The Middle of an Era

By George Friedman

I have written in several places about a paradox. On the one hand, if you take a snapshot of the world every 20 years or so, the reality of how the world works and what matters will have shifted dramatically compared with the previous snapshot. On the other hand, at any point in time there is a general belief that the world as it is at this moment will remain in place for a long time. It is not just the public but also experts and those who govern who tend to fail to see how transitory the present reality is. As a result – and this is what makes it important – as the geopolitical system shifts, there is a tendency to see the shifts as transitory, a temporary disruption caused by unfortunate events, until they are well entrenched, and so we tend to align ourselves with the shift far too late.

In 1900, Europe was peaceful and prosperous, and it dominated the world. It was assumed that this was a permanent reality. By 1920, Europe had torn itself apart, impoverished itself, in a bloody war. It was assumed that Germany, having been defeated, was finished. By 1940, Germany had re-emerged and was astride Europe. It was assumed that the German tide could not be resisted. By 1960, Germany was an occupied and divided country. It was assumed that war between the strongest of the occupiers, the United States and the Soviet Union, was inevitable. By 1980, there had been a war, but in Vietnam rather than Europe, and the United States had been defeated. The U.S. was now aligned with China against the Soviet Union. It was assumed that the Soviets were a permanent and dangerous enemy to both countries. By 2000, the Soviet Union no longer existed. It was assumed that the key interest of all countries was economic growth, and that traditional conflict among nations had become a marginal matter.

Twenty years is an arbitrary time period, but historically it’s about the length of a human generation. The world changes radically in each generation, but the dates can vary. The last era began in 1991 and ended in 2008. Yet even now there are many who are waiting for the world of 1991 to return. More important, only now is the full power of what started in 2008 being felt.

Life After the Cold War

Consider how the world changed in 1991. The Soviet Union collapsed, and it was assumed that the rump state, Russia, was no longer a significant factor in how the world worked. Europe signed the Maastricht Treaty, which was seriously and reasonably believed to be the preface for the creation of a United States of Europe. The United States led a vast coalition of nations against Iraq’s occupation of Kuwait, defeating Iraq with few dissenting voices. China had adopted capitalism and begun its historic economic surge; it seemed an unstoppable train headed toward liberal democracy. Japan, the previous economic miracle that would never end, was in the midst of its transformative economic crisis. With the Cold War over, the U.S. was the only global power, and the world was reshaping itself in the American image.

The world was filled with the promise that the horrors and dangers of the 20th century were behind us. And for a time, that appeared to be the case. The first sign that the world was not quite as it seemed came in 2001, when operatives of al-Qaida attacked the United States, and the United States struck out at the Islamic world.

That era hung on for a few more years, until two events a few weeks apart finally broke it. On Aug. 8, 2008, Russia and Georgia went to war, putting to rest the idea that Russia had fallen into permanent, shabby irrelevance, or that conventional warfare was obsolete. Then on Sept. 15, 2008, Lehman Brothers collapsed, wrecking the illusion that the global economy could only go up. In the span of just over five weeks, the core assumptions of the era began to change.

Russia was no longer a superpower, but it was certainly still a regional power. It still had a sphere of influence beyond its borders, and it would protect its interests by force. The empire the czars had created would not go quietly into that good night.

The core weakness of the European Union was revealed: It was not a nation-state but merely a treaty joined into by sovereign states whose leaders were elected by their citizens and whose loyalty was to their voters, not to Brussels. The EU was a perfectly designed instrument for economic success, but it could not cope with economic dysfunction because economic pain did not distribute itself neatly over the bloc’s vast geography. Each member state increasingly pursued its own interests and frequently found the EU a hindrance rather than a help. 2008 was the high point of Europe.

China found in 2008 that an economy built on exports was not in its hands but in the hands of its customers. The economic stagnation that followed transformed China from a powerful engine pouring goods out to eager customers to a nation scrambling to put out financial fires, fantasizing about endless roads and artificial intelligence, all while turning into a dictatorship that would likely define it for the next era. Japan, rather than descend into disaster, used its social solidarity to weather its crisis by accepting the idea that a declining population and stable growth lead to higher per capita income.

