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1-The best of the times the worst of the times ;A brief History of our current world order

Updated: Jun 5, 2021

Since the beginning of Industrial revolution Capitalism has mutated, shifting from profits by selling products and services (corporate capitalism), to profits from speculation(financial capitalism), and now profits from surveillance (surveillance Capitalism). This latest mutation may explain why the explosion of the digital has failed, so far, to decisively impact economic growth.

We might be at the beginning of one of those periods in History where an established Empire is threatened and then replaced by an emerging one. When this happens the new Empire rises and the old one declines in importance. This change does not happen without turmoil in the Society.

The indicators that determine this change are always the same of the past:

- High Debt levels and a monetary crisis:

The extremely low interest rates of the last decade have limited central banks’ power to stimulate the Economy as they used to do with pre 2008's recessions. They are now monetizing the debt.

- An increasing wealth gap in the Society.

An economy working only for the few has created Political divisions within Countries that will lead to increased social and political conflicts. Autoritarism is on the rise

- Geopolitical instability

The rise of an emerging power (China) is challenging an existing one (USA). This will put in motion Capital outflows in the years to come.

The rise and decline of economic Empires

The cycle of Empires usually follows three phases:

1) the ascent phase, characterized by the gaining of competitive advantages; The leading indicators are: strong growth, high productivity, strong currency and credit market, good educational system, civic cooperation between citizen, rule of law, productive resources allocation, cooperation, military strength, moral values.

2) the top phase, characterized by sustained strength but eventually showing the seeds for the loss of the competitive advantages. Others Countries start copying the leaders. Work ethics decline and large wealth gap are created.

3) the decline phase, which is characterized by self-reinforcing declines in what previously were its strengths. Wealth gap grows deeper with populism (left and right) and Capital outflow begins. The pie becomes smaller and there are bigger problems on how to divide it. This downward spiral put an end to the established world order (see China, Dutch, British, USA )

A brief History of our current US world order

-The Gold standard period

During the end of 19th Century Great Britain was the leading superpower until when, at the eve of WWI, Countries started running enormous Gov. deficits funded by their central banks’ printing and lending of money (to finance the war). The monetary system in place was the Gold Standard where most currencies were fixed against Gold which was the only international money. Trust started lacking so international credit was lacking too and after the war big devaluations in many countries' currencies( including the winners of the war) happened because they had to devalue their huge debts to create a new start.

The post war period and dollar standard

At the end of WW2 the US had won the war, had two-thirds of the world’s gold held by governments (Gold was the world’s money at the time), accounted for 50% of the world’s economic production, and was the dominant military power. So a new World Order began after the end of World War II in 1945, with the Bretton Woods agreement that put the Dollar in the position of being the de facto world’s leading reserve currency removing the Pound and USA replaced Great Britain as leader of the World becoming the richest and most powerful country. It earned this money via its large exports.

The US Empire and Dollar fiat money system

In the years that followed, to finance its activities, the US government spent more than it took in tax revenue so it had to borrow money creating more dollar-denominated debt. US began abusing the "privilege" of having the world reserve currency (everyone in the world was buying its debt because they wanted to save in that currency). US was running twin deficit (trade and budget deficit) for 2 decades until Countries started their claiming on Gold. When these became excessive, the Bretton Woods monetary system broke down on August 15, 1971. President Nixon, like President Roosevelt on March 5, 1933, defaulted on the US’s promise to allow holders of paper dollars to turn them in for Gold. Thus the dollar devalued against gold and other currencies. The Dollar-based fiat monetary system era had begun.

The inflation -stagflation period

As a result of going off the gold-linked monetary system that constrained money and credit growth, there was a massive acceleration of money and credit, inflation, oil and commodity prices, and a panic out of bonds and other debt assets that drove interest rates up and caused a run into hard assets like real estate, gold, and collectibles for most of the next 10 years, from 1971 to 1981. Inflation became the biggest political problem and Governments also created controls on prices and wages which created further economic distortion. Inflation psychology led Americans to borrow money and immediately take their pay checks to buy things to “get ahead of inflation. Then the president of the US Central bank (Volcker) announced that he would constrain money (M1) growth . The move to monetary tightness broke the backs of debtors and curtailed borrowing, which drove the world economy into its worst downturn since the Great Depression.

The Disinflationary and Booming 1980s

From that peak in inflation and interest rates( both around 20%) the disinflation Age began until now, where both the inflation rates and interest rates have fallen to nearly 0%. Falling inflation and falling interest rates caused the stock market and economic boom of the 1980s and 1990s . Money, credit, and debt began again to rise , which again produced a prosperity that led to debt-financed purchases of speculative investments that became the dot-com bubble, which burst in 2000.

1990-2008: Globalizing, Digitalizing, and Booming Financed by Debt

The long period of disinflation ended when Short-term interest rates hit 0% (Monetary policy number 1)in the economic crisis of 2008 .The long term interest rate decline wasn’t enough to create a new wave of money and credit expansion that was needed. So, Central banks started printing money to buy financial assets( Monetary policy number 2) which only helped those who were smart enough to buy financial assets. The last decade saw The real economy fighting against Deflation while the book was taking place in the financial economy. The Wealth Gap that exploded as never before was just the obvious consequence

The 2008-20 Money-Financed Capitalist Boom Period

In 2020 Covid-19 trigged economic and market downturns around the world, which created holes in incomes and balance sheets, especially for indebted Companies and people that had incomes that suffered from the downturn. So, on April, 2020 the US central bank(and other Central banks around the World) announced a massive money and credit creation program through big deficit spending.(direct payments from the government to citizens).Basically the FED was monetizing the new debt. This was Monetary Policy n.3.It was essentially the same announcement that Roosevelt made on March 5, 1933.

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