The People’s Money

MONEY IS THE game changer of our time. It circulates around the globe, facilitating the integration of economies—and countries—and further integrating our already connected world.¹ Every day, international currencies worth nearly $2 trillion move across borders. Roughly 90 percent of these transactions are part of financial flows—that is, capital directed toward investments rather than the purchase of goods and services.² These international currencies are bought and sold for commercial and financial reasons, and profits (and losses) result from even tiny changes in the exchange rates.

Since the 1980s, most countries have relaxed or removed barriers to the movement of capital. This so-called financial liberalization is the key feature that differentiates the current phase of globalization—the economic integration of countries that trade with and invest in each other—from similar episodes that the world has experienced. For instance, in the years after World War II, the United States and countries in western Europe dismantled many trade restrictions—in 1957, Germany, France, Italy, Belgium, Luxembourg, and the Netherlands established a customs union and created the European Economic Community—but they maintained controls on capital movements.

Increased integration has pushed many countries to completely open their current accounts, which means that money can freely move around to pay for goods and services; many countries have progressively opened their capital accounts as well, meaning that money can freely move around to be invested where opportunities arise. Individuals, companies, and financial institutions can go to international markets to borrow money, raise equity, and diversify their assets, and they can invest in foreign countries to exploit the opportunities offered by rapid economic growth. In relative terms, the growth of investments worldwide has been much more significant than the expansion of world trade. Between 1990 and 2007, just before the global financial crisis, world trade grew nearly fivefold, whereas total international capital flows expanded by a factor of eleven.

Along with financial liberalization, innovation in information technology and the availability of more powerful—and less expensive—computers have allowed money to circulate more quickly. It is now possible to move large amounts of money across international borders at the touch of a button. The use of computers in finance has increased the bandwidth between markets and has made it possible to automate the high-frequency trading of international currencies through a system that responds far more quickly than any human can. As a result, the global foreign exchange market has expanded rapidly in the last two decades, as evidenced by the daily market turnover. Since April 1989 (when statistics on them were first collected), foreign exchange transactions have grown almost eightfold.³

Financial globalization has been transformational for two reasons. First, as money moves around and fuels economic activity, it generates more money, and the world becomes richer. In his best-selling book Capital in the Twenty-First Century, the French economist Thomas Piketty observed that between 1987 and 2013 the average income per adult worldwide grew at an annual rate of 1.4 percent above inflation. This growth was stronger, and particularly significant, in the developing countries. Using an indicator more widely available than income per adult, we see that the average annual income per capita grew by 115 percent (in real terms in 2010 U.S. dollars) in emerging-market economies between 1990 and 2014—from approximately $2,265 to $4,870.⁴ In South Korea, for example, the average annual income per capita increased from approximately $3,000 in 1987 to approximately $25,000 in 2014; in Malaysia, it went from just below $2,000 in 1987 to almost $10,000 in 2014.⁵ The poorest countries also saw their income per capita grow significantly—even if many people still fell below the international poverty line, living on less than $1.90 a day. Take Ghana, for instance: the average annual income per capita went from less than $400 in 1987 to about $1,600 in 2014, but approximately one-quarter of the population still lived below the international poverty line.⁶

Many people have seen their living standard improve, and some have become very rich. Between 1987 and 2013, the average wealth of each adult in the world grew by an annual average of 2.1 percent in real terms. However, the richest individuals worldwide saw their wealth increase at three times this rate.⁷ The number of billionaires has also gone up. Today there are more than 1,800 billionaires in the world, with a combined wealth of almost $7 trillion.⁸ This is larger, in nominal terms, than Japan’s economy. Many of these super-rich individuals are in developing countries, with China, India, and Russia leading the pack (with 251, 84, and 77 billionaires, respectively). The United States, however, tops the list with 540 individuals.

It is not just individuals that have become richer—the wealth of nations has expanded, too. Countries that play a key role in the global manufacturing chain (such as China) or in the energy supply chain (such as Saudi Arabia and other oil-producing countries) have accumulated a large amount of dollars and financial resources. In the aggregate, the financial wealth in the hands of nations is now more than $10 trillion (a sevenfold expansion since 1995, when it was just $1.4 trillion) and is held in central banks’ foreign exchange reserves and in sovereign wealth funds. Reserves are normally used to manage and stabilize the exchange rate (more on this point in chapter 5) and can be deployed in case of a currency crisis. Sovereign wealth funds—investment funds owned by sovereign states—address the long-term development needs of countries that depend on natural resources: they ensure that the “wealth of nations” remains intact for the benefit of future generations.⁹

The second reason financial globalization has been so transformational is directly related to the first: more money means cheaper money. Later in this chapter, I will look at the effect of cheap and easily available money—how it has glued the world economy together but also how it has led to imbalances and misallocations of financial resources that make the global economy more vulnerable to financial crises. However, in order to understand both the opportunities and the dangers that cheap money creates as it moves around the world, we first need to understand what it takes for money to move around the world at all.