And the United States discovered that being astride the world was a prescription for stumbling and falling. The war against jihadism would not end; the Russians would not accept their place in the world order; the Chinese would be less an economic problem than a potential military one; and the Europeans would be self-absorbed and provincial, as would be expected from their position. The United States realized that it was not ready, institutionally or psychologically, to manage the power it had acquired, and it could not delegate.

A New Era

The world in 2008, some 17 years after the last era had begun, did not resemble what most people expected. For a long time – for some even today – there was the expectation that the post-Cold War world (as good a name as there is for what began in 1991) was the norm, and but for someone’s bungling we would still be there and certainly would return to it. But eras come and go, and the world of 2008 will be in place well into the 2020s.

After 10 years, its outline is already clear. It is a time of economic dysfunction, defined by slow growth and unequal distribution of wealth, leading to domestic political tension and deep international friction. Countries will be focused on their own problems, and those problems will create trouble abroad. It is a world that is best described as parochial, tense and angry. There are worse things that it can be. But much depends on how rapidly the United States matures into its role as the single-most powerful country in the world. Likely the emergence of the U.S. from its internal rages will be the major feature of the next era.

Twenty years means nothing in history, but it means everything in our lives, so our tendency to convince ourselves of the permanence of the present era is understandable. But history didn’t end in 1991, and it didn’t end in 2008. For better or worse, this too shall pass.

Xi’s power grab means China is vulnerable to the whims of one man

Autocracy is a risky system, even in a country with a solid bureaucratic tradition

Martin Wolf

Sometimes an announcement succeeds in being both unsurprising and shocking. It had long been evident that China’s Xi Jinping would not — indeed, could not — step down from power. He has made too many enemies, particularly through his anti-corruption campaign, even if he wanted to go, which seems unlikely.

Yet the announcement that the two-term limit on the presidency is to go, is still shocking. What seemed likely is now a fact. Mr Xi has discarded the attempt by Deng Xiaoping to institutionalise checks on the power of China’s leaders — itself a reaction to the wild excesses of the era of Mao Zedong. What is re-emerging is strongman rule — a concentration of power in the hands of one man. It now looks a bit like “Putinism with Chinese characteristics”.

True, even before this decision, it had been possible for Mr Xi to retain his positions as head of the party and commander-in-chief, indefinitely. The term limits applied only to the intrinsically less powerful office of president. Yet if he had lost the presidency, while retaining his other positions, a scintilla of doubt might have emerged over who was in charge. Mr Xi disliked this or, as likely, thought he could not risk it. He seeks power unbridled and undivided.

How is this momentous step — the move towards placing one man in absolute control of a rising superpower for the indefinite future — justified? Interestingly, it is not. The authoritative People’s Daily states: “The amendment is a vital move, made from the long-term experience of the party and country, to improve the institutions and mechanisms by which the party and country exercise leadership.”

So why is this a vital move? Because the “implementation of the structure will be conducive to the authority and centralised leadership of the [Chinese Communist party’s] Central Committee, and the guidance to the country and society by the party”. Thus, the party controls the country and Mr Xi controls the party — and so everything else, indefinitely. That is good, because, well, it is good.

The move back from a collective leadership to autocracy negates the hopes of all those who believed a rapidly developing China would move towards democracy as, say, South Korea did in the 1980s. Yet China’s gross domestic product per head at purchasing power parity is already a little higher than was that of South Korea at that time. Today, the only rich autocracies are oil exporters. Singapore may be viewed as a “guided” democracy.

According to the International Monetary Fund, China’s GDP per head at PPP is now 84th in the world, nestled between those of Brazil and the Dominican Republic. But, if its economic rise were to continue, it would be a new kind of high-income giant.

Could Mr Xi’s growing power threaten that rise? Possibly. Autocracy exposes a country to the unchecked whims of one person. As years turn into decades, such concentrated power has too often turned sour, as the ruler grows increasingly detached from reality.

Mr Putin began as an economic reformer, but has now created a stagnant kleptocracy. Power tends to corrupt and absolute power corrupts absolutely. Chinese people have the experience of the Great Leap Forward and the cultural revolution to remind them of this great truth.

