What if China Ruled the World?

Weekly Commentary • May 29 2024
What if China Ruled the World?
David McAlvany Posted on May 29, 2024
  • China’s Document 9 erases the freedom we hold dear
  • Can the Western freedom model Coexist with a Coercive Eastern World Order?
  • We have entered a New Economic Cold War

“Paul Tucker suggests that the current discord between West and East will extend for decades to come. This is potentially civilizational, far beyond the flashpoints of conflict we might see with Taiwan, certainly not limited by the Chinese cartographers’ nine-dash line. There is a civilizational conflict afoot, and China, as a rising power, or maybe even if you want to go back to their history, a returning power, objects to the way things are done.” — David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany.

Last week’s program, Dave, was really interesting as we talked to Kamran Bokhari. We see the different chess pieces around the globe maneuvering. Sometimes they have to coexist in symbiotic relationship, sometimes they come against each other. And I know the two of us have been reading a book called Global Discord, with Paul Tucker being the author, he’s a return guest for us. But the conversation continues, it really is a chessboard with life and death consequences, isn’t it?

David: It is. And we can look at things from a very short-term perspective or a longer-term perspective. And in the short term we have the gyrations within the markets to consider, and even events which may seem to sort of blot out the sun in terms of their importance in the immediate. For instance, the Chinese economy needs to stabilize. It is in a bad place. And you might think to yourself, “Yes, and it’s the end of their story. Their ascendancy is now stalling, and just like Japan reached its peak by 1989, and then went nowhere quickly for 30 to 40 years, so, too, the Chinese story is something that’s fading.” And Tucker would say, “Not so.” Next week we’re joined by Paul Tucker, his first book, Unelected Power was featured in Foreign Affairs magazine, caught my attention for its admonition to central bankers to solve problems that central bankers can solve, but no more.

And so in an age of overreach, he made the point that the administrative state needs to stay within healthy boundaries or else find itself cast off and taken out, if you will, to some degree. So Paul spent many years at the Bank of England, and from 2009 to 2013 was its Deputy Governor. Larry Summers said, “There are many central bankers who know a lot about monetary policy, and dynamic stochastic general equilibrium, but there are few with Paul’s breadth of knowledge of philosophy, literature, culture, history, and so much else.” Among other duties, Paul is now a research fellow at Harvard’s Kennedy School.

Kevin: There really is nothing new under the sun, and it’s nice to see someone like Paul Tucker. He’s a historian, like you said, of philosophy. David, it reminds me of a three-thought phrase that a friend of your dad’s used to say. He said, “Politics is economics applied to religion. Economics is politics applied to religion.” But if you take religion out of that and just say ideology, ideology is critical, and politics and economics are tied directly to it. When you were at Oxford, there was a program there that actually incorporated those three.

David: Politics, philosophy, and economics. The classic PPE degree designed for those who would help run the world from a British perspective. So maybe that’s an old world and not the new world, but an even newer world is one that has a preview set out in what China calls Document Nine, published in 2013. And a very interesting look at what Xi Jinping and what the Chinese Communist Party would like to see happen. And Tucker brings this out, highlighting the fact that very few people today have even heard of Document Nine, so of course wouldn’t recognize how important it is for the steps that are being taken today. The things that are being said yes to, and the things that are being said no to.

Kevin: As China rises in power, we haven’t really had to think too much about their ideology because they economically and militarily were not powerful enough to exert hegemony worldwide. But now, you said this came out in 2013, we’re now in 2024. Let me just read from page 222 of Tucker’s book what Document Nine actually says, and let’s see if we relate to that here in this Western world of democracy.

“Document Nine basically has seven nos, as they’ve become known, no to promoting constitutional democracy,” this is in the document, “No to universal values, no to civil society, which is individual rights, challenging the party’s social foundation and leadership of the masses. No, to neoliberalism, which is total marketization. The western idea of journalism via freedom of the press, no to that, contrary to party discipline. Historical nihilism against the history of the party, that’s no,” that’s a no-no. “And the new China, no to any questioning of the socialist nature of socialism with Chinese characteristics.” This is very powerful since Document Nine is their marching orders.

