Finance situation has the power to break empires

Looking at what is harassing the American economy one realizes that it is finance more than guns that have the power to make or break empires. Finance has had a bumpy history with bubble busts. It is as fickle as human nature and this truth has been captured in the twists and turns of the stock markets – the next stage in the history of money.

The Dutch invented the concept of Joint Stock Company as well as that of trading in stocks in 1602 by setting up the VOC. Within the next one hundred years the share prices of VOC spiked nearly eight times indication the powerful position of the Holland in the trading of Europe with Asia.

It is nefarious manipulation by insiders that sets off the bubble-bust cycle in the stock markets. Another reason is the flow of hot money between the financial centres and the monetary authorities. The best example of this is the activity triggered by Alan Greenspan during the 90s when too much money was poured into the economy.

In the modern era of today the latest power centre is termed Chimerica or “the wonderful dual country” by Niall Ferguson in his book The Ascent of Money. The two countries are China and America. The man in the street in America is 22 times richer than his counterpart in China and yet it is the savings of the Chinese that is propelling consumption by the Americans.

This is because China is trying to maintain its edge in exports by not appreciating its currency. Thus it has been buying dollar denominated bonds in huge quantities for many years and by doing so finances a sizeable part of the swelling deficits in America. Ferguson argued that it is imports from China kept in control inflation in USA. The savings in China brought down the interest rates of America.

Chinese labour kept low the wage cost of USA. It also let loose a lending spree and fed fuel into the expansion of global liquidity during the early part of the 21st century. The hedge funds, private equities and the mortgage market have all gone for a tailspin. But for how long? Will the mutually suitable relationship between the two countries turn into rivalry in the political arena as happened between Germany and Britain one hundred years ago?

The book was ended in June 2008 but the main drama took place just after that. Hence many questions remain unanswered while many theories are not acceptable.

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