An Experiment Incubated at Harvard to Resolve the International Debt Disaster (Half 1 of seven)

1. Beneath the Balinese Stars: Encounter with an Observer of Civilizational Cycles

November 2022. Human civilization, that colossal vessel, was crusing into waters extra unfamiliar than ever earlier than. Like a planet drawn right into a subject of complicated gravitation, its previous orbital parameters have been failing, whereas no new secure trajectory had but been computed. A pandemic sweeping throughout the globe had acted as a potent catalyst, hastening the collapse and drift of previous continental cabinets.

On the invitation of Professor Gu Xueyong, educational chair of the G20 summit program, Han Feng departed his self-imposed island of isolation and flew to Bali.

Beneath the tropical stars there, the power-holders of the previous world convened. They resembled historical clergymen, making an attempt by archaic rites to rediscover for this more and more unstable planet some absolute, immovable gravitational anchor. But on the cosmic scale, Han knew nicely, absolute stillness is nothing however an phantasm.

It was on this paradox-laden area that he encountered Ray Dalio.

Greater than a financier, Dalio was an “observer of civilizational cycles,” a geologist of the monetary world. His works, Debt Crises and Rules, will not be mere discourses on economics however expansive star charts, marking the trajectories and cycles of wealth and energy throughout centuries. To talk with him head to head was, as Han described it, like a lifelong radio astronomer who had solely noticed pulsars by distant devices, all of the sudden standing earlier than a neutron star itself, feeling the tremor of its gravitational waves.

Determine 1. On the Tsinghua College Southeast Asia Middle in Bali, I met Ray Dalio. I instructed him I used to be studying his e-book Debt Crises and had discovered deep perception in it; he was visibly happy.

Dalio’s genius lay in distilling the bewildering complexity of human financial exercise right down to its most elementary legal guidelines. He pierced by the fog of centuries of economic knowledge like a geologist finding out a core pattern, uncovering the recurring cycles that sedimented like strata. In his constructed coordinate system, the medium by which humanity carried “consensus”—cash—had traversed three distinct epochs of evolution.

To know the place we stand on this second, and the place we could also be headed, one should first perceive these three epochs and the cruel logic of their evolution, as chilly and unyielding as bodily legislation itself.

The First Kind: Exhausting Forex — The Universe of Worth’s Bedrock

This was the primary epoch of worth, a primordial cosmos rising from the invisible hand of the “market” itself. Right here, the oldest stars have been supplies whose bodily and chemical properties proved secure: shells, gold, silver. Their worth didn’t come up from any central command however crystallized in numerous human exchanges, like crystals precipitating out of a supersaturated answer. They have been the primary consensus of wealth to emerge spontaneously from the huge computational system of the human market.

Friedrich Hayek referred to as it “non-state sovereign cash.” Dalio, in additional bodily language, revealed its essence: these property are not anybody else’s debt.

This was a definition as foundational because the coordinate origin. Gold’s existence trusted no contract, no promise. Its worth was an goal actuality, born of its bodily properties intertwined with the collective unconscious of humankind. In Dalio’s taxonomy, actual property, shares, and even the novel informational kind we’ll later discover—Bitcoin—all belong to this class. They’re the “ontological matter” of the worth universe, the constructing blocks from which all complicated constructions come up.

One other key property of this kind is its intensified resilience when civilization is struck by high-energy shocks. Struggle, pandemic, monetary collapse—at any time when the fragile lattice of credit score networks woven from agreements and guarantees is torn aside by higher-dimensional blows, worth collapses inward towards these densest, most historical singularities. Gold, throughout hundreds of years of human historical past, has repeatedly performed this function. Two civilizations might obliterate each other’s credit score techniques completely, however neither can destroy the consensus of gold.

Exhausting foreign money, then, is the bedrock of the worth universe. In each grand monetary structure, it performs the function of the silent, large, indispensable “supermassive star,” sustaining the stability of your entire galaxy’s rotation.

The Second Kind: Paper Cash — The Age of the Gravitational Lens

As civilization’s complexity grew exponentially, the mass and density of the primordial cosmos have been not ample to help the swelling quantity of financial exercise. The starry seas of world commerce required a medium of liquidity far higher than the crustal reserves of gold may present. Thus started the second epoch of worth.

This period was pioneered by the bankers—goldsmiths and silversmiths seated on the wood benches (banca) of Italy. They have been the primary engineers to find the secrets and techniques of “space-time distortion.” Observing that the gold saved of their vaults remained dormant more often than not, they realized they might challenge extra claims to gold—banknotes, drafts, silver certificates—than the steel reserves they bodily held.