Domestic firms, multinational companies, governments, international organizations, individuals, and even criminals need money to pay for international exchanges of goods and services. There are about 180 official currencies that are issued by sovereign states or by groups of sovereign states, but not all these currencies qualify for international use. To be used internationally, a currency must, at the very least, be internationally acceptable as a means of exchange—that is, it must be accepted for transactions in goods and services in and between foreign countries.

Another key feature of international money is that it is liquid, meaning that there is enough of it to meet demand at any given time. The world economy functions best when there is plenty of international liquidity, which ensures that international transactions—for example, the import/export of goods and services—can be easily and rapidly settled.

Furthermore, international players need money that they can set aside until they need it, knowing that, rain or shine, it will maintain its value. Storing value is an important function of money; it allows individuals, households, businesses, and even governments to save and invest. They don’t need to consume today in order to maximize the amount of goods and services they can get for their money because they will be able to buy approximately the same amount with that savings in the future. This allows individuals, firms, and nations to save in order to consume or invest at a later stage. Countries, for instance, may save in anticipation of a later increase in public spending—for example, to cope with an aging population. Individuals do something similar when they save to ensure an income stream when they retire from work. Savings also help in withstanding unexpected events or shocks. If a country’s exports suddenly drop, it can use savings to pay for essential imports such as food and energy. Countries also need enough reserves to cope with a sudden dearth of liquidity, as happened in the United States after the collapse of Lehman Brothers in the fall of 2008. In all these cases, funds are held in currencies that are trusted to keep their value.

Today international money is fiat money: governments declare it legal tender within their jurisdictions. It is based on credit, and its value is unrelated to the value of any physical good—for instance, gold or silver. The credibility of and trust in the policies and the institutions of the country that issues an international currency are therefore critical.¹¹ Foreign holders of international currencies must trust the issuing governments not to pursue policies that can undermine the value of that currency (e.g., keeping interest rates low to support domestic growth can weaken the currency) or its stability. If the currency becomes unstable, with wide and protracted fluctuations, then individuals, businesses, foreign central banks, and governments may lose confidence and switch to other, more stable assets. A country that issues an international currency therefore needs to instill and maintain confidence in the value of that currency. This value can be ascertained by looking at the long-term trend in the currency’s exchange rate variability (which indicates how stable its value is) and at the country’s long-term inflation rate and its position as an international net creditor. Also, confidence in the general political stability of the issuing country is essential for nonresidents to hold that country’s currency.

Given all this, what currencies have become international money, and why? Many different factors underpin a currency’s international use. The size of the issuing country’s economy and its share of world trade, market development, preferences, and habits are the most crucial. The main international currencies—the U.S. dollar, the euro, the Japanese yen, and the British pound—are issued by countries whose economies and external sectors are among the world’s largest.

These currencies all meet the requirements discussed above. There is no (or very little) restriction on their cross-border use and circulation. They can be acquired and exchanged everywhere in the world. Take the British pound, for instance. People who are not resident in Britain can buy pounds for different purposes, from trade to tourism, and can easily hold them in sterling-denominated bank deposits in their countries. (This has not always been the case: in the post–World War II years, Britain imposed stringent capital controls on the amount of pounds that could be moved into and out of the country to be traded in international markets. We’ll explore some of the reasons for controls like these when it comes to China in the ensuing chapters.)

In addition, these countries all boast a liquid and diversified financial sector, a well-respected legal framework for contract enforcement, and stable, predictable policies. The financial sector is key in developing and supporting an international currency, as international investors need to have access to a wide range of financial instruments denominated in that currency that are tradable in different markets. They also need well-developed secondary markets with a wide variety of financial instruments on offer, available liquidity, and limited constraints to capital movement.

