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I know and no senior economic policy makers I know—and I know many and I know the best—who have any excellent understandings of what happened in the past and why. Most investors who look at longer-term returns look at those in the US and the UK (the countries that won World War I and World War II) as being representative. That is because there are not many stock and bond markets that survived World War
World War I must have been easy to foresee in the years leading up to it, but that wasn’t the case. Before the war, there had been about 50 years of almost no conflict between the world’s major powers. During those 50 years the world experienced the greatest innovation and productivity growth rates it had ever seen,
Countries Didn’t Exist—Instead, Territories Were Run by Families. Back in 1500, there were no sovereign states with borders and ruling orders. They hadn’t been invented yet. Instead there were big family estates called kingdoms and dynasties run by kings and emperors that almost constantly fought with their neighbors for wealth and power.
First, the wars between Christian Europe and the Ottoman Empire significantly slowed land trade (especially for spices and luxuries) between Europe and the rest of the world, which created a significant opening for maritime trade.
Venice’s leader—called the doge—did not have the right to name a successor and was restricted from bringing family members into government. New doges were chosen by vote by a series of committees whose members, in some cases, were chosen by lot from among several hundred aristocratic families.
European governments began to support and sponsor this research, with the most famous example being the Royal Society in the UK, which was founded in 1660 and proved instrumental in promoting the exchange of ideas and discoveries (Newton was its president from 1703 to 1727).
The arrival of capitalism, combined with the new approaches of the Enlightenment, led to an economic transformation called the Industrial Revolution, which was centered in Britain.
Eighty Years’ War (1566–1648): This was the revolt by Protestant Netherlands against Catholic Spain. The Dutch first declared independence in 1581, but their full independence was not realized until the Peace of Westphalia (1648) ended both the Thirty Years’ War and the Eighty Years’ War.
Additionally, and as is classic, as the Dutch became extremely wealthy, they became less competitive—for example, their wages were generally higher than those in other parts of Europe. The Dutch East India Company lost its competitive edge as well. For example, it was ineffective in trading popular new products like tea.
Because bills of exchange were the dominant vehicle for international trade credit, all merchants wishing to trade with the Dutch were forced to open an account at the Bank of Amsterdam, which led to around 40 percent of global trade being settled in Amsterdam using bank guilders.
and the fact that Dutch commercial entities and banks insisted on its usage all cemented the guilder’s place as the first global reserve currency.7 This gave the Dutch the “extraordinary privilege” of being able to get into a lot of debt.
the same time, England became financially strong as it created a powerful and centralized fiscal authority that allowed the state to raise significantly more revenue than its international rivals. By the 18th century, the tax burden in Britain was almost twice that of France. The creation of the Bank of England in 1694 helped standardize and increase the liquidity of UK government debt, improving its ability to borrow.
The Company of the West, or the Mississippi Company, was a trading company with monopoly rights in French Louisiana (half of the present-day United States). Law allowed French government debt to be used to purchase shares in the Mississippi Company. With a new company that had an exciting story about exploiting the opportunities of the new frontier and a bank and government finances supporting this endeavor, all the right ingredients were in place. As the company expanded, state debt holders jumped at the ability to convert their debt into equity. This created what was perceived to be a great
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American Revolution (1775–83): France and Spain allied with the American revolutionary forces against the British government.
Only two US banks made the list of the top 20 largest global banks in 1913, at numbers 13 and 17. In comparison, British banks occupied nine slots, including three of the top five.
That the Allies’ wartime debts were largely owed to the US boosted the use of the dollar for denominating global government debt.
1954 the Southeast Asia Treaty Organization (SEATO) was established among the US, the UK, Australia, France, New Zealand, the Philippines, Thailand, and Pakistan.
the biggest military risk for the leading powers is that they lose the economic and technology wars.
As a solution, and to fight the spread of communism, the US supplied them with massive aid packages (known as the Marshall and Dodge plans), which were a) good for these devastated nations, b) good for the US economically because these countries used the money to buy US goods, c) good for the US’s geopolitical influence, and d) good for reinforcing the dollar’s position as the world’s dominant reserve currency.
While I was able to anticipate the debt crisis, which was profitable for me, it also led me a) to anticipate a debt-default-triggered depression that never came and b) to lose a lot of money betting on it. As a result of my personal losses and the losses of clients, I had to let everyone in my fledgling company, Bridgewater Associates, go and was so broke I had to borrow $4,000 from my dad to help pay my family’s bills. At
What I had missed was that when debts are in the currencies that central banks have the ability to print and restructure, debt crises can be well-managed so they are not systemically threatening.
China’s economic reforms and open-door policies after Deng Xiaoping came to power in 1978 and China’s being welcomed into the World Trade Organization in 2001 led to an explosion of Chinese competitiveness and exports.
Chinese didn’t want anything they had to offer. This led to the British bringing opium into China to get the Chinese addicted, so that they would trade for it. A series of military confrontations followed during the 1800s (most notably the Opium Wars),
Still, these conditions plus shortages of clean water, cropland, and coastal marine fisheries have historically made China vulnerable to food shortages. For that reason, China has often been food-insecure and even today imports a lot of food.
America is run from the bottom up (e.g., democracy) and optimized for the individual; China is run from the top down and optimized for the collective. The Chinese word “country” consists of the two characters for “state” and “family,”
Traditional Chinese military philosophy teaches that the ideal way to win a war is not by fighting but by quietly developing one’s power to the point that simply displaying it will cause an opponent to capitulate.
