All language subtitles for The Ascent of Money - 6of6 - Chimerica - Ch4 2009 DVDRip XviD AC3

ln our time, we've witnessed
the zenith of global finance.

ln 2006, the world's total economic
output was worth around $47 trillion -

that's 47 followed by 1 2 zeroes.

The total value of stock
and bond markets

was roughly $1 1 9 trillion -
more than twice the size.

And the amount outstanding
of the strange new financial life form

known as derivatives
was $47 3 trillion - ten times larger.

By the summer of 2007, it seemed as if
the Earth had turned into Planet Finance.

As never before,
the world was interconnected,

but not just by cabIes,
container ships and jet pIanes.

By 24/7 deaIing rooms
and internationaI investment banks.

ln this series, we've seen how
the markets for credit, bonds, stocks,

insurance and real estate all evolved
in Europe and North America.

Well, now it's time to tell the story

of how those financial innovations
conquered the world.

This is the story
of financial globalisation.

Globalisation is something
we take for granted today.

And yet for all the advantages
of an interconnected world,

perfectIy exempIified by Hong Kong's
astonishing humming container port,

there's a downside to gIobaIisation,
and that is its vuInerabiIity -

its vuInerabiIity to financiaI shocks,
because finance isn't an exact science,

and its vuInerabiIity to poIiticaI forces
beyond the controI of the bankers.

The ascent of money
has seldom been smooth.

Time and again, it's been punctuated
by big and painful crises.

Just ten years ago,
it seemed that these crises

were more likely to blow up
in emerging markets, like Asia.

Yet today, it's the West that's caught up
in a full-blown credit crunch,

while Asia seems
scarcely to have noticed.

lndeed, a new phenomenon
has come to define the world economy.

American borrowers have come
to rely on Chinese savers -

a symbiotic relationship between China
and America that l call ''Chimerica''.

But can we be sure
that Chimerica will save

this era of financial globalisation?

The chiIIing reaIity
is that a hundred years ago,

another age of financiaI gIobaIisation
ended not with a whimper, but with a bang.

And there's no reason why that
shouIdn't happen again in our time.

lt used to be said
that ''emerging markets''

were places where
they have emergencies.

lnvesting in faraway places
can make you rich,

but when things go wrong, it's often
been a fast track to financial ruin.

That's why many of today's apparently
unstoppable emerging markets

are really re-emerging markets.

These days, of course, the uItimate
re-emerging market is China.

To taIk to some peopIe,

there's simpIy no Iimit to the amount
of money to be made here.

And it's certainIy true
that over the past 20 years,

the mainIand has foIIowed the exampIe
set here in Hong Kong, and boomed.

And yet this isn't the first time that
foreign investors have piIed into China,

aiming to make megabucks from
the worId's most popuIous nation.

And the Iast time,

those foreign investors
Iost aImost as many shirts

as the IocaI taiIors here
can stitch together in a week.

The key problem with overseas
investment, then as now,

is that it's hard for an investor
in London or New York

to see what a foreign government
or company is up to

when they're an ocean or more apart.

lf the foreign borrower
decides to default on its debts,

what's an investor to do?

The answer before 1 91 4
was brutally simple but effective.

Get your government
to send in the navy.

By guaranteeing European
political control,

gunboat diplomacy provided
reassurance for British investors

even at the remotest extremities
of the world economy.

The Royal Navy provided the firepower

that underwrote the first age
of globalisation...

..and its pioneers,

like William Jardine...
and James Matheson.

Jardine and Matheson
were buccaneering Scots

who'd set up a trading company in the
southern Chinese port of Canton in 1 832.

Not to put too fine a point on it,

their most profitable line
of business was drug dealing.

They shipped opium produced
under British Government control in lndia

to China's population of addicts -

a trade that China's Emperor
had banned.

On March 1 0th, 1 839,
an imperial official named Lin Zexu

arrived in Canton under orders from
the Emperor to stamp out the trade.

He besieged the British
opium warehouses,

blocking any further imports.

