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systems are most efficient when they have more players, both for a larger consumer pool and a more differentiated—and from that, more efficient—supply chain system.
.Supply-chains
.Complex-systems
Everything about modern China—from its industrial structure to its food sourcing to its income streams—is a direct outcome of the American-led Order. Remove the Americans and China loses energy access, income from manufactures sales, the ability to import the raw materials to make those manufactures in the first place, and the ability to either import or grow its own food.
China absolutely faces deindustrialization and deurbanization on a scale that is nothing less than mythic.
The rules of finance changed drastically not at the beginning of the American-led Order, but in the years after. In the 2020s they will change again into something we have never seen before. This is going to require a bit of unpacking. Once again, let’s start at the beginning.
And since the Mesopotamians never got into building out the sorts of sprawling urban infrastructure of the Indus cities* or the omnipresent vanity projects of the Egyptians,* they could focus on generating ever-greater barley surpluses for use in trade. Barley? Barley was the currency of exchange for more than two millennia.
The circa 2000 BCE solution was the shekel. Three one-hundredths of a shekel could be traded for one quart of barley. One shekel was equal to 11 grains of silver.
One shekel could pay a laborer for a month. Twenty shekels bought you a slave.
Armed with a commonly agreed-upon medium of exchange, labor specialization took a leap forward.
Ultimately Rome expanded beyond its ability to defend the realm. Once the Romans lost their marches (where the gold came from), the imperial economy seized up, taking short-term political stability and long-term military capacity with it.
one final schmear on the shit sandwich:
kicking names and taking ass
By the late 1800s Britain’s command of the seas often translated into trade chokeholds.
Furthermore, the Americans didn’t even join World War I until three years in, and so were able to serve as creditor to the Europeans rather than needing to debase their currency to keep fighting.
Even better, the Americans were perfectly willing to provide the World War II Allies with anything they needed—oil or fuel, steel or guns, wheat or flour—so long as they were paid in gold. By war’s end the U.S. economy wasn’t only far larger and that of Europe far smaller.
The U.S. dollar wasn’t just the only reasonable medium of exchange in the entire Western Hemisphere: it had sucked the very metal out of Europe that would have enabled a long-term currency competitor anywhere in the Eastern Hemisphere. If anything, this is truer than it sounds. After all, the metals-backed currencies of Europe were the culmination of all human civilizations of all eras stripping the entire planet of precious metals since before the dawn of recorded history.
everyone—and I mean anyone and everyone—could trade for anything and everything.
The numbers not only didn’t add up, they couldn’t add up. Throughout human history, humanity has probably produced no more than 6 billion troy ounces of gold (about 420 million pounds). Assuming every scrap of gold ever mined was available to the U.S. government, that would only be enough to “back” a total global currency supply of $210 billion.*
Long before the world wars, even long before America’s Admiral Perry forced Japan open to the world, the Japanese had a unique view of debt. In Japan capital exists not to serve economic needs, but instead to serve political needs. To that end, debt was allowed, even encouraged . . . so long as it didn’t become inconvenient to the sovereign.
.Japan
while economics and politics have always been intertwined, Japan was the trendsetter in making finance a tool of the state.
.Japan
Purchasing the loyalty and happiness of the population—who rightly felt betrayed by their wartime leadership—was more important than generating profits or building stuff. That a loyal and happy population was pretty good at building stuff didn’t hurt.
.Japan
Western economic point of view, such decision making would be called “poor capital allocation,” the idea being that there were few prospects that the debt would ever be paid back in full. But that wasn’t the point. The Japanese financial model wasn’t about achieving economic stability, but instead about securing political stability.
.Japan
First, the Americans steadily outsourced their own industry to the Asian states. That provided an excellent rationale for the Asians’ debt-driven model, as well as ensuring ravenous American (and in time, global) demand for the Asians’ products.
demand proved robust and stable enough to make the Asians’ exports profitable enough that all four managed to (for the most part) grow out of the debt.
.Japan
Third, as the most enthusiastic of the fiat currency adopters, the Asians were willing to push the limits of what was possible to the point that Americans and Europeans got a bit skittish about the very nature of Asian finance.