An international currency is not just a vehicle for financial intermediation. It also allows the issuing country to play the role of world banker—that is, to transform short-term liquid deposits into longer-term loans and investments, all denominated in its currency.¹² This transformation extends the duration of investments and provides funding for long-term projects; at the same time, by linking the supply of and demand for financial resources, it helps economic growth. But it is also potentially destabilizing for the domestic economies involved as well as for the world economy if the mismatch between short-term liabilities and long-term assets becomes irreconcilable—as we learned from the sub-prime mortgage market in the United States, where the 2008 global financial crisis originated. In that case, the collapse of the property market and the default of borrowers with poor credit ratings—indeed, sub-prime borrowers—triggered the collapse of the banking system and fueled a global financial crisis. How? Bank deposits were transformed into mortgage loans to sub-prime borrowers. Then these sub-prime mortgages were repackaged in financial products and sold to other banks, insurance companies, and assorted financial institutions. When the property market in the United States dropped and the guarantees/collaterals of all those loans lost significant portions of their value, the value of those financial products and of the banks that had them in their portfolios collapsed.

Because of Switzerland’s institutional framework and its neutral position in foreign policy, its franc also plays the role of a safe haven in times of crises. Safe-haven currencies are viewed as particularly reliable because of the sound economic policies, the strong institutional framework, and the political (and geopolitical) stability of the countries that issue them. Savers and investors turn to and hoard safe-haven currencies when financial instability or geopolitical risks are high.

But this comes with a cost. When demand strengthens, so does the exchange rate, and a currency that is too strong can be detrimental to the domestic economy. For example, between the onset of the financial crisis in September 2008 and September 2011, the value of the Swiss franc increased nearly 50 percent compared to the euro, as investors flocked to it as a haven from economic uncertainty. On September 6, 2011, the Swiss monetary authorities declared that “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.”¹⁴ Their solution was to cap the value of their currency and set a minimum exchange rate of 1.20 francs to the euro, and they stated that they were “prepared to buy foreign currency in unlimited quantities” to “enforce this minimum rate.” In the end, this strategy proved too difficult to maintain, and on January 15, 2015, in the wake of the European Central Bank’s turn to quantitative easing (QE is an unconventional monetary policy measure in which the central bank buys financial assets on the market in order to increase their price and so lower the yield), the Swiss monetary authorities let the franc float again. This was unexpected. Even Christine Lagarde, managing director of the International Monetary Fund (IMF), said she found the move “a bit surprising”¹⁵—especially because the Swiss National Bank had reiterated its commitment to the policy of anchoring the franc to the euro only a few weeks earlier and had introduced negative bank deposit rates to support the currency ceiling. Although the abrupt move certainly undermined the credibility that the Swiss central bank had established over the years, the franc soared by 30 percent in early trading after the announcement.

In recent years, the definition of reserve currency has become more nuanced, with a de facto distinction between currencies that are held in central banks’ reserves and key reserve currencies that are also part of the IMF’s basket of Special Drawing Rights (SDRs).¹⁶ Inclusion in the SDR basket is a way to draw a line between the major reserve currencies and other international currencies that are used less extensively and are held in reserves on the margin. It is, above all, the implicit recognition that a currency is a full member of the international monetary system. The dollar, the euro, the pound, the Japanese yen, and, since December 2015, the Chinese renminbi are the only currencies included in the SDR basket—and the renminbi, as I discuss throughout the book, is different from the other currencies in the basket. These are the currencies of the largest economies (in the case of the United States, China, Japan, and the euro area) or of economies that are systemically important (in the case of Britain)—meaning that their policies may have systemic impact on other countries—because of the size of their financial sector. Dominant among those currencies in the SDR basket is the dollar, with a 41.73 percent share, followed by the euro at 30.93 percent. The renminbi holds 10.92 percent, whereas the yen and the pound have 8.33 and 8.09 percent, respectively.¹⁷

The dominance of the dollar goes back a long way. In 1943, American negotiators who were preparing to discuss postwar recovery reckoned that the dollar would “probably become the cornerstone of the postwar structure of stable currencies.”²⁰ Indeed, at the conference in Bretton Woods the following year, the dollar became the standard for the international monetary system. Countries that participated in the conference agreed to peg their currencies to the dollar and to maintain the exchange rates within a 1 percent band—that is, their currencies could not appreciate or depreciate against the greenback by more than 1 percent. The dollar provided liquidity to a system ultimately underpinned by the gold reserves of the United States, which at the time amounted to three-quarters of all gold stored in central banks around the world. Within this system, the dollar, at least in theory, was convertible into gold at the rate of $35 an ounce.