Nevertheless, experience and theory also show that it is possible for wise and far-sighted rulers, subject to minimal constraints on their power, to promote the development of their countries. Autocracy may work. But it is, at the least, a high-risk system, even in a country with a tradition of high quality bureaucracy, such as China. This is known as the “bad emperor” problem. Autocracy may be effective. But it may also lead to gross excesses.

This also ignores the moral qualities of democracy as a political system that recognises the dignity of individuals as citizens with a right to act in the public sphere as well as in a private capacity. Yet many Chinese people must now feel that democracy is in desperately bad shape. It is far harder to argue for the superiority of the democratic system, what ever its theoretical virtues, after the disasters of the past two decades — the Iraq war, the financial crisis, and the election of a man so palpably ill-suited to his position as Donald Trump.

Yet I for one still hold to Winston Churchill’s dictum that “no one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.” In the end, so long as a democracy remains democratic, with free and reasonably fair elections, the most ill-suited or timeworn leaders may be peacefully removed. That is invaluable.

This shift back towards indefinite one-man rule in China, within the framework of an all-pervading Communist party, means that we are, once again, in an era of competition of systems, between democratic and — strange though it may sound (and indeed is) — communist capitalism. One implication is that the western democracies have to regard China not just as a rising great power, but as a strategic competitor. It is essential for China to be a partner over such challenges as climate change, world trade or global security. Indeed, in many of these areas, the direction of Mr Trump’s America First US is more worrying.

Nevertheless, in dealing with such issues as foreign direct investment, technological transfer and the role of Chinese businesses, western leaders must be cautious. In all these areas, the decision of Chinese businesses are subject to strong guidance by the Communist party and the Chinese state. This cannot be ignored. To the democracies, autocratic China is a partner, but not a friend.

Yet the most important implication of China’s increasingly clear political direction is what it means for western democracy itself. Universal suffrage representative democracy is still a young system. It is subject to the ills of demagogy, plutocracy and, not least, short-sightedness. Democracy needs to improve its performance if it is to regain the prestige it has lost, not just in the eyes of the wider world, but in those of its own citizens.

This will require a closer look within, at how the core institutions of the state, politics and the media work in today’s democratic systems. It will take renewed examination of the web of attitudes and restraints that help make a system of peaceful political competition achieve desired outcomes for the people. This is no easy challenge. But it has, once again, become our great task.

China Confronts the Mundell-Fleming Trilemma

Yu Yongding

BEIJING – After years of intervening to manage the renminbi’s exchange rate, China’s central bank, the People’s Bank of China (PBOC), is under pressure to float the currency. But striking the right balance between loosening its grip on the exchange rate and maintaining monetary stability will not be easy.

All economics students learn the Mundell-Fleming model, according to which an economy cannot maintain a fixed exchange rate, free capital movement, and an independent monetary policy simultaneously. If a country with a fixed exchange rate and an open capital account tightens monetary policy, in order to contain inflation, the rise in domestic interest rates will give market participants an incentive to borrow foreign currencies and convert them into the domestic currency for investment in domestic assets.

The resulting capital inflows, if persistent, would generate upward pressure on the currency, forcing the central bank, in a bid to maintain exchange-rate stability, to intervene by selling domestic currency, especially for US dollars, until interest rates and the money supply have returned to their original levels.

But China has never been one to adhere to established models. The country has run a current-account surplus every year since 1993. Because the renminbi was appreciating very slowly, expectations in foreign-exchange markets were persistent. But, given China’s porous capital controls, short-term capital, aimed at exchange-rate arbitrage, continued to flow into the country.

If China had allowed the renminbi to appreciate, its external surplus would have disappeared.

But, fearing the impact a stronger currency would have on trade, the PBOC has spent more than a decade working actively to impede appreciation, by exchanging renminbi for dollars.

According to the textbook version of theMundell-Fleming model, the PBOC’s approach should have caused it to lose control of the money supply and the interest rate, resulting in runaway inflation. Yet China’s inflation rate remained moderate. Overall, the PBOC succeeded in maintaining an independent monetary policy, while preserving exchange-rate stability and partial capital-account openness.

