Towards a history of the 21st century world economy

Building on the remark in the previous post, I can form a quick thesis about epochs in the world economy in the 21st century.

Back in the mid-00s, Brad Setser ran a blog tracking foreign currency reserves of the world's central banks. (After 2008, he disappeared into the Obama administration Treasury.) It was from that blog, I am sure, that I learned of what some were calling "Bretton Woods 2.0" - the original Bretton Woods being the system of exchange rates set up by the world powers after World War 2, one of many new global institutions created at that time, when the victorious US was fully half of the world economy...

"Bretton Woods 2.0" has had a number of meanings. Sometimes it refers to the new order which followed Nixon's abandonment of fixed exchange rates and the gold standard in 1971, in favor of a floating petrodollar. It was also bandied about in 2008 as a name for the financial new world order that the G20 would create, as it took over from the G8 as the chief locus of global economic governance. It never quite fulfilled that role, I think, but nonetheless we did end up with a distinctive new balance - more on that in a moment.

But back in the mid-00s, BW 2.0 referred to the situation in which China funded the US by buying Treasuries in vast quantities. That situation itself emerged, on the Chinese side, from a desire not to experience a currency crisis like the Asian export economies of 1998 did, and on the US side, from the post-9/11 economic strategy of low interest rates and a housing boom...

Setser and other commenters often remarked on the unsustainability of BW 2.0. In any case, when the global financial crisis ("the GFC", as we call it in Australia) hit in late 2008, we entered a new epoch in which the developed economies relied on ultra low interest rates and continued Chinese growth, to keep going.

The events of 2015 may be ending that regime, because China's own strategy of export-driven growth has reached its limit, and now they need to become an economy driven more by internal consumption. They're also putting those accumulated reserves to work geopolitically with schemes like the Belt-Road initiative and the new development banks (reminiscent of the post-WW2 construction of new global institutions; then America led, now it's China).