At Bretton Woods, the dollar was put at the heart of a new multilateral legal framework for monetary and financial relations. This framework was underpinned by two institutions also created at Bretton Woods: the IMF and the International Bank for Reconstruction and Development (now part of the World Bank). The IMF, in particular, was established to monitor the fixed-exchange-rate arrangements between countries (although adjustments were allowed in case of “fundamental disequilibrium”) and to extend balance-of-payments assistance (i.e., loans) to countries at risk.²¹

However, the Bretton Woods system presented an unresolved contradiction between the goal of maintaining the value of the key reserve currency and that of ensuring liquidity to the world economy. To provide the necessary liquidity to the international payment system, the country that issues the key reserve currency eventually ends up running a current-account deficit—reflecting the amount that a country borrows to finance consumption and investments that exceed domestic savings. Persistent current-account deficits eventually undermine confidence and trust in the currency because foreign holders expect a depreciation of that currency in order to narrow the deficit.²² In 1960, the Belgian economist Robert Triffin expounded this dilemma, which has been known ever since as the Triffin dilemma.

As confidence in the key reserve currency begins to erode, other countries need to reduce their surpluses in the current account, let their currencies appreciate, or switch to other reserve assets. But within the Bretton Woods system, switching to other reserve assets was not an option because all other currencies were anchored to the dollar. Therefore, if other countries were not prepared to reduce their current-account surplus or allow the appreciation of their currencies, then the United States’ current-account deficit would continue to grow, reducing confidence further. In the late 1960s, the United States maintained that its allies could do more to reduce their surpluses by inflating or revaluing their currencies. The Europeans and Japanese, on the other hand, argued that it was the responsibility of the United States to make the first move and reduce its large deficit—which the United States was financing by issuing dollars. They had one major lever that they could use to curb the United States’ policy autonomy, which was to demand the conversion of accumulated dollar balances into gold. But this amounted to a “nuclear option,” given the huge damage it would have done to the diplomatic relations between the United States and its Western allies. This strategy would have also caused considerable capital loss—there were more dollars than gold, so it would have been impossible to convert all dollar holdings by central banks into gold. This made most governments reluctant to demand the conversion of the dollars they held.²³ Eventually, in August 1971 the United States unilaterally decided to suspend the convertibility of the dollar and to let it find its own level in the currency market. The Europeans and the Japanese were left with no other option but to accept that the Bretton Woods system had come to an end.

Nonetheless, the dollar remains the currency of choice for individuals, businesses, and nations despite some challenges to its dominance (most notably, from the euro). Although the world has transformed since the end of the Cold War, the international monetary system has not intrinsically changed, and the dollar still plays the dominant role. All in all, the size of the U.S. economy, its liquid and well-diversified financial markets, its solid public institutions, and its effective legal system have made the dollar an attractive currency to non-U.S. residents who look for a stable and secure shelter from financial shocks and geopolitical risks. Habits, network externalities, and inertia also explain a great deal of the dollar’s success; the extensive use of the greenback internationally has prevented other currencies from developing sufficient networks to challenge its dominance.

Since the dismissal of the Bretton Woods system, non-American holders of dollars have trusted the U.S. monetary authorities to promptly meet the demand for liquidity without undermining currency value. Because of its role as the key international currency, the greenback needs to be available in ample supply—and in an amount greater than that of any other international currency. As a result, the intents and actions of the U.S. government and the Federal Reserve are scrutinized much more than those of any other government or central bank that issues reserve currencies.

In practice, however, foreigners have maintained confidence in the dollar through its various ups and downs. The demand for dollars strongly increased in the years before the financial crisis. For example, the implied demand for dollars as a share of the U.S. gross domestic product (GDP) expanded more than the U.S. economy did between 1990, when it was 10 percent, and 2008, when it had grown to 20 percent.²⁴ This demand did not significantly drop after 2008; despite the collapse of the banking and financial sector in the United States, the dollar became the safe-haven currency that many foreign investors wanted to hold. In 2011, the demand for dollars was over 23 percent of the U.S. GDP, and it was approximately 17 percent some five years later.²⁵ Ultimately, in fact, there is no alternative—yet—to the dollar, and this explains why non-U.S. individuals and organizations have stuck to the greenback regardless of U.S. domestic policies and their short-term impact on the currency.