China’s experience indicates that what the Mundell-Fleming model presents as a stark choice is actually more like a spectrum. A country can maintain control over its exchange rate, relatively free capital movement, and effective monetary policy simultaneously, but only to a certain extent.

The reason for this is that the Mundell-Fleming model fails to consider the role of sterilization policy. When a country with a leaky capital-control regime is running an international balance-of-payments surplus, maintaining a fixed exchange rate requires continuous expansion of the money supply. But sterilization policy can be used to mop up the excess liquidity created by intervention on the foreign-exchange market. And for more than a decade, China has been doing precisely that.

A key component of China’s sterilization policy has been the sale of central bank bills. Normally, a country will sell government bonds to the public to soak up excess liquidity. But the PBOC had sold all of its government bonds by 2003. So it sold its own securities to the public instead.

A less noticed, but perhaps more important, sterilization tool used by the PBOC was to increase reserve requirements. In 2010-2011, the PBOC increased the reserve requirement ratio (the percentage of deposits banks must hold at the PBOC) 11 times – from 16% to 21% – in order to curb inflation and prevent overheating.

But China’s sterilization policy carried high costs. Among the most obvious was the heavy burden placed on the Chinese economy from the accumulation of huge volumes of foreign-exchange reserves, which peaked at nearly $4 trillion in June 2014.

Moreover, while many Chinese economists view the absence of high inflation as evidence that China’s sterilization policies have mopped up all of the excess liquidity, major asset bubbles, including for urban housing, suggest otherwise. According to the Ministry of Housing and Construction, from 2004 to 2014, housing prices in a sampling of Chinese cities increased by 150%. Given this, China may still face a reckoning with insufficient sterilization.

It should be noted that China has been able to circumvent the Mundell-Fleming model only when the renminbi is subject to upward pressure. From 2015 to 2017, when the renminbi faced accelerating depreciation, the PBOC intervened to prevent a plunge – an effort that depleted China’s foreign-exchange reserves by a massive $1 trillion. That intervention – the largest that any central bank has ever undertaken – left the PBOC with little choice but to tighten capital controls substantially.

If China has to choose, an open capital account and effective monetary policy are more important than a fixed exchange rate – a reality that will become even more pronounced as time passes. The good news is that, for the last year or so, the PBOC has stopped intervening daily in the foreign-exchange market. Whatever challenges China faces, the PBOC must not lose its nerve. For the sake of China’s continued economic stability and progress, it needs to convince markets that it is committed to a floating exchange-rate regime. 

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. He has also served as a member of the Advisory Committee of National Planning of the Commission of National Development and Reform of the PRC.

This Powerful PC Runs on Any Device—and Never Needs an Upgrade

Someday you might not have lots of different computers: You might have a virtual one, and lots of ways to connect to it

By David Pierce

Why buy a PC when you can stream one over the internet to any connected device, like Netflix? WSJ's David Pierce tests out a powerhouse virtual PC from a French startup called Blade. Photo/Video: Emily Prapuolenis/The Wall Street Journal
Sometimes a game just clicks for me. Last week, when I bought “Call of Duty: WWII,” the latest in the epic series of shooter games, I found a gritty mess of a game unlike anything I’ve ever played. I couldn’t put it down.

So I didn’t. I played on my home computer, my work computer, my phone, an iPad, my 65-inch Android-powered Sony TV—even a crappy old Android tablet I found in the closet. On every device, all I had to do was log into the Shadow app, made by a French startup called Blade. As soon as I did, poof: I was right back on the beaches in Normandy. I could even pause the game on one device then immediately pick it up on another. 
How is that possible? Because the “computer” that was running my game is actually a virtual system, housed in a data center somewhere. Every time I log in, Blade spins up the processing and graphics power needed to run a gamer-grade Windows PC. Wherever I have a superfast connection to the internet, my machine is there for me. I can access it via any device with an internet connection and a screen—as long as I pay the subscription fee.

Operating in France for about a year, Blade is expanding to the U.S., and initially pitching itself to gamers, who it hopes will pay for the sort of performance Shadow offers. But this phenomenon isn’t just about gaming. 