20,000 chests of opium
valued at �2 million

were confiscated
and literally thrown in the sea.

Faced with catastrophic losses,
Jardine hurried to London

to lobby the British Government
to send a gunboat.

WeII, Jardine got his wish granted.

On August 23rd, 1840, British gunships
Ianded here on Hong Kong IsIand.

The Qing Empire
was about to feeI the fuII force

of history's
most successfuI narco-state.

As Jardine had predicted,

the Royal Navy made short work
of the Chinese defences.

With south-western China
under British control,

the opium trade was given free rein.

Drug addiction exploded.

Large tracts of the country
slid into rebellion and anarchy.

But for Jardine Matheson, with their head
office now established in Hong Kong,

the glory days of Victorian
globalisation had arrived.

By1 900, the firm had diversified into
more respectable lines of business.

lt had its own breweries,
its own cotton mills,

its own insurance company,

and its own railways, like the one
they built from Kowloon to Canton.

Back in 1913, an investor in London
had an extraordinary range

of foreign opportunities,

and nothing iIIustrates that better than
the Iedgers of N M RothschiId & Sons.

Just a singIe page from 1913

Iists no fewer than 20
different foreign securities,

incIuding bonds issues by ChiIe,
Egypt, Germany, Hungary, ItaIy,

not forgetting 1 1 different
raiIway companies,

incIuding four from Argentina,
two from Canada and, down here,

the good oId KowIoon to Canton
raiIway Iine.

For the first time in history,
the world economy was truly united

by a combination of low trade
and high finance.

Yet this first era
of financial globalisation

was to be brought to a violent halt by
the world's first truly global conflict.

On June 28th, 1 91 4,
the heir to the Austrian throne,

the Archduke Franz Ferdinand,

was assassinated
in the Bosnian capital, Sarajevo.

lnitially, financial markets
shrugged off the news

as just another bout of Balkan bloodshed.

ln reality, the assassination

had sparked off a chain reaction
in the world's financial markets.

As investors belatedly grasped the
likelihood of a full-scale European war,

liquidity - the ability to borrow
money or sell assets -

was sucked out of the world economy as if
the bottom had dropped out of a bath.

The resulting disruption
to international finance

shattered globalisation.

It's absoIuteIy fascinating to foIIow
the outbreak of the First WorId War

through the financiaI pages
of the London Times.

It wasn't untiI JuIy 22nd, 191 4,
that anybody appreciated

that the assassination of the
Archduke Franz Ferdinand in Sarajevo,

three weeks before, might have
some financiaI repercussions.

Just ten days Iater,
on August 1st, 191 4,

the Times had to report the cIosure
of the Stock Exchange,

and cIosed it remained
untiI January 4th, 1915.

Why were investors so seemingIy
obIivious to Armageddon

just days before
the outbreak of worId war?

WeII, the answer is that a combination
of financiaI innovation

and gIobaI integration had made
the worId seem reassuringIy safe.

The lights in financial markets
were flashing green, not red,

until the very eve of destruction.

There may be a lesson
here for our time, too.

Financial globalisation mark one
took a generation to engineer.

But it was blown apart
in a matter of days.

And it would take more than a generation
to repair the damage done

by the guns of August 1 91 4.

The First World War had put an end
to the first age of globalisation.

Until the late 1 960s,
international finance slumbered.

Some even considered it dead.

ln 1 944,
the soon-to-be-victorious Allies

gathered to devise a new financial
architecture for the world.

Trade wouId be free,

but capitaI movements wouId be
subject to tight reguIation.

When money did fIow
across nationaI borders,

it wouId go from government
to government.

This new financial order
was to have two guardian sisters,

established here in Washington DC -

the lnternational Monetary Fund

and the lnternational Bank for
Reconstruction and Development,

later known as the World Bank.

By the 1 97 0s, however, vast sums
of money were being accumulated

by the oil exporters of the Middle East.

With Western bankers desperate
to reinvest the money as loans,

the guardian sisters relaxed their grip.