Another problem with cheap money is that low interest rates tend to encourage investors to “search for yield” and to foster a willingness to run more risks, as risky investments yield higher returns. Excessive exposure to risky and low-quality assets can lead to volatility, financial instability, and—as was the case in 2008—episodes of crisis. The booming residential mortgage market in the United States, generated by easily available credit, in turn fueled a booming residential housing market and strong private consumption growth. Spiraling indebtedness was deemed sustainable because of the unrealistic expectations of many people (and banks) that the housing market would continue to expand: they believed that as long as demand was strong—and house prices were increasing—the underlying debt could eventually be repaid and the risk was therefore low. Money continued to flow in, the cost of borrowing remained low, and the number of sub-prime mortgages grew.

In the years leading up to the crisis, cheap money created financial anomalies that could not be ignored. In February 2005, Fed Chairman Alan Greenspan drew attention to a “conundrum” in the world bond market: long-term interest rates had declined despite an increase in short-term rates.²⁶ Long-term investments usually have higher yields than short-term investments, to reflect the longer duration and thus potentially more risk for investors. “This development,” explained Greenspan, “contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields.”²⁷ He found it inexplicable that investors were prepared to lend money in the longer term at lower rates than in the short term. Did this mean that institutional investors would continue to lend to the United States despite increasing indebtedness? It seemed hard to believe because in those years the country was running a large twin deficit: in the current account (as imports significantly exceeded exports) and in the budget account (as the public sector consumed significantly more than the taxes it collected). Credit tends to dry up when both deficits are growing, as creditors grow doubtful of the debtor’s ability to eventually repay the debt.

Ben Bernanke, who replaced Greenspan as head of the Fed a few weeks later, came up with a hypothesis to explain the conundrum—the “global saving glut” hypothesis. Bernanke maintained that the excess of savings over investment by so-called saving glut countries—developing countries and, in particular, the manufacturing economies of Asia and the oil exporters—had led to the global fall in real interest rates and to increased credit availability. It was a case of excess supply over demand. The significant increase in the supply of savings globally could therefore account for the “relatively low level of long-term interest rates.”²⁸

As we know now, the saving glut hypothesis was just one facet of a much more complex dynamic—but it was an argument that suited many people who did not want to see the end of cheap money. During the final years of his chairmanship, Greenspan had made a point of not intervening to burst the bubble because he thought that the role of central banks was not to curb exuberance, not knowing how the markets would react, but to provide support and “clear up the mess” after the bubble has burst.²⁹ He therefore challenged the conventional view that the role of central bankers was to break up the party and take away the punch bowl.³⁰ And even if he had wanted to, it would have been a difficult task: when money is cheap and many are gaining, it is difficult to change policy course. “As long as the music is playing, you’ve got to get up and dance,” said Chuck Prince, a former chief executive of Citigroup in an interview with the Financial Times in 2007.³¹

In 2008, the music stopped. The global financial crisis forced the United States to cut the level of its debt. Demand for imports went down, and the trade deficit narrowed. During the postcrisis slump, monetary policies became even more accommodative, with unconventional measures such as QE devised to support growth. In the years after the crisis, interest rates were near zero in developed countries; central banks in the United States and Britain—followed, some years later, by the Bank of Japan and the European Central Bank—had to embrace QE in order to maintain liquidity in their economies. Many investors were pushed to search for yield in the more rewarding but also more risky emerging markets, and the resulting strong capital inflows drove currency appreciation in a number of developing countries. In the fall of 2010, Brazil’s finance minister Guido Mantega complained that the Fed’s monetary policy had forced a number of countries to lower their exchange rates in order to keep their exports competitive. “We’re in the midst of an international currency war, a general weakening of currency,” he said in an interview with the Financial Times. “This threatens us because it takes away our competitiveness.”³²

Capital flows reversed in 2013 when Bernanke signaled a possible end of QE. Investors began to question the strength and credibility of some fast-growing emerging-market economies and became more selective. This revealed imbalances, especially in countries where cheap money had fueled excessive debt. India, Brazil, Indonesia, South Africa, and Turkey were singled out as the “fragile five” for their inability to withstand capital outflows (foreign money leaving the country and moving somewhere else). When Bernanke revealed the planned “tapering” of the Fed policy in the spring of 2013, money did, in fact, flow out of these markets, causing havoc. This “taper tantrum,” as it has come to be known, was a powerful illustration of just how integrated the world economy had become, with emerging-market economies and developing countries bearing the brunt of the policies implemented by developed countries. As Raghuram Rajan, the governor of the Reserve Bank of India, put it in an interview with Bloomberg India TV: “International monetary cooperation has broken down.” He added: “Industrial countries have to play a part in restoring that [cooperation], and they can’t at this point wash their hands off and say, we’ll do what we need to and you do the adjustment.”³³

