We Are Witnessing The Flippening - Between US & China

Superpowers don’t die. They just fade away.

Like the UK before it, almost exactly 100 years ago, I used to think that the American decline would be slow and imperceptible at first but gain momentum with each successive global crisis. This COVID-19 fiasco may, however, just get so bad that America falls off a cliff like its employment numbers. I wouldn't bet too much on that in the long run, though. The same stuff that makes Americans Cartman-esque is the stuff that also makes us innovative and fearless risk takers capable of forging an epic almost-11-year bull run out of the ashes of the previous Great Recession.

That being said these numbers in a series of COVID-19 analyses by McKinsey, widely recognized as the smartest people in the room, paint a pretty bleak picture.

Basically, it states that the coveted V-shaped recovery will only be realized by China and not the US or Europe. The main reason for that is that China implemented drastic measures quickly. They locked down the whole of Hubei province when there was only 830 or so cases of infection. How they knew to do that while the other major regions of the world did not is a whole nuther question but what's done is done. We can't go back in time now. China still saw another 100-fold increase in infections after their lockdown before infections started leveling off. By comparison, if the US locked down everything today - which, as we've seen, is absolutely impossible - and we saw another 100-fold increase in infections before "flattening the curve" - also impossible because the US has 10-15 urban epicenters at this point - we would see a total of 8 million infections in the United States. That's if we went on total lockdown today and people would actually stay the fuck inside.

So it's entirely possible, in my opinion, that these figures for the US turn out to be rosy for the United States and Europe. Here, McKinsey presents the case that China will have a "V-shaped" recovery, while the US and Europe experience "L-shaped" recoveries.

Totally pessimistic pundits like Nouriel "Dr. Doom" Roubini go even further in their analysis:

... every component of aggregate demand – consumption, capital spending, exports – is in unprecedented free fall. While most self-serving commentatorshave been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the COVID-19 crisis is something else entirely. The contraction that is now underway looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.

Make no mistake. That's where we're headed. What is going to happen this time is going to make 2008 pale in comparison. The funny thing about the Fed-fueled stock market recovery that has happened the past 3 days is that it is advertised as the "biggest three-day surge since 1931" as if that is somehow reassuring!

With the American unemployment rate set to eclipse 30% in the next couple months, we'll be lucky to just survive this one. If you have anything left financially after this, it will be because you masterfully navigated these shark-infested waters.

Let's return to the reason for this post - The Flippening. The last time we saw a hegemonic shift in power at happened to the UK - sometime between World War I and World War II. By the end of World War II, the jig was definitely up. The US proved it by pushing the Bretton Woods System, with the US dollar as its lynchpin, down the throat of the UK. That system initially looked like this:

At the time, it seemed like a coup. Why? The British interests were represented by THE economist rock star of his time - Milton Keynes. He advocated a global currency called the bancor. But America had the soft power and their relatively unknown monetary leader Harry Dexter White led the charge toward the implementation of the Bretton Woods System. In a twist of history that I always find incredibly ironic and more than mere coincidence, Mr. White was caught up in post-war anti-Communist sentiment and died of mysterious circumstances on his own farm in 1948.

Eventually, Nixon ended the gold exchange standard to protect US interests. Then we ended up with our current system that looks something like this:

The US dollar should be MUCH bigger in this graphic and were we to look at an equivalent graphic after 2015 we'd have the Chinese yuan (CNY) in the center there. That's how it works. All these tertiary currencies have to pay their tithe to the "IMF currencies" - GBP, EUR, JPY, CNY, USD - and the non-USD ones, in turn, have to "bend the knee" to the USD. Harry Dexter White created this international financial system so perfectly suited to backstopping the American Empire. The incessant brr brrrrr brrrrrrrr of the world's central banks incessantly printing fiat could be about to bring it all to a screeching halt. The one saving grace that might keep the almighty US Dollar in its seignorage-earning place is simply that all countries are brrrr'ing up their money printers. After all, what's a couple trillion between friends!?

But these digital times are just faster. Even when compared to 2008 and definitely compared to 1929, the impetus for recovery could come at any time from any sector in the world. Plus, now we've come to realize that we can just apparently ignore classical economics and print money forever. Will the 21st century Chinese equivalent to the Bretton Woods System be the release of its sovereign digital currency - the DCEP - and a suite of tooling that will ensure its use in global trade? I don't know. I'm just spitballing here, but I think there is an awareness now of just how important digital currency is going to be A.V. after the virus. Or else why would Congress even be considering the "digital dollar" right now, especially after they spent all summer hating on Libra? But the truth is this "helicopter money" is not going to get into taxpayers hands very quickly if we don't think with our blockchain hats on. Circle/Coinbase (USDC) and Gemini (GUSD) are already here with a regulated solution. Why not just jump on it? Now's the time to think outside the box and make it happen.

At some point, the quickness and rational/irrational nature of the decisions that American and European leaders make in the next few weeks will determine just how long from now that point will be, we will get back to something that resembles "normal."

Question is: What will that look like when we finally do?