That opening up was the biggest force behind the high rates of improvement that we saw over the last 40 years. Since then the RMB has had some fluctuations but hasnât depreciated below the 2005 rate (when de-pegged). Then do that calculation for others, add them up, and then you will have a good picture of the state of the world. The goal has been to put where we are in the context of the big-picture stories that got us here and to see the cause/effect patterns of how things work so that we can put where we are into better perspective. More specifically, as a rule: The decline phase typically happens as the excesses of the top phase are reversed in a mutually reinforcing set of declines, and because a competitive power gains relative strength in the previously described areas. Around 1960 the Soviet Union shifted from an ally to an enemy and withdrew economic supports. The last time they had needed to do that because interest rates had hit 0% began in 1933 and continued through the war years. As a result of these different perspectives the Chinese are typically more thoughtful and strategic than Americans, who are more impulsive and tactical. As with all my studies, I will attempt to convey what I learned in both a very short, simple way and in a much longer, more comprehensive way. For example, in the real economy, when the level of goods and services demanded is strong and rising and the capacity to produce those things demanded is limited, the real economyâs capacity to grow is limited and, if demand keeps rising faster than the capacity to produce, inflation rises. No hard money is involved in fiat systems; there is just âpaper moneyâ that the central bank can âprintâ without restriction. In the third type of system, governments can create money and credit freely, which works for as long as people continue to have confidence in the currency and fails when they donât. If you want to read a great description of this process of figuring out how to go from the old monetary system to the new fiat one, I recommend Changing Fortunes by Paul Volcker, who was the leading American negotiator of how the new monetary system would work. I will publish the book this fall but felt that, as I was writing it, the learning I was getting from my research was very helpful in understanding what is happening right now, so I wanted to pass it along to you as a work-in-progress.
Though these events seemed bigger at the time than they appear in retrospect, they were all significant achievements of smart Chinese people who were committed to Chinese progress. Underpinning that goal was a plan to dramatically improve Chinaâs education system.21 He wanted to have a socialist market economy, which he referred to as âsocialism with Chinese characteristicsâ that would be achieved by taking in all facts to âseek truth from facts.â He made that radical shift without criticizing Mao or Marxism-Leninism, which he believed meant shared prosperity. For the first time in my lifetime, the United States is encountering a rival power. Looking back across five hundred years of history and nine major empires—including the Dutch, the British, and the American—The Changing World Order puts into perspective the cycles and forces that have driven the successes and failures of all the world’s major countries throughout history. Countries that have the worldâs reserve currencies have amazing powerâa reserve currency is probably the most important power to have, even more than military power. Hitler seized them all. Still, sterling needed to be devalued again in 1967. I am not ideological. This explanation of money and credit will be followed by an appendix that will show why and how all currencies devalue and/or die, with references to the most important cases of the last 500 years. As a result, I will be imprecise in my wording so that I can convey the big picture without getting tripped up on what might seem to be big things but, in the scope of what we are looking at, are relative details. Because early in the debt cycle governments are considered trustworthy and they need and want money as much or more than anyone else, they are typically the biggest borrowers. It was not many years ago that there were no significant rivals to the United States so it was quite easy for the United States to simply express its wishes and find that most countries would comply; the only rival powers were the Soviet Union (which wasnât much of a rival), its allies, and a few of the developing countries that were not economic rivals. You can clearly see that whole big cycle up and down in interest rates and inflation rates since the new dollar-denominated monetary system. I would have had to start more than 2,000 years before Christ and I wouldnât have started at the beginning. Capitalism means private ownership of the means of production. For example, I wrestled with how much I should worry about the differences between countries, kingdoms, nations, states, tribes, empires, and dynasties. It does not include the part of the revenue and debt from its operations in Asia but does include its revenues from goods it retrieved in Asia and sold in Europe. Part 1 summarizes all that I learned in one very simplified archetype of the rises and declines of empires, drawing from all my research of specific cases. What I had missed and learned from this experience 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. We are seeing some early signs of US moves to curtail Americansâ investments in Chinese markets and to possibly delist Chinese companies from American stock exchanges. These cycles of debt and writing off debts have existed for thousands of years and in some cases have been institutionalized. How much income do you have and will you have in the future relative to your expenses? By 1966, attempts to defend the peg were being described by prominent British policy makers as âa sort of British Dien Bien Phu.â61 When the pound came under extreme selling pressure again in 1967 (following rising rates in the developed world, recessions in major UK export markets, and heightened conflict in the Middle East),62 British policy makers decided to devalue sterling by 14% against the dollar. In our explorations of how the world really works, it was clear that we each brought different pieces of the puzzle that made the picture much clearer when we put them together. By producing money and giving it to debtors in need, central banks can prevent the debt crisis dynamic that I just explained. As the prosperity increases the wealth gap grows. At times when the central bank is faced with the choice of a) allowing real interest rates (i.e., the rate of interest minus the rate of inflation) to rise to the detriment of the economy or b) preventing real interest rates from rising by printing money and buying those cash and debt assets, they will choose the second path, which reinforces the bad returns of holding âcashâ and those debt assets. This has helped me see up close how remarkable the advances in China have been and how excellent the capabilities and historical perspectives that were behind them are. More specifically, a credit collapse that happened because there was too much debt so the central government had to spend a lot of money it didnât have and make it easier for debtors to pay their debt. My biggest mistakes in my career came from missing big market moves that hadnât happened in my lifetime but had happened many times before. While I have learned an enormous amount that I will put to good use, I recognize that what I know is still only a tiny portion of what Iâd like to know in order to be confident about my outlook for the future. As shown the United States produced many times as much as the other major countries produced in 1945, and though its share declined, it remained much higher than any other country until recently when it was surpassed by China.
No system will sustainably work well, in fact all will break down, if a) the individuals in it donât respect it more than what they individually want and b) the system is not flexible enough to bend with the times without breaking.
Should Americans fight with the Chinese to impose what they think the Chinese should do on them and vice versa, or should they agree not to intervene on what each other does?  For an overview of the convertibility crisis and devaluation, see Schenk, Decline of Sterling, 68-80; Alec Cairncross & Barry Eichengreen, Sterling in Decline: The Devaluations of 1931, 1949, and 1967, 102-147 (hereafter referred to as Cairncross & Eichengreen, Sterling in Decline). While I can understand that perspective, I want to assure you that I will seek to explain whatever major differences exist, that the timeless and universal similarities are much greater than the differences, and that to let the differences stand in the way of seeing those similarities which provide us with the lessons of history we need, would be tragic.
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