The 2013 taper tantrum provided a preview of the more severe episode of financial and monetary instability that broke out in January 2016. In the first two weeks of the year, the Shanghai Composite Index fell 18 percent, coming very close to the trough of the stock market crash in the summer of 2015; the value of the renminbi was also driven downward by news about the slower-than-expected growth of China’s economy. Unlike in 2013, in 2008, and even in 1997—when the Asian financial crisis devastated many economies in the region but left China unscathed—China was at the center of this financial instability. The process of developing the renminbi as an international currency, which I will discuss in the rest of the book, has made China much more open to financial globalization than was the case in 1997, and it is now easier for money to move into and out of the country. But China’s banking and financial system is not strong enough to absorb domestic shocks, allowing them to bounce through the global economy.

When the U.S. trade deficit with China peaked in 2006 and 2007 on the back of strong demand, it was more than $800 billion, or 5.8 percent of U.S. GDP.³⁴ In order to finance its trade deficit, the United States had to run a current-account deficit, which, as noted earlier, is the amount that a country borrows from abroad to finance consumption and investments that exceed domestic savings.³⁵ In 2007, for the third year in a row the United States ran a current-account deficit of over $700 billion, equivalent to approximately 5 percent of the country’s GDP.

The mirror image of the United States’ current-account deficit was China’s surplus. In 2007, China’s current-account surplus peaked at just more than 10 percent of the country’s GDP.³⁶ The synchronized expansion of the deficit and the surplus of these two countries is a fitting illustration of the paradox that the world economy was experiencing in the years before the global financial crisis: the world’s largest economy, the United States, was running a current-account deficit that was financed to a substantial extent by emerging-market countries—China, in particular.³⁷

In some ways, these two countries are natural complements to each other. China’s model of growth since the 1980s has revolved around exports, foreign investment, and the accumulation of foreign exchange. Over the same period, the United States has focused on domestic demand—in particular, private consumption—to drive growth. In both countries, policy makers use their policy instruments to ensure full employment of resources—especially the labor force. During this time, savings significantly increased in China, and indebtedness significantly expanded in the United States. The numbers are noteworthy: in China, aggregate savings were just over 50 percent of GDP, whereas in the United States they were approximately 17 percent of GDP.

To some extent, the policy outcomes in the two countries were jointly determined. As long as China continued to manage the exchange rate and as long as the United States could use low interest rates (i.e., cheap money) to maintain growth, the system held together. In addition, from 2003 through 2008, the final years of the Great Moderation, there was no pressure to correct the deficit/surplus mismatch. Both the United States and China were able to meet their targets for GDP growth and full employment of resources, and the rest of the world was experiencing strong growth (although some countries, including Spain and Ireland, were also building trade and financial imbalances). There was no incentive to correct this system, and few experts or policy makers saw these imbalances as a problem.³⁸ It was seen simply as a reflection of a loan from East Asia to the United States.³⁹

The situation drastically changed with the onset of the global financial crisis. The dollar weakened, and interest rates dropped even further from the already low levels of the precrisis years. As they have remained very low, the world has continued to be flooded with cheap money. Furthermore, as the Fed—as well as the Bank of England and the European Central Bank—has cut interest rates to near zero (and negative interest rates introduced very recently) and embraced QE, money has continued to move around the world in the search for yield, especially to the developing countries. Whereas developed countries, until very recently, have been saddled with low confidence, high unemployment, and low demand, the economies of developing countries have been expanding dynamically in the postcrisis years. (But since 2015 this dynamic seems to have run into difficulties.)

For many years, dollars have oiled the wheels of the international money machine,⁴⁰ fueling the demand for goods that China and other developing countries have become more and more adept at producing. In the next chapter, I’ll discuss how China has managed to exploit the dollar-based system and the availability of cheap capital to its own advantage. This has resulted in the country’s overall transformation and strong economic expansion. But the limits of China’s system—a currency with restricted international circulation, a repressed banking sector that misallocates financial resources, and limited public provisions for health care and retirement (chapter 3)—have constrained the development of the domestic banking and financial sector and have cemented the role of the renminbi as a currency with limited international use.