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Globalization dialing back to 2000, global economy disaster similar to 1970s: Ferguson

Niall Ferguson

Niall Ferguson is the Milbank Family Senior Fellow at the Hoover Institution at Stanford University and a honorary contributor to Maeil Business Newspaper of South Korea. He was previously a professor of history at Harvard, New York University and Oxford. He is the founder and managing director of Greenmantle LLC, a New York-based advisory firm. His latest book is “Doom: The Politics of Catastrophe.

Globalization is dialing back to 2000, before China joined the World Trade Organization and it won’t return in full scale unless there is a set of binding rules, according to Niall Ferguson, Senior Fellow at the Hoover Institution at Stanford University and author of “Doom, The Politics of Catastrophe.”

The global economy currently is grappling with the similar twin disaster from energy and food crisis during 1970s due to sanctions and war related to Russia, a major supplier of energy and food sources. But sanctions are having limited impact to stop Russian war in Ukraine as the economy can continue to make money from its supplies of gas and other commodities.

-The effect from Russia`s economic sanctions?

The Biden Administration and others argued that the sanctions were very, very strong. but I argue that they weren`t really, because if you didn`t limit European purchases of Russian energy. The Russian economy would continue to make about a billion dollars a day. And that explains why the rubles depreciation was temporary phenomenon, Of course, the Russians imposed capital controls too. So it became impossible to get money out of Russia. But the really key variable is the Russian earnings from the sales of oil and gas to Europe. Now the Europeans should and could impose an oil embargo. but the German government opposes that and continues to oppose it. So as long as that`s the case, I don`t think the sanctions are sufficient to cripple the Russian war effort over time. They will of course cause the Russia`s economy to shrink and to perform less well. But the time frame of the war is measured in in weeks and months whereas the effect of the sanctions will be felt over years. And that`s a mismatch really between economic sanctions and military outcomes.

-The impact on commodity prices and the global economy in the long run?

Well, even in the short term the impact is quite significant. They`re already an inflation problem dating back to last year. But the impact of the war on food prices as well as on energy prices has been huge. The most severe impacts will be felt in Africa, where countries ranging from Egypt to Somalia rely very heavily in Ukraine and Russia for green wheat in particular. The Russian economy supplies a lot of fertilizer the entire world. Brazil for example relies very heavily on Russian fertilizer and that has been hugely disrupted. So the cost is not only of food, but of agricultural inputs have surged if you look at the United Nations food Price Index. It`s at its highest level since the 1970s and so the war is performing a similar role to the 1973 war between the Arab countries in Israel, which led to the Arab OPEC oil price hike and a huge inflation problem. In the 1970s. There was also a food inflation problem. So we`re rerunning the – 2 – 1970s at this point and the war is performing a similar role to the role that war played in the 1970s.

-The status of the dollar as a reserve currency?

I think the challenge at to the dollar is not particularly great. From the Chinese remember because it`s not a convertible currency and you wouldn`t really want to hold your reserves in a non-convertible currency. The alternatives to the dollar exist. But they are much smaller scale. Swiss Franc, Japanese Yen, of course euros and to a lesser extent the British Pound. But if you think about the financial sanctions that were used against Russia because they were imposed not just by the U.S. but also by its allies, there was no real way of escaping them. And I think from China`s point of view, this is a major problem. China has much larger currency reserves than Russia. But its international reserves are mostly held in the form of U.S. dollars or the currencies of countries allied to the United States. So while Russia and China would love to escape from the power of American fnancial sanctions, it`s quite hard for them to do so as long as American allies go along with the U.S. when it comes to financial sanctions. There are long-term problems that Americans need to worry about. They have a huge deficit and a rapidly growing debt. They have used financial sanctions repeatedly as a weapon since 2001. At some point there will be powerful incentives for the rest of the world to reduce its reliance on the US dollar. But I think this is quite a slow moving problem. In the 1930s 40s and 50s the British Pound had an obvious challenge to the U.S. dollar. But the U.S. dollar today does not have an obvious challenger anywhere in the world and let me quote Larry Summers. “What are you going to do instead of holding dollars? When Europe has a museum. Japan is an elderly care home. China`s a jail and Bitcoins experiment.” That was Larry summers in 2019, and it`s a great line.

-Deglobalization as the result of contest between the United States and China?

Globalization peaked in 2007 by almost any measure. Trade capital flows, migration, even cultural globalization and since then we`ve had a series of shocks the financial crisis – the popular backlash of 2016 in Western politics and Covid-19, and now Ukraine.