Financial globalisation was reborn.

The region where the bankers
chose to lend the petrodollars

seemed to promise the best returns.

Not for the first time
in financial history,

it also posed the biggest risks.

ln seven years, Latin America
quadrupled its borrowings from foreigners

to more than $31 5 billion.

Then, in 1 982,

Mexico declared that it would
no longer be able to service its debt.

Soon, the entire continent teetered
on the verge of bankruptcy.

But the days had gone when investors
could confidently expect their governments

to send a gunboat to get their money back
when foreign borrowers misbehaved.

Now responsibility for such debt crises
fell on the lMF and the World Bank.

They didn't have gunboats.

But in return for new loans,

they could insist that
Latin American governments

adopt painful ''structural
adjustment programmes'' -

impose fiscal discipline.

To American economists, these
programmes all made perfect sense.

But not everyone agreed.

To the increasingly vocal
critics of global finance,

the two guardian sisters
of the post-war order

were being transformed
into economic hit men.

They were holding a financial gun to
the heads of Third World governments...

..propping up dictators and furthering
the interests of Yankee imperialism.

And woe betide those
who resisted the hit men.

Conspiracy theories flourished
in the anti-globalisation movement.

According to one popular theory,
two Latin American leaders -

Jaime Roldos of Ecuador
and Omar Torrijos of Panama -

were actually assassinated for resisting
the demands of American imperialism.

And yet there's something about
this story of a WorId Bank-IMF pIot

against Third WorId Ieaders
that doesn't quite add up.

After aII, it's not as if the
United States had Ient that much money

to Ecuador and Panama.

In the 1970s, they accounted for just
0.4% of totaI US grants and Ioans.

Nor were they particuIarIy big
customers for the United States.

Again, Iess than 0.4%
of totaI US exports.

Now, those just don't strike me
as figures worth kiIIing for.

To say the least,

the idea of lMF-sponsored
assassinations is a stretch.

Nevertheless, this new phase
in the story of globalisation

did see the emergence of a new and
more plausible kind of economic hit man,

armed with a financially
lethal weapon - the hedge fund.

The men who ran the hedge funds
were far more intimidating

precisely because they didn't even need
to threaten violence to get their way.

And their distinctive contribution
to globalisation was to speed it up.

Whereas the World Bank lends money
to countries for periods of years,

hedge funds are more likely
to put their money in for just weeks,

or even days.

The grandmaster of
the new economic hit men

was George Soros.

A Hungarian Jew by birth, but educated
in London and based in New York,

Soros brought to global finance
a brand-new theory of economic behaviour

that underlined
the fallibility of human nature

and the instability of financial markets.

Your actions wiII have
unintended consequences,

so the outcome wiII not correspond
to your expectations.

And that is the way
human affairs generaIIy work.

According to Soros's
Theory of Reflexivity,

financial markets can't
possibly be perfectly efficient,

much less rational,

for the simpIe reason

that prices are just the refIection
of the ignorance and the biases,

mostIy compIeteIy irrationaI,
of miIIions of investors.

In Soros's eyes, markets are bound
to go through cycIes of boom and bust,

as sureIy as the human temperament

is prone to bouts of euphoria
and despondency.

Soros's Quantum Fund had made
millions from short selling,

a type of dealing which
borrows stocks or currencies

and sells them for future delivery

on the calculation that
they'll go down in value.

His biggest coups came from
being right about losers, not winners.

And the greatest of these was among
the most momentous speculative hits

in all financial history.

On September 1 6th, 1 992,
with the British pound in big trouble,

l watched as Soros put out
a contract on the Bank of England.

I became convinced that specuIators
Iike Soros were bound to win

if it came to a straight showdown
with the British Government.

It was a matter of simpIe arithmetic -

a triIIion doIIars of currency traded
every day on foreign exchange markets

against the meagre hard currency
reserves of the UK Treasury.

At that time, the British pound
was tightly linked to the German mark

through the ERM -
the European Exchange Rate Mechanism.