A new computer called the Blade Shadow exists entirely in the cloud and can be accessed from any device, including phones and tablets. Photo: Emily Prapuolenis/The Wall Street Journal 

Someday soon, what Uber did for cars and Netflix did for TV will happen with computers. Rather than buy a PC, a phone, a desktop, a smart TV and an Xbox, you’ll just access those gadgets and features when you need them. They won’t need to be distinct, powerful devices with their own hefty allocations of processor and memory. Instead, you’ll have a single virtual computer with all your data and preferences. You’ll reach for a touch screen when you’re on the go, sit down to a larger one with keyboard and mouse when you’re at your desk. Maybe you’ll have a wall-size one, too.

Some people argue processors are so plentiful and cheap, there’s no reason not to put them in everything. And any access-anywhere supercomputer will require software that runs smoothly across a variety of screen sizes, and internet access that’s always fast and never absent. Based on my Shadow experience, none of those things are even close to true right now. But the glimpses I got of what it’ll look like when this all works? Those were tantalizing.

Plug and play

My virtual Shadow PC is a beast of a machine—the performance equivalent of a $2,000 gaming PC, which Blade says it will upgrade continuously as new chips come out. (That’s another advantage of a setup like this: no need to buy a new machine every two years.) I was able to stream games in 4K or at stupendously high frame rates, though Shadow can’t currently power VR rigs. At $50 a month ($35 if you commit to a year-long subscription), the math on Shadow looks good.
Blade wants you to treat your virtual machine like your own computer. The company says it won’t peek into your Shadow to see what you’re up to, or collect data about how you use it. One thing Blade does police? Mining cryptocurrency, which it can spot by the giant spikes in graphics-card usage.

You can use Shadow on as many devices as you want (one at a time) and download apps and games just as you would to a local machine. Photo: Emily Prapuolenis/The Wall Street Journal 

You can use Shadow on as many devices as you want—but only one at a time. Blade bundles a Windows 10 license with the subscription, and you can download apps and games just as you would to a local machine. You can’t stick something in the disk drive, though, because there is no disk drive.

The Shadow app works on Mac, Windows, and Android, with an iOS app coming soon. You can also buy Blade’s $140 Shadow Box, which is just a polygon full of ports for you to connect easily. Unnecessary, sure, but it’s a perfect replacement for your giant desktop tower at home.

There were times when the Shadow worked so well I forgot I was using a virtual computer. I played games on my Android phone that its processor simply couldn’t have handled. I edited videos and photos on my Microsoft Surface Laptop, and everything felt smoother than usual—though there was a slight mismatch between the Shadow’s resolution and the Surface’s screen. 
I don’t recommend buying into Shadow, though, because all too often things don’t run properly. In addition to countless crashes and lags, I had problems with everything from the Shadow’s audio feed to its touch input. On the worst day, my system simply wouldn’t turn on—and since I didn’t have a gadget to tinker with, all I could do was call customer support.

My Shadow experience improved over the two weeks I tested it. But one downside will never go away: If I didn’t have internet access, I didn’t have a computer. Crummy reception meant I couldn’t stream from Blade. We’re not read y to trust in ubiquitous high-speed connectivity.

The Blade Shadow can be used to play “Call of Duty: WWII” on your smartphone—just add an Xbox controller. Photo: Emily Prapuolenis/The Wall Street Journal   
It may sound appealing to have access to a full computer from your phone, but trying to navigate Windows from a tiny touch screen drove me batty. Blade’s working on a partial solution, an app that shows a tray of games and files you can tap to open. You’re still on your own for everything else.

Despite the speed bumps, this one-brain-many-screens future is coming. You likely already store your files in the cloud, so why not interact with them there? No matter where you log in, your Facebook and email are always the same. So it should be with your computer: the same experience, optimized for the screen you’re on.

Right now, this setup only makes sense in the home, where bandwidth is most consistent. But it will get most exciting when it works as well anywhere, as long as there’s a screen handy. Like, for instance, the next time I’m in a meeting with my editor and suddenly hear the Call of Duty.