David: And one of the things that Tucker does is this constant interplay between the ancient, the modern, and the current events that are happening today, bringing them and tying them together. I agree with Summers, there are few economists that can flow from philosophy to literature to history with the command of each as Paul does. I got some sense of that in his first book. But in Global Discord: Values and Power in a Fractured World Order, I felt like I needed to return to the library and hit refresh on Hobbes and Kant and David Hume in particular.

Don’t let that scare you. In fact, what you’ll find next week is that so many issues are recurring through time. The questions and challenges of one age are frequently revisited by another, and are pieced together like a conversation extending through time on the most important topics and concerns. There are occasionally dominant voices in the conversation, but the exchange of ideas is unending.

Coming back to those seven nos, one of Tucker’s reflections is that this is not unsimilar to what Pope Pius IX had put in his day, and even under Bismarck, what we saw in the 1860s and 1870s. So this idea that you need to define the social discourse and delimit what is allowable and not allowable, well, this is just one more iteration of what the future looks like if the Chinese have their way.

Kevin: Yeah, you have these repeating themes, but they still go back to that saying that your father’s friend had, which is politics is economics applied to, in this case, religion, philosophy, ideology, you name it. But whether it’s a pope or whether it’s a communist system, when you apply those economics and politics to that, there are consequences for those who don’t play ball.

David: Paul’s an economist, but I would say, with a caveat. Political economy, which is probably the better description of his field, it encompasses public policy and the impact of policy orientation on both the economy and the political system. So political economy, for me it retains the best elements of what the study of economics was through the 18th and 19th centuries.

And as you fast-forward to the modern era, it’s really in the 20th century that you had economists compelled to compete for legitimacy with the math department in a university or college. History, literature, and philosophy are, as Summers suggested, under the thumb of things like the DSGE [dynamic stochastic general equilibrium] modeling, now a popular tool in economics departments.

And it seems there are stark divergences between the theoretical models of the economist in the real world, which, this is kind of where the jokes come from. It explains the divergence between prediction and outcome, and the jokes that sort of ease the tension between the economists’ stature in the academy and what we scratch our heads with in terms of the predictive abilities. Can they actually call anything as they look ahead?

Now, models are an attempt to rationally explain—in this case rationally explain human behavior. And sometimes humans are less than rational. And so models miss us and certainly we at times fail to fit the mold made for us.

Kevin: But there is a mindset of actually controlling the model to predict the outcomes for you. I have taken for granted, to a degree, we’re coming out of Memorial Day Weekend where we have fought for freedom so that people can do what they will within the law, versus systems that say, “You will do what we will, and we are the law.” There’s a big difference between coercion and freedom, isn’t there?

David: Yeah, and I think that’s one of the things that I found repugnant about Richard Bookstaber’s ideas in The End of Theory. If you go back to that speculative venture which he introduced us to, there was in his view a point of departure from economic models and trying to come up with a theory that explains human behavior, a theoretical explanation of patterns and choices. And again, from his book, The End of Theory, an opportunity to direct the path, to channel the energy and bring the power of data, big data, to bear on the predictable or probabilistic nature of people, to better channel the choices that we make for an optimized outcome. And I say it’s repugnant because to me it is a top-down controlled ideal as opposed to something that is perhaps more bottom-up or grassroots.

So in his view, you don’t need a theory of human behavior if you can gate and channel energy where you believe it should optimally flow. And that is probably more similar to what the Chinese have in mind. Bookstaber was a professional risk manager. He was a policy contributor. He actually helped design the Dodd-Frank document. I don’t know. Is that 1,200 pages? I forget how long it was. And he’d like to solve the problem of market chaos, which is understandable, but he’s doing that, or wanting to do that, from a top-down version. I have many objections to that approach, but it’s always worth considering how others understand the world and seek to solve problems within it.

Tucker, of course, is doing something quite different. He implores us to hold on to the distinctive way of political life that characterizes the constitutional democracies in which some of us are lucky to live. And I think that’s what you’re referencing in terms of Memorial Day. Actually, there’s a lot that we should be grateful for and recognize as of incredible value. And that’s in distinction to a culture which is telling us we should be embarrassed by our past, and these ideas—the ideas of “old dead white men”—should be discarded because they are so embarrassing. Again, hold on to the distinctive way of political life that characterizes the constitutional democracies in which some of us are lucky to live, that’s a part of the core of Tucker’s book, Global Discord.

Kevin: Well, and you look at the last two world wars, and it was a battle of ideology. We had the pound sterling as the standard, but it was gold-backed. And we also had the U.S. dollar under the Bretton Woods system, gold-backed. That was a promise we made during Bretton Woods to keep people free. We’re talking about, do what you will within the law because you have the power to do so. Balance of payments was important. Instead of living in debt and being able to print money, people had to settle in gold. And the United States made a commitment to the rest of the world after World War II that we would try to protect economic freedom by adhering to a gold standard. Of course, we broke those promises, Dave. So in a way, we are shifting into a new gear.

David: Yeah, broke the promises in ’33, maybe even before that, with the pound sterling and the U.S. dollar leaving the gold standard for the gold exchange standard, 1922 after the Conference of Genoa.

Let’s start this way. There are many in the world today who object to the rules-based international order that’s taken shape after World War Two. The biggest challenge is potentially civilizational. That’s potentially the biggest danger, is the conflict becomes not a small tit-for-tat between one country and another, but it really becomes a dividing line, a civilizational dividing line. There are other approaches taken throughout the ages, and that’s what we’re confronting today, one of them with China. You could argue that others have reluctantly moved to the current situation we have today.

The British objected to being dethroned from a more prominent position in the 19th century as the conflicts of the 20th century changed.Who kept the sea lanes open, who governed the global flows of capital, and who ultimately was responsible for the world’s reserve currency?

You could argue that continental Europe, if you go back and look at France and Germany, but even a longer list too, might have had a different vision of the future from the vantage point of the late 19th and early 20th centuries. But most important to Tucker’s analysis is the growing discord between the U.S. and China, with radically different assumptions about how society should be organized, about the value of the individual, and to whom the benefits should accrue in terms of that organizational structure, the framework for both domestic and international power.

This is where we’ll spend most of our time next week with Tucker. You’ve got Confucianism’s priorities in the East, which are very different than a view of the world in which the West, again, borrowing from a totally different theoretical construct altogether. Tucker provides an explanation of where we’ve come from, argues for the importance of appreciating and maintaining the course set by earlier thinkers. So he’s cataloging who we’ve borrowed ideas from. He critiques Hobbs. He critiques Kant. He leans heavily on a blended perspective from David Hume and a more contemporary philosopher, Bernard Williams.

Kevin: I think about these ideological differences. Xi of China, he knows that he would like to see expansion of China’s power and that’s what he’s working toward. But this is a quote directly from him. He says, “The party cannot be subject to the law.” And when he’s talking about the party, of course, he’s talking about what runs the communist agenda. So when we look at those seven nos that we talked about, what we’re really being told is no to individual rights and freedoms. The many for the one instead of the one for the many, or vice versa. The collective basically is the overall ruler. And it reminds me of what Bookstaber said for economics, which is top-down management always leads to tyranny and terror.

David: I think back to the quote, the early part of chapter nine in Tucker’s book, this is thousands of years old, a Chinese quote. “There are people who create order. There are no rules that create order.” And again, it’s just this difference between the rule of law, which is what we’ve championed here in the West, versus the rule by law, where you’ve got people, again, from a top down perspective creating order and organizational structure, and so, such a different perspective in terms of a worldview or a social construct.

So to predict the conflicts of the 21st century, maybe even if we could avoid them, we would do well to understand the ideological differences between competing world powers today, looking back to the analogs from the ancient world up through the more modern 17th to 19th century examples. He leans pretty heavily on Britain and France, and maintaining a conflict of interest for several centuries.

Tucker suggests that the current discord between West and East will extend for decades to come. This is, again, potentially civilizational far beyond the flashpoint of conflict we might see with Taiwan. Certainly, not limited by the Chinese cartographers’ nine-dash line. There is a civilizational conflict afoot, and China as a rising power, or maybe even if you want to go back to their history, a returning power, objects to the way things are done.

Not all cultures are influenced by Confucianism in the East and to the same degree. And so you look at South Korea, you look at Japan, they certainly have embraced constitutional democracy, have embraced the market economy. I think actually you could look at the seven nos from Document Nine, and you can see a lot of Asia is more in alignment with who we are today than who China wants to be tomorrow.

But there is discontent, discontent with the status quo. You can see that with that acronym, the BRICS [Brazil, Russia, India, China, South Africa], a growing anti-dollar block. And we often talk about dollar stability. We often talk about the reserve status that has held sway following Bretton Woods. Kevin, not everybody likes it, and there’s a variety of reasons for that. But only one country, China, offers a different path altogether. We mentioned this a few weeks ago as a critical takeaway. Again, the contrast of the rule of law versus the rule by law, the Western tradition has a focus on the of law, China on the by law.

So where do our political values come from? What ideas should shape our institutional frameworks? What makes for legitimacy? How are security and stability maintained? These are a lot of the things that Tucker gets into.

Kevin: Well, and with his knowledge of central banking and his knowledge of economics, trade cooperation seems to be critical to things not boiling down to just outright war.

David: Yeah. We talked with Harold James many times about the importance of trade and cooperation, and what he has speculated was the end of globalization. Tucker implores us to hold tight to a set of ideas which promotes freedom and provides the conditions for cooperation. Even as we struggle with these ideological differences. Does this have to be a conflict between civilizations? Not necessarily, but it can go that way, with conflict lasting for a very long time.

Kevin: Well, on Friday night, we went out to dinner with some friends who had just gotten back from Europe, and they had visited Patton’s grave. We were talking about Patton because he was killed, well, or he died not long after the war. It depends on how you read that history, but Patton actually—

David: You mean his brakes weren’t working and, well-

Kevin: —yeah—

David: —never mind.

Kevin: He survived an entire war under enemy fire and then somehow, some way, he died in a jeep accident. Part of the reason, I think, was there was this question of, do you cooperate with what he thought was the new enemy? He said the tanks were pointed the right direction when they got to Berlin. He said, “Let’s just keep them pointed east because our next enemy is Russia.”

I personally think somebody didn’t like that answer, and so somehow, some way, he was taken out. I may be wrong, but if Patton was allowed to continue east, it would have been different. It would have been trying to overpower what he knew was the next Cold War enemy.

At this point, we have this question, Dave. We’ve got China on the rise, our tanks pointed the right direction, and do we fight? Or actually, do we try to cooperate and see what happens as long as we don’t lose control? Well, I certainly wouldn’t want to live under Document Nine.

David: Yeah, I mean, geoeconomics, geopolitics in what we’ve described—or borrowed from Juan Zarate in Treasury’s War, the book that he wrote a few years ago—these are things that suggest that we’re edging closer to a new Cold War with China.

Russia and Ukraine, they provide an early proxy conflict, and if you look at China’s belt road strategy, the OBOR, One Belt One Road, it represents a new framework for trade and cooperation, very distinct from the U.S. and European organizational structure, the IMF, the World Bank, NATO, the host of other organizational non-government entities, which are the Chinese impediments to their version of safety and security.

They don’t like what we have. They don’t think that what we have is legitimate. Again, what they’re offering is a different framework. We had the pound sterling, which was the linchpin for Globalization 1.0. We had the U.S. dollar, linchpin for Globalization 2.0. Pax Britannia becomes Pax Americana.

Did the global financial crisis represent a turning point in how the world views our current system of organization? That, I think, is what the Chinese are leaning into.

When we say a new Cold War with China, when we suggest that Russia and Ukraine are sort of a proxy conflict for a conflict between the U.S. and China, this gets very interesting, very interesting indeed because something did shift following the global financial crisis, and the losses were more than financial and economic coming out of the global financial crisis. We had, in response to that, the absolutist authoritarianism on display in China, and they said to the world, “We’ve got a better way of doing things. Look at how quickly we recover versus countries in Europe and the U.S. We have a better means, a better track towards security. We know how to create security and eliminate risk.”

Kevin: This is where the book that Tucker wrote is so important, Global Discord, because what he says is, “Let’s look at the options. Where do we go from here? If you have two competing ideologies that really don’t resemble each other at all, how do we actually live in peace or actually make this work?”

David: Yeah, and there’s four plausible scenarios that he lays out, sort of the lingering status quo, a superpower struggle as a second alternative, a new Cold War, which is just one of the four alternatives, or a reshaped world order.

In any of these scenarios, you find that international relations are central. What he’s doing is providing a background for understanding the philosophical underpinnings of the existing structure. The world is today very Eurocentric from the standpoint of ideology and theoretical influence, and America plays a dominant role in maintaining security and stability, and we sort of designed and maintain the architecture. It may not always be that way. China is a rising power with great power ambitions, and a system redesign is exactly what Xi Jinping would like to see.

Kevin: When I came to work for your family, Dave, Ronald Reagan was still president. We, at that time in 1987 when I came, were a nation that had $3 trillion in debt. Just a few years before that, by 1981-’82, we only had a trillion. I say only a trillion, but we had a trillion in debt, and it took from George Washington to Jimmy Carter to get there. Then, we went to three under Reagan, and now we’re what, 34, 35? I mean, there is a point where debt— Dave, I go back to your racing, When you would race, Iron Man, there’s something about reserves.

Remember the analogy of having a matchbook with 24 matches, and you want to be careful throughout that long, long race how you burn those matches because reserves are the only thing that gets you across the finish line.

Now, I’m thinking about the global economic crisis that we had back in 2008. We still had some reserves. I think we’re sort of at the end of the matchbook right now. With what we’re talking about, can we afford to be as far in debt as we are if we were to go into another crisis?

David: Well, that’s what makes, I think, this book so important, is we’re looking at a conflict which is taking place in a very unique context. We are not in the strongest position we’ve been in in a hundred years. In fact, you could argue perhaps we’re in the weakest position from a financial standpoint. We cannot afford another global financial crisis.

The stakes are extraordinarily high—should we encounter a bond market crisis, for instance, here in the U.S., or a U.S. currency crisis. You already have growing disaffection for the U.S. and the U.S.-led security framework, the U.S. dollar. You’re met with a further catalyst for negative PR.

What you’re talking about is solidifying an anti-dollar bloc, which could be prelude to conflict as we try to maintain by force what a growing bloc of countries would like to abandon or move away from. I think at this point it’s not merely a matter of cleaning up after a financial market mess has been made. These outcomes are potentially destabilizing, not just to the U.S., but to the global calm or order that we’ve had following World War II. Domestic mistakes now have international implications.

Kevin: Yeah, we talked about repeating themes. There is a reality to history that repeats over and over and over. It may wear different clothes, but like you were saying, the same philosophical questions, economic questions, and political questions just continue to come up each time. There’s a reference that Paul Tucker makes about the Thucydides Trap, and the Thucydides Trap actually had to do going all the way back to the Peloponnesian Wars between Greece and Sparta. He ties that into where we are right now, mainly with China.

David: That’s right, so the Spartans were afraid of Athens and Athenian power, and so the idea there being that the conflict was inevitable because you had a rising power, and so you had to strike first, you had to do something. And the analogy is made to China and the United States.