As things gradually normalize and we revert to a more integrated world economy, but se we still have the undecided question of Taiwan ahead of us. And we also have the growing threats of Iran`s nuclear program in the Middle East. And it’d take a very optimistic person to say don`t worry globalization will be fine and we`ll soon get back to where we were in 2007. I don`t think that we`re going to the 1930s in other words to a complete breakdown of globalization. It`s more that we`ve dialed it back. And maybe that was necessary maybe globalization overreached. Maybe we became too reliant on Chinese sources for manufactures and other materials. Maybe the supply chains became too complex. And maybe the political costs of globalization started to exceed the benefits in economic terms. My sense is that globalization needed to be dialed back somewhat. And we`re not going to go all the way back to the pre-globalization era of autarky and trading blocks. I think we`re going to settle around about the year 2000 level that is to say the year before China joined the World Trade Organization. It was in many ways of mistake to let China join the WTO, even although it wasn`t compliant with a whole range of the requirements. I think if we`re going to have globalization succeed, it has to be based on rules and those rules need to be binding and if they`re not going to be binding then I don`t think globalization can succeed.

-Bitcoin as the alternative to reserve currency?

Bitcoin is a digital asset. You could think of it as a kind of digital gold. It`s programmable to be finite in its supply and I think it`s natural that a financial system native to the internet should evolve. After all, what have we been doing up until now typing in credit card numbers and websites. It`s kind of stupid writing checks paying in banknotes. We have a very old-fashioned system of payments in the United States. And it needs to be modernized. I think Bitcoin is part of that modernization, but so is ethereum. It`s more potential because you can build a whole ecosystem of smart contracts on top of ethereum. I think decentralized finance, web 3, or whatever you want to call, is the payment system of the future native to the internet. South Korea is ahead of the world because you have much more online gaming in South Korea than in most countries, and game tokens are part of everyday life for young South Koreans. Gradually, the world is going to move in that direction and we will see the evolution of online payments online financial products online forms of saving and lending. All of this I think is good. And of course, there will be bumps in the road. They`re always our bumps in the road – bubbles and busts.

Shin Hyun-song and I were at Oxford together many years ago. In fact, we were roommates and so I know him well, but I disagreed with his argument because it seems to me too negative, simply to say we have to stop all cryptocurrency and just do Central Bank digital currency. I don`t think that`s a good argument because that stands in the way of some very exciting innovation that`s going on and you going to prevent innovation from happening or at least you`ll prevent it happening in the U.S. if you impose those sorts of restrictions. I`m more in favor of letting the experiment develop, regulating where appropriate but not prohibiting Innovation. I don`t think that`s the way to go.

-Alternative to central bank’s monetary monopoly ?

Well, I don`t really know the answer to the first question about the IMF SDRs that that`s one of these ultimately political decisions because in truth SDRs don`t really matter terribly much and don`t play a big part in the financial system. It`s just a question really of political symbolism. On the question of the Central Bank digital currency. I think we should all be very careful of copying the Chinese model because the purpose of the E-CNY of the Chinese electric yuan is mainly surveillance of domestic transactions.

I don`t see any need to create an effective Central Bank Monopoly on money. The monetary system that`s evolved since the breakup of bread and woods is not based on Central Bank control. Central Bank regulation of money, that is mostly created by private sector Banks. That system has not worked too badly, though. Of course, it did lead to the financial crisis of 2008-2009. But I don`t see an argument there for imposing Central Bank control. I think that the key here is to allow technology to modernize both monetary and the payment system, but in ways that don`t increase the power of government over individuals. A central bank digital currency assumes that the state has a right to surveillance of everybody and every transaction. In my view surveillance should only be warranted if there`s reasonable grounds to believe someone`s engaged in an illegal activity. And that`s the balance that a free society needs to strike. So I don`t think that any Western Country should copy the Chinese model. Rather, we should be looking at ways to maintain of course monetary and price stability, to allow the private sector to do what it does best which is to innovate and improve the efficiency of economic life. Ultimately, there are ways of lowering transaction costs and increasing transaction speeds. Improving security all of these things are within our grasp. But I don`t think they should be driven by state surveillance. Rather. I think they should be driven by private sector Innovation with a moderate and not intrusive system of regulation that allows private citizens law abiding citizens to pay for things with some measure of privacy.

By Interview by Lee Sang-duk ,Edited by Hye-seung Seo

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