Thus was born financial institution credit score, the origin of debt cash. It acted like a robust gravitational lens, bending and amplifying the singular gentle of gold into numerous digital pictures.

Adam Smith noticed that early banks sometimes maintained a leverage ratio of 5 to at least one: a single unit of gold reserves may help 5 items of paper cash in circulation. This immediately quintupled market liquidity. The machine of the human financial system was all of the sudden fed an unprecedented gas, and the flames of the Industrial Revolution roared forth, propelling human civilization to a better energetic state.

The Bretton Woods system, established after World Struggle II, was the head of this age of the gravitational lens. It anchored the foreign money of the strongest financial energy—the US greenback—to gold, and in flip, different nationwide currencies to the greenback. It was a finely nested planetary system: satellites orbiting the first star (the greenback), which itself orbited the traditional golden solar.

At this stage, with gold as the last word supply of gravity and central banks performing as celestial mechanics adjusting orbits with care, the system may preserve a fragile, dynamic equilibrium. Dalio referred to as this period’s cash “Paper Cash.” At its core, it was high-quality debt backed by true arduous foreign money. It was a map—one which corresponded to an actual continent of gold beneath it.

The Third Kind: Fiat Cash — The Nice Decoupling and the Pink Big of Debt

But debt, by its nature, grows exponentially. When the quantity and velocity of satellites in a planetary system improve with out finish, their centrifugal drive finally exceeds the gravitational binding of the central star.

In 1971, that essential threshold was reached. America, the system’s core, had issued much more greenback debt than its gold reserves may redeem. President Nixon decided that appeared sudden however was in actual fact dictated by bodily legislation itself: he severed the hyperlink between the greenback and gold.

This was the Nice Decoupling of the monetary cosmos.

From that second, humanity entered the third epoch of worth—the period of Fiat Cash. Fiat, from the Latin, means “let or not it’s accomplished.” The worth of foreign money not required any anchor within the bodily world, deriving solely from the decrees and credit score of sovereign states. The golden solar that had burned for millennia appeared to exhaust its hydrogen gas in a single day. The planetary system misplaced its gravitational heart; all currencies grew to become wandering planets, their solely gravity fields fashioned by their issuing nations’ mixed energy, army would possibly, and future tax revenues (authorities bonds). Nationwide fiat credit ballooned like stars of their terminal stage, swelling into purple giants.

In 2018, whereas on educational alternate at Columbia College, Han visited former Federal Reserve Chair Alan Greenspan in Washington, D.C. Greenspan confirmed him a chart he had drawn by hand, a doc Han nonetheless retains in his digital archive. It resembled a spectrogram of distant stars, exactly recording the “redshift of worth” the greenback skilled after the Nice Decoupling.

Pointing to the road tilting steadily upward, Greenspan defined in a voice as unemotional because the announcement of a bodily fixed: from 1971 to 2018, the greenback had devalued towards gold by an element of 26.

Determine 2. Might 2018, in Washington D.C., throughout cherry blossom season, discussing Bitcoin with former Fed Chair Alan Greenspan in his workplace.

This was a half-century of sluggish, relentless evaporation of worth. For particular person lives lived inside it, the change was imperceptible, like a gradual shift in atmospheric stress. However on the macro scale of civilizational historical past, it was irreversible entropy progress, an enormous dilution of consensus. It meant that in fifty years, anybody who had saved wealth in greenback financial institution accounts somewhat than arduous foreign money had silently misplaced 96% of their buying energy to the inflation of this purple large.

As soon as the greenback, the lead goose, broke free from gold’s gravitational pull, all currencies rapidly adopted. As we speak, no sovereign cash on Earth is pegged to gold. Humanity as a complete had entered a purely unanchored experiment in credit score cash.

In response to Dalio’s cycle idea, this experiment is now inevitably approaching its terminus. A whole long-wave debt cycle, like a galactic orbit, spans roughly a century. From the Nice Melancholy of 1929 to at present, almost 100 years have handed. Humanity is as soon as once more coming into the chaotic gravitational zone of a world debt cycle—the “Three-Physique Downside” of our age.

And this time, the storm’s heart will kind concurrently over the 2 best civilizational entities: america and China.

Faye’s Closing Observe for Episode 1

Faye closed her pocket book and wrote:

Exhausting foreign money, paper cash, fiat cash—the three epochs resemble three nice migrations. And now, we’re forsaking the previous gravitational heart.

The suspense stays: Within the subsequent episode, Han Feng turns his gaze eastward—to China. How did the “actual property commonplace” ignite a civilization-scale credit score enlargement, and why has it reached its bodily limits?

Preview | Episode 2: The Genesis Experiment on the Japanese Continent — Land as Basis.

Picture supply: Shutterstock