Graham Allison, I think he’s also at Harvard, but he wrote a book on the Thucydides Trap just a few years ago. And it was only a little over two decades ago, 2001, China was a new entrant into the World Trade Organization. Economically, they were part way to the current economic stature. So again, reforms opened in ’76. Then they’re invited to the WTO and fast tracked towards economic success. So, from emerging economy to rising superpower, now with ambitions to redesign the system we take for granted. This is not guesswork, it’s not conspiracy theory. And I don’t think it’s fearmongering or that deterministic fixation with the Thucydides Trap. It comes back to Document Nine. It reflects Document Nine.

Beijing’s central committee published Document Nine in 2013. We can think of it as the agenda. It’s a mandate for change. 70% of it is a requirement to drop any reference to the values and institutions associated with liberal democracy. It’s a rough framework for a new approach to governance and growth, ultimately global governance, apart from anything we’ve seen in modern times.

Kevin: So, this goes back to economics being politics applied to religion or ideology. Economics can actually be instruments of war.

David: Yeah. Chapter four highlights this, geoeconomics within geopolitics. And that chapter opens with this quote, the definition of geoeconomics, “The use of economic instruments to promote and defend national interests, to produce beneficial geopolitical results and the effects of other nations’ economic actions on a country’s geopolitical goals.” That’s a quote from Robert Blackwill and Jennifer Harris’s book, War by Other Means. Whether it’s War by Other Means by Blackwill and Harris, or Treasury’s War by Juan Zarate, you’re talking about books that illuminate the current conflict, competitive foreign policy.

But again, it’s economic means, as Paul Tucker describes it. In one sense, we are already at war. Call it an economic conflict, call it a new cold war. The rivalry in the competition is real. We’ve described the central bank buying of gold as a means of creating a sanctions-proof reserve base. And we’ve seen the Chinese consume a huge amount of gold in recent years, and that continues unabated. We’ve talked about how, since 2022 when the US Treasury took Russian reserves, all of a sudden the global central bank community had a little bit more pep in their step for acquiring gold. That trend continues as a response to the use of geoeconomic strategy, and it’s in defense of national interests.

Kevin: The watching of the flow of gold is something that I learned early on, back in 1989 as we were getting ready for a Persian Gulf War. We didn’t really know until August of ’89 that that was going to happen. But early in ’89, I remember in the Spring of ’89, three times the gold market was hit where the resistance level was about $30 higher than the support level. We would come in on a Monday morning, Dave, and we would see that gold had fallen $30, which was close to a 10% drop at that time. And back then you could call the trading floor. You could call and talk to people who were actually involved in trading. We said, “What happened?” Come in on a Monday morning, gold’s down almost 10%.

And actually what was happening was something called a bear raid. And the Saudis, who knew beforehand that Saddam Hussein was going to invade Kuwait, they were preparing by investing in gold. And the way they actually gave themselves a little bit of a discount was they would sell a couple of million ounces into the market early on in light trading, knock it down, and then accumulate over the next few weeks, at 10% discount, a lot more gold. And we saw that happen. It was two or three times in the Spring of 1989. I’ll never forget because I didn’t know that we would be at war that next year with Iraq.

David: Not since the end of World War II have we had more in flux or more at stake. And so, I look forward to turning for further insights to Paul Tucker and Global Discord: Values and Power in a Fractured World Order. You mentioned gold’s appeal, and I can’t help but recall a quote from my dad. It’s the golden rule—and not the do unto others as you would have them do to you, but the alternative version, which is, “He who owns the gold makes the rules.”

And so, for some analysts and commentators, gold trading to all time highs reflects monetary and fiscal credibility being called into question. I think one of the things that this book does is, it allows us to see in an even broader context the uncertainties, which I think do include the fiscal and monetary, but they reach further out to the geopolitical, the geoeconomic. And maybe even further back, to the foundational and philosophical underpinnings of the world we live in. So, to see the price of gold move today, you might ask, is it signal or is it noise? And we would surmise that it is a very important signal.

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Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at mcalvany.com, and you can call us at (800) 525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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