to win. So the losers clearly know what they are going to lose, the winners don’t know what they are going to win.

And that really pushes the question, “Why should we do this?” So, the pushback in the United States, which I think is remarkable, and Hilary Clinton’s change of style in talking about the trade issue, I think, is the most dramatic example of that. That really is an indication of the way in which the world is moving. And what I think you should do, if you stand back from this debate a bit, is see that, in the end, this open world economy has been very, very beneficial for the United States, and it has been beneficial for most of the world, most of the time.

David: Clearly. Maybe this question centers on sort of domestic politics and employment, but if we imagine global GDP as a pie, when the pie grows everyone seems to get along, and that is what we have had. Certainly the openness you describe in the world economy has been massively beneficial to us – to everyone. But if the pie shrinks, then politicians begin to seek to maintain the old slice of pie, which prioritizes, as we said, national self-interest over international interests, and often cuts into someone else’s piece, so to say. We talked about this earlier in terms of currency devaluation as a tool toward maintaining that slice of pie in the tradable goods sector, keeping that previous level of trade. These are trends which may not suggest increased globalization and trade cooperation. How do we get away from sort of domestic political myopia and the constraints that, say, the political leadership in the United States has coming into an election year where employment and employment politics rise to the surface?

Harold: What you are saying is, really, that in order for these agreements to be attractive and look politically right, the pie has to expand, or the cake has to grow. We need more to distribute, and the more that we feel that the world is just a shrinking pie or a shrinking cake, the less we are likely to agree, and the more we are going to say, “What we need to do is to get advantages at the expense of somebody else. But I think that is exactly where it really helps to look back at historical examples when that kind of contraction took place, and when the world became more nationalistic and more conflictual.

And that is really the story of the 1930s. It was a dismal period. Terrible, terrible crimes. And in 1945 the consensus that you don’t want ever to go back to that world was the world that was the world that drove the engagement of the United States and the Breton Woods institution and the United Nations, and so on. Then, in the end, you get the growth that is going to sustain the process of openness, but at the beginning people didn’t see that. So in a sense, I don’t know what the recipe really is except to just think back on historical episodes, you can never win, really, by growing at the expense of your neighbor. Both sides, really, suffer from that, and there are very, very clear historical lessons in that area.

David: Perhaps you can explore with me the changes in political and trade relationships when a country goes into a formal default, a sovereign default. How does the trade map change? We live in an era where sovereign default is not a strange concept, and is, in fact, likely in some parts of the world. In the 1930s Argentina remained very, shall we say, Brit centric, and kept up their debt service to ensure healthy terms of trade. Brazil, on the other hand, defaulted, and they shifted away from trade with the United States and started working with Nazi Germany instead. So where we have too much debt in the system and default is likely, how does the geopolitical and trade map change?

Harold: It is clearly true that some countries today have got levels of debt that they can’t really handle. The problem is that if one country defaults it can start a kind of vicious spiral or a domino game in which investors generally get nervous so they withdraw their money from countries that look similar to the country that is defaulting. So rescue attempts in the aftermath of these defaults have to look both at dealing with the aftermath of default and limiting the contagion. When contagious defaults happen I think you really do get, then, this tipping into the cycle of more nationalism, more protectionism, and so on.

So again, the question is, really, what can be done to make for more elevation, more dynamism? What can link the world more effectively? And having people who have good ideas who put those ideas over, so that there is a wide group of people benefit. The individual defaults clearly need to be addressed if a country has absolutely impossible debt levels. The Europeans are dealing with this at the moment and in the case of Greece, it will surely be an issue in the European politics for the years to come, but what they also need to do is to work out a way that that doesn’t affect other vulnerable countries in the European periphery.

David: Russia and China have been somewhat salvific for a few countries that have come under pressure; Greece and Cyprus come to mind in terms of doing some different deals and investment programs in their hour of need. I guess that is kind of what I have in mind in terms of a shifting of political loyalties in the context of solving a debt problem. Maybe this is something that we get past sooner than later, but it still, from a grand strategy standpoint, seems as if the United States is, through these two policies, the TPP and the TransAtlantic, trying to create a context where we maintain. Is that fair? Are our foreign policy and these trade agreements inextricably linked?

Harold: I agree with that. I think it does make sense as a foreign policy measure. I am not sure that these efforts in Greece or in Cyprus to get Russia to intervene in some kind of way are really very productive. It seems to me that there is a lot of bluster about this. There wasn’t really a realistic possibility of a lot of Russian help, and a lot of Chinese help is even more improbable, because why should China, in a moment that the economy is slowing down, waste a lot of resources in the small European marginal countries? They don’t want to do that.

But what you are pointing to is, I think, right, that the general process of disintegration and fragmentation that has been there since the financial crisis lends itself to strategies of countries like Russia trying to pick holes in it. And I think you can think of the refugee crisis. There is another instance of the same kind of thing. The refugee crisis is clearly undermining the Europeans that Russian policy in Syria is actually pushing the refugee crisis and making it worse.

David: There was a quote that you had in your book, The End of Globalization, from Mr. Kindleberger, where he says that once British hegemony was lost, and nothing was there to take its place, international relations collapsed into anarchy. And my question to you, Dr. James, is – is U.S. hegemony worth keeping? What are the costs of losing or forfeiting it?

Harold: I am not completely happy with the idea of U.S. hegemony. Clearly the United States has a smaller share of the world economy now than it did in 1945. And that is actually good because it helps to make other areas more stable when they grow. We wouldn’t want to return to the world of 1945 when half of the manufacturing is in the United States. But what I think you are really thinking of, and what is important, is the idea of an open liberal international trading system with the rule of law where contracts are enforced and where people can rely on some kind of continuity and that’s the world that, in the wake of big financial crises – Kindleberger thought about the Great Depression. He was terrified that something like the Great Depression might happen again. That is exactly the world when these threats come up again.

David: Now, the reality is, we have very tepid growth globally and in the U.S., depending on the measures you are looking at. They have been not too impressive given the amount of stimulus put into the system from monetary policy measures. Let’s say, for instance, that we revisit some version of the global financial crisis. We haven’t normalized interest rates – I know this is taking us way from the TPP conversation – but if we have not normalized interest rates, would you argue for the necessity of fiscal policy measures?

Harold: Yes. That is one area I think there some room to maneuver. And particularly in the low interest rate environment. I think many people have made this point that it really makes sense to do infrastructure projects because it is very cheap to borrow for credible governments like the government of the United States, or the U.K., or even the Japanese government. But you do have to think of the future and to think of whether the infrastructure that you are creating is useful or not. If it is not useful, if you are building bridges to nowhere, obviously, you are going to have lots of additional costs in the future, servicing and maintaining useless projects. You don’t want to do that. But if you can really identify gaps in the infrastructure that need to be filled, this is surely the right moment to do that, and the Europeans should see that, and the United States should see that, as well.

David: This maybe ties in to the recent presidential debate, and I’ll bring this topic up in a minute, but government spending, of course, is what we are talking about when we are talking about fiscal policy measures. If there is not an increase in the revenues of government, then we are really talking about deficit spending. So to avoid radical deficit figures we are talking about an increase in revenues. That is corporate taxes, that is individual taxes, etc. And from a recent presidential debate, I think it was Hilary Clinton who said, “Of course we can spend this money. We’re going to take it from the wealthy.”

And it makes me come back to this issue within the TPP where we live in an era of extreme capital mobility and if fiscal policies are implemented that require government spending, and government doesn’t want to necessarily rack up a huge long-term liability, why would individuals stick around? You have Hirschman’s classic exit option, which seems to loom in an age of capital mobility. You already have corporations who have done that and parked all their cash overseas. Why wouldn’t wealthy individuals just say, “Thank you – no thank you – we’re gone?”

Harold: There is a logic in that position, but there is a logic in the other position, as well, that says if you want to engage in this kind of higher tax environment, then you need to control capital mobility in some way. And there are many signs, not just in the United States, but in other countries, as well, that we are moving more into a world where capital mobility is likely to be controlled. But I think your hunch there, as it were, is quite correct that the next time that a big financial crisis hits, people really expect to know where it is going to come from. The likelihood is that it will be an emerging market crisis, is that there will be much more of a backlash against capital mobility.

And then you go back, essentially, to the world of the 1950s and 1960s where it was very difficult to move capital and countries can inflate or they can have higher taxes. The inflation is another way of having higher taxes and they finance themselves in that way. So there is a kind of coherence about this view. I think that the case for greater infrastructure spending now is not really that it needs to be financed by higher taxes, but it is very, very cheap to borrow, and so we get a kind of version that we can do something for almost nothing. That is the powerful argument for doing something, and not that we need a high tax regime to do it.

David: So rather than focusing on sort of transfer payments, really making sure that whatever infrastructure projects are proposed and accepted have some sort of positive rate of return relative to the debt service.

Harold: Exactly. And that is, I think also, why it is important to ensure that these public/private partnerships and the private capital is also willing to get engaged in that. That is generally a sign that there is a good expectation of a proper rate of return.

David: Is there anything in the last few years that has surprised you? You have a lot of historical context, whether it is looking at European families that have been in business through the centuries, or looking at the inter-war period and crisis in Europe and the United States. With the historical background that you have, what has surprised you in the last few years, if anything?

Harold: I get surprised when people think that the crisis is over, and in fact, this is a kind of really complicated system of dislocation that hit first, particularly badly, the United States, and then everybody said, “Well, it’s just an American crisis.” And then it hit the Europeans and people said that it was to do with the peculiar way in which the euro was set up. And now it is hitting the emerging markets and people say it’s peculiar to the emerging markets, but actually, it is sort of deeply built into the logic of the flow that you get a particular problem, people find solutions to it, but the solutions create other problems. And we are really living in that world where the solutions that we had that were in some ways quite effective after 2008 are creating new problems and we need to think of ways of minimizing the impact of those new problems.

David: What would you see as the most critical of the new problems we have to address?

Harold: I think both the combination of the idea that currency wars are back on the agenda, and the need to extend international trade agreements to services as well as to manufacturers. Those are in a way a reaction to the Great Depression. It is necessary to work on both those fronts.

David: I remember you saying something in your book, Family Capitalism, that family capitalism has been particularly important in countries and societies experiencing profound shocks and discontinuities, that it is, in fact, a way of managing risk in a high-risk environment. And it would seem that in an age of slow economic growth that the mega-corporation might come under pressure, maybe even be replaced by private capital, private enterprise, whether it is of a familial nature or something like private equity, but just where it is something that is a little bit more low-profile. How would you reflect on that, again, as we look at a changing world – a world, as you say, that may still be in crisis? How do families and individuals best navigate that?

Harold: That’s right. The big corporation with their product and feature of a particular [unclear] development, was really in the way of [unclear] development when it was very difficult to have market processes in some areas. And the new technology allows a great deal more subcontracting and it allows leaner enterprises. So I expect the world of big corporations, actually, to be quite turbulent. And there is quite a difference to the 20th century where big corporations rarely survived through the century. Now we are seeing a considerable turbulence and lots of famous names are disappearing. If you have an idea of innovation that is not necessarily a bad thing, but it needs a culture and a climate around it that is supportive of innovation.

David: Well, as we wrap up, I want to thank you for your contribution, not only for the Commentary, but you continue to write prolifically, and I am appreciative of it. My library continues to grow. I have the Harold James shelf, and it is a pretty substantial shelf. So I appreciate your contribution. Every time I glance through one of those volumes again, the level of scholarship, the commitment to excellence, the degree of insight, I am glad there are a few of you out there, because you do open the world in a unique way to those of us who are not in the professional academic sphere.

Harold: Well, thank you so much, it is very nice of you to say that. But you really have great questions and the questions that you asked today are just on the forefront, I think, of what the political agenda should be.

David: We will look forward to continuing the conversation in future years, and we wish you well there with your work at Princeton.

Harold: All the best to you. Thank you again, it has been great talking to you.

David: Thank you.

Kevin: I always enjoy Harold James, Dave, when he is on the show, and his books, like you said, they just uncover so much. But when we are talking about globalization, and when we are talking about the destruction of globalization which has been a key theme that he has written on, what we are talking about is, what direction do we go in a crisis? And he said, one of the things that has surprised him – I’m glad you asked that question – is how many people think that the crisis has passed, yet the crisis has just transferred. He mentioned the emerging markets is where the crisis is right now, but one of his concerns was, ultimately, we may see capital controls as this crisis unfolds again.

David: And it is not surprising to see capital controls in the world where currency wars are more of an issue. He has pointed out in one of his books that, in fact, if you see capital flight from a country of greater than 3-5% of GDP it is likely to cause a domestic, if not an international, crisis. So when you begin to see capital flight, which might be considered a hot money flow out of the country where speculative investment dollars came in and now speculative investment dollars are flowing out, that outflow sucks major life out of a very small economy, and quite frankly, even a large economy, because we have seen the same thing happen in developed European countries where, again, 3%, 4%, 5% of GDP, if that is the scale of capital flight, you find yourself in the middle of economic crisis, and now the powers that be are doing everything that they can to batten down the hatches and make sure it doesn’t get worse. Enter stage left – capital controls.

Kevin: Which is exactly what you brought up last week in the show. You said, “What if the government actually starts targeting the money? You are talking about it going into mattresses, gold, cash, what have you. If the government is targeting money, people are going to probably hide that money.

David: It is interesting because mattress money, if you want to call it that, is really no different than a form of capital flight. You are going to have foreign direct investment into an emerging market and have that money leave, and it basically was available capital for investment. And when it gets sucked out it creates a tightness in credit and it creates a real desperation for liquidity. It creates a panic.

The same thing can happen if enough people just put money in the mattress and don’t want to participate in the economy at that particular point. Maybe it is because they are concerned about volatility in the stock market, the bond market, or they have a basic insecurity relating to the constant value of a currency in question. But again, you will see desperate governments do desperate things and it is right at the margin, 3-5% of GDP of capital flight or money coming out of an economy, and you have a real, real problem.

Kevin: I think the verdict is still out, Dave, even after listening to Harold James and you talking about the TransPacific Partnership, the verdict is out for me in that I don’t know whether to come down on the support side or the go-against side, only for the fact that if it increases globalization – this is something that a lot of people miss – you actually have less in the way of controls. Globalization is a positive for the world. We are not talking about necessarily a one world controlled government, but globalization is the free exchange of trade, services, information, that type of thing. If, indeed, it is just a reaction, however, to the end of globalization, and it turns into stringent types of controls, I would be against it.

David: I think that’s fair, and to the degree that it promotes individual autonomy, the individual actor choosing, being entrepreneurial, starting a new venture, expanding it overseas, etc. – brilliant. We give it kudos. On the other hand, if it is catering to special interest groups and lobby groups and as a consolidation of power and sort of tying political interests to business interests in almost a fascist footstep, then obviously it is something that is problematic from the get-go.

Kevin: Well, one thing we can come to an agreement on is that the crisis still is here, and we are seeing solutions unfolding and the consequences of those solutions, I think we have to continue to study this and talk to the people who are in the know.

David: That’s right. Looking at the knock-on effects of the policy measures put in place during the global financial crisis is the next issue. Just as we learned from 2001 and 2002, the solutions to that crisis led to the next crisis. The solutions to the 2008-2009 crisis will lead to the next crisis, and we have to pay attention to, again, what those knock-on effects are, and the ways that we should be positioning ahead of them.

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