As German interest rates rose

in the wake of that country's
hugely expensive reunification,

Britain's rates had to rise too,

hurting home-owners and businesses.

Soros calculated that the British
Chancellor, Norman Lamont,

would be forced to withdraw from
the ERM and devalue the pound.

lt was the biggest bet of Soros's life.

So sure was he that the pound
would drop that he bet $1 0 billion -

more than the entire
capital of his fund.

The risk-reward
was disproportionate.

And therefore it seemed
Iike a good specuIation,

or investment, if you Iike,
shorting the pound.

l was equally convinced that sterling
would have to be be devalued,

though all l had to bet
was my credibility.

That evening, I headed to the opera
to see Verdi's The Force Of Destiny.

It proved exceedingIy appropriate.

At the intervaI, they announced
that ChanceIIor Norman Lamont

had appeared in there,
in the Treasury courtyard,

to say that Britain
was withdrawing from the ERM.

How we aII cheered.

Today has been an extremeIy
difficuIt and turbuIent day.

Massive specuIative fIows
have continued to disrupt

the functioning of
the Exchange Rate Mechanism.

Soros made a billion dollars that day,

and that was only 40%
of his fund's annual profits.

(NiaII) Do you feeI...
or did you feeI a sense of triumph

when your prophecy came true
and the bet paid off hugeIy?

Of course. It was Iike when
you're betting and you win,

naturaIIy, you have that
satisfaction and aIso the profit.

COWS MOO

Soros owed his success
to a kind of gut instinct

about the way the ''electronic herd''
would move.

But even his instincts
are sometimes wrong.

So what if instinct couId somehow
be repIaced by mathematics?

What if you couId write
an aIgebraic formuIa

that guaranteed doubIe-digit returns?

WeII, on the other side
of the financiaI gaIaxy,

such a formuIa had just been devised.

As the new era of globalisation
increased trade and growth,

it also increased the world economy's
vulnerability to financial shocks

that could spread rapidly
to the four corners of the Earth.

But what if we inhabited another
completely different kind of planet?

A planet without all the complicating
frictions caused by subjective,

sometimes irrational human beings.

One where the inhabitants instantly
absorbed all new information

and used it to maximise profits,

where amid the turbulence
of everyday life

all was calm and predictable.

ln such a perfectly observed,
efficiently interconnected world,

an unpredicted catastrophic stock market
crash would be about as common

as an adult shorter than
one-and-a-half feet in our own world.

lt would happen only once
in four million years of trading.

This was the planet imagined

by some of the most brilliant
financial economists of modern times.

And this is what
their planet looked like.

ln 1 993, two mathematical geniuses
came to Greenwich, Connecticut,

with a big idea.

Stanford University's Myron Scholes

had invented a revolutionary new theory
of pricing things called ''options''.

He and Harvard's Robert Merton
were the original ''quants'' -

a new breed of speculators
using quantitative mathematics

to make money.

From this nondescript office they plotted
a global financial revolution.

Merton and SchoIes's idea was
based on the simpIe option contract.

Take the case of a stock
that's worth $100 today.

Now, suppose I think that stock's
going to be worth 200 in a year's time.

WouIdn't it be nice to have the option to
buy it at today's price in a year's time?

If I'm right, I make
a tidy profit of $100.

But if I'm wrong, weII, who cares?
It was onIy an option.

The onIy cost to me
is the price of the option itseIf.

The big question is,
what shouId that price be?

$5? $1 0?

The answer
was to be found in a magic formula.

''Quants'' sometimes refer
to this formula as a ''black box''.

Well, let's look inside the box.

The challenge Merton and Scholes
faced was how to price an option

to buy a particular stock
on a particular date in the future,

taking into account the unpredictable
movement of the price of the stock

in the intervening period.

Work that option price out accurately,
rather than just relying on guesswork,

and you truly deserve
the title ''rocket scientist''.

With wonderful mathematical wizardry,

the quants reduced the price
of the option to this formula.

FeeIing a IittIe bit baffIed? Finding
the aIgebