An Experiment Incubated at Harvard to Resolve the Global Debt Crisis (Part 1 of 7)

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 Like a planet drawn right into a discipline of advanced gravitation, its outdated orbital parameters have been failing, whereas no new secure trajectory had but been computed. A pandemic sweeping throughout the globe had acted as a potent catalyst, hastening the collapse and drift of outdated continental cabinets.

On the invitation of Professor Gu Xueyong, tutorial 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Beneath the tropical stars there, the power-holders of the outdated world convened. They resembled historic monks, making an attempt by means of 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 enviornment 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, usually are not mere discourses on economics however expansive star charts, marking the trajectories and cycles of wealth and energy throughout centuries. To talk with him nose to nose was, as Han described it, like a lifelong radio astronomer who had solely noticed pulsars by means of distant devices, immediately standing earlier than a neutron star itself, feeling the tremor of its gravitational waves.

Determine 1. On the Tsinghua College Southeast Asia Heart in Bali, I met Ray Dalio. I informed 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 all the way down to its most basic legal guidelines. He pierced by means of the fog of centuries of economic information like a geologist finding out a core pattern, uncovering the recurring cycles that sedimented like strata. In his constructed coordinate system, the medium by means of 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 regulation itself.

The First Type: Arduous Foreign money — 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 resolution. 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 type we are going to later discover—Bitcoin—all belong to this class. They’re the “ontological matter” of the worth universe, the constructing blocks from which all advanced buildings come up.

One other key property of this type is its intensified resilience when civilization is struck by high-energy shocks. Battle, pandemic, monetary collapse—each time 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 historic singularities. Gold, throughout 1000’s of years of human historical past, has repeatedly performed this function. Two civilizations could obliterate each other’s credit score programs solely, however neither can destroy the consensus of gold.

Arduous 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 the whole galaxy’s rotation.

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

As civilization’s complexity grew exponentially, the mass and density of the primordial cosmos have been now not adequate to assist the swelling quantity of financial exercise. The starry seas of world commerce required a medium of liquidity far larger 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 may 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 strong gravitational lens, bending and amplifying the singular mild of gold into numerous digital pictures.

Adam Smith noticed that early banks usually maintained a leverage ratio of 5 to 1: a single unit of gold reserves may assist 5 items of paper cash in circulation. This immediately quintupled market liquidity. The machine of the human financial system was immediately 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 Battle 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 appearing as celestial mechanics adjusting orbits with care, the system may keep 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 laborious foreign money. It was a map—one which corresponded to an actual continent of gold beneath it.

The Third Type: Fiat Cash — The Nice Decoupling and the Purple 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 power finally exceeds the gravitational binding of the central star.

In 1971, that crucial threshold was reached. The USA, 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 regulation 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 performed.” The worth of foreign money now 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 middle; all currencies turned wandering planets, their solely gravity fields shaped by their issuing nations’ mixed energy, army may, and future tax revenues (authorities bonds). Nationwide fiat credit ballooned like stars of their terminal stage, swelling into pink giants.

In 2018, whereas on tutorial change 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 gradual, relentless evaporation of worth. For particular person lives lived inside it, the change was imperceptible, like a gradual shift in atmospheric strain. 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 quite than laborious foreign money had silently misplaced 96% of their buying energy to the inflation of this pink big.

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

In line with Dalio’s cycle concept, this experiment is now inevitably approaching its terminus. An entire long-wave debt cycle, like a galactic orbit, spans roughly a century. From the Nice Despair of 1929 to at this time, almost 100 years have handed. Humanity is as soon as once more coming into the chaotic gravitational zone of a worldwide debt cycle—the “Three-Physique Downside” of our age.

And this time, the storm’s middle will type concurrently over the 2 biggest civilizational entities: the US and China.

Faye’s Closing Observe for Episode 1

Faye closed her pocket book and wrote:

Arduous foreign money, paper cash, fiat cash—the three epochs resemble three nice migrations. And now, we’re forsaking the outdated gravitational middle.

The suspense stays: Within the subsequent episode, Han Feng turns his gaze eastward—to China. How did the “actual property normal” 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