Culturally, being commercial was not held in high regard by China’s leaders so there was less development of the commercial legal system and the financial markets.
The Chinese fought to stop those sales, which led to the First Opium War, in which the technologically superior British Navy defeated the Chinese in 1839–42, leading Britain to impose a treaty that gave the British Hong Kong and opened up a number of Chinese ports, most notably Shanghai, to traders from Britain (as well as other powers in subsequent treaties), which eventually led to the loss of large parts of northern China to Russia and Japan and the loss of what we now call Taiwan to Japan.
It is easy to see the important role that period has played in shaping Chinese leaders’ perspectives—e.g., why Mao saw capitalism as a system in which companies pursued profits through imperialism (i.e., through the control and exploitation of countries, just as the British and other capitalist powers did to China), enriching the greedy elites while exploiting workers.
During Nixon’s visit, Nixon and Zhou Enlai signed an agreement—the Shanghai Communique—in which the US stated that it “acknowledges that all Chinese on either side of the Taiwan Strait maintain that there is but one China and that Taiwan is part of China. The United States government does not challenge that position. It reaffirms its interest in a peaceful settlement of the Taiwan question by the Chinese themselves.” Despite those assurances, reunification with Taiwan still remains the most consistently contentious issue between China and the US.
Early on, Deng set out a 70-year plan to a) double incomes and ensure that the population would have enough food and clothing by the end of the 1980s, b) quadruple GDP per capita by the end of the 20th century (which was achieved in 1995, five years ahead of schedule), and c) increase per capita GDP to the levels of medium-level developed countries by 2050 (on the 100th anniversary of the PRC). He made it clear that China would achieve those goals by having a “socialist market economy,” which he also referred to as “socialism with Chinese characteristics.”
In 1984, after a lot of haggling with the UK, it was agreed that Hong Kong would return to Chinese sovereignty in 1997, with a “one country, two systems” approach. Then in 1986, China reached an agreement with Portugal to obtain Macau’s return to Chinese sovereignty in 1999.
It struck me as odd that the Chinese, who were earning about a 40th of Americans on average, would be lending money to Americans, since rich people are in a better position to lend than poor ones. To me, it was a shocking reflection of how deeply Americans were willing to get into debt to finance their overconsumption and how much more the Chinese valued saving.
Belt and Road Initiative, which extends through Central Asia, starting with the countries on its border (Kazakhstan, Pakistan, Tajikistan, and Afghanistan) to Europe, and through the Arabian Peninsula and South Asia into the Mediterranean and Africa. The amounts invested and earmarked for investment are enormous—the largest such program since the Marshall Plan. It is a good demonstration that wealth = power.
they have also sparked resentments from recipient countries who are having problems paying back their loans and find that China is too controlling, and from the United States because China’s assertions of soft power have lessened American influence in those countries.
This picture, in which the average of something in China is below the average of the same thing in the United States but the total in China is greater than the total in the US, is because the average level of development in China is lower while the Chinese population is more than four times as large as the American population.
1. The Chinese government pursues a wide range of evolving interventionist policies and practices aimed at limiting market access for imported goods, services, and businesses, thus protecting its domestic industries by creating unfair practices.
2. The Chinese offer significant government guidance, resources, and regulatory support to Chinese industries, most notably including policies designed to extract advanced technologies from foreign companies, particularly in sensitive sectors.
3. The Chinese are stealing intellectual property, with some of this stealing believed to be state-sponsored and some of it believed to be o...
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When they are looking for supporters of their causes, all leaders want to appear to be the leaders of the army that is fighting for good against the evil army that is doing bad things. That is why we hear accusations from both sides that the other is doing evil things and no disclosures of the similar things that they are doing.
because in wars leaders want to convince their constituents that “we are good and they are evil” because that is the most effective way to rally people’s support,
For example, the US cutting off China’s imports of oil, other needed commodities, technologies, and/or other essential imports from the US or other countries would be clear and obvious signs of the war escalating.
China will probably advance its technologies, and the quality of decision making that is enabled by them, faster than the US will because big data + big AI + big computing = superior decision making.
American leaders can’t admit that the competitiveness of US technology is slipping and can’t argue against allowing free competition to the American people, who for ages have been taught to believe that competition is both fair and the best process for producing the best results.
As we saw in earlier chapters, the British did it to the Dutch and the Americans did it to the British.
Look at Alibaba and Tencent and compare them with American equivalents. Americans might ask why these companies are not competing in the US. It is mostly for the same reasons that Amazon and a number of other American tech companies aren’t freely competing in China.
The US not fighting would be a great geopolitical win for China and a great humiliation for the US. It would signal the decline of the US Empire in the Pacific and beyond in much the same way as the British loss of the Suez Canal signaled the end of the British Empire in the Middle East and beyond.
The United States’ greatest power comes from having the world’s leading reserve currency, which gives the US enormous buying power because it gives it the ability a) to print the world’s money and have it widely accepted abroad and b) to control who gets it.
For example, one should accept the fact that when choosing leaders most Chinese believe that having capable, wise leaders make the choices is preferable to having the general population make the choice on a “one person, one vote” basis because they believe that the general population is less informed and less capable.
Also, they believe—like Plato believed and as has happened in a number of countries—that democracies are prone to slip into dysfunctional anarchies during very bad times when people fight over what should be done rather than support a strong, capable leader.