.Japan
Modern Communist China has known nothing but the era of fiat currencies and cheap money. It had no good habits to break.
One Belt One Road global infrastructure program—which many non-Chinese fear is part influence peddling, part strategic gambit—is in many ways little more than a means of disposing of the surpluses.
The Chinese Communist Party’s only source of legitimacy is economic growth, and China’s only economic growth comes from egregious volumes of financing.
CCP’s preferred method of storing their wealth is in U.S. currency . . . outside of China.
Post-1971, however, the laws of capital were, if not repealed, then certainly loosened.
.Capital
.Economic-history
These new firms swam alongside—or even within—the internal systems of the major energy players. Enter Enron.
created natural gas “banks” that enabled it to be the connective tissue between producer and consumer.
These new firms swam alongside—or even within—the internal systems of the major energy players. Enter Enron.
Enron earned its income by buying and selling promises for the future taking and delivering of various products. The futures market is a real thing—it provides reliability to both producers and consumers by linking them with partners before the instant delivery is required—but playing in the middle space requires some pretty sacrosanct bookkeeping.
With capital no longer being the restrictive factor it once was, credit terms gradually got easier.
Disaster Is Relative
First, the fiat age has enabled economies large and small, countries near and far, to paper over their problems with cash.
Second, everyone—and I mean everyone—is doing it.
Third, no one—and I mean no one—is printing currency at the same rate.
the yuan is a store of value for no one. Capital flight out of China to the U.S. dollar network regularly tops $1 trillion annually.
China’s financial system, paired with its terminal demographics, condemns it to not being consumption-led, or even export-led, but lending-led. That makes China vulnerable to any development anywhere in the world that might impinge raw material supply, energy supply, or export routes—developments Beijing cannot influence, much less control.
Scale matters. Particularly when the rules change.
When capital is cheap enough, even pigs can fly. Once.
From 2000, when the subprime industry was birthed, to 2007, when it ended, total credit in the United States roughly doubled. The ensuing crash from such irrational exuberance knocked roughly 5 percent off of U.S. GDP in the two years before the economy found its footing. Doubling of credit. Five percent economic drop. That’s a good baseline.
The Germans are remarkably conservative in their financial dealings, both as a people and a government. Qualifying for a mortgage first requires making regular mortgage-like payments into a sequestered bank account for several years to prove attitude and bona fides.
.kenships
Between fiat failures and the demographic crunch, the days of cheap, easy, omnipresent finance are ending. Impacts and outcomes will vary not only in nature, but also in application.
lot of low-hanging fruit. Infrastructure is easier and cheaper to construct and maintain in flat, temperate zones than in mountains or tropics. Similarly, it is easier and cheaper to maintain skill sets for populations that are already educated than to boost low skill levels.
Expect to hear a lot about capital flight and capital controls. In the more or less unified world of the Order, capital can fly back and forth across borders with few limitations.
Capital flight is already a feature of the late Order. The United States’ mostly well-earned reputation for having a hands-off approach to private capital has made it the undeniable global financial hub. The Chinese hyperfinancialization model (and to a lesser degree, similar financial systems throughout East Asia) has sent irregular bursts of cash into the United States.
When firms don’t think they will be able to get their profits out of a foreign country, they are far less likely to have any interest in operations in that country in the first place.
The biggest risks to capital will be in the places with the fastest-aging populations as well as those with the most rapidly retiring workforces: Russia, China, Korea, Japan, and Germany, in that order.
Disinflation is a very specific sort of price drop. When your smartphone or computer gets an update that enables you to do something better and quicker, that’s disinflationary. It’s the same when a new oil field or car plant or copper smelter comes online and increases supply. Prices drop, but the relationships that make up the market are not unduly tweaked.
Cratering demand generates an oversupply in something basic, like electricity or condos or electronics. Markets cannot adjust without amputating part of the production side, which hurts workers, which reduces demand even more. Some version of deflation has been plaguing Japan ever since its economic crash in the 1990s, and the European Union ever since the 2007–09 financial crisis, and it is probably already endemic in China, where increasing-production-at-all-costs is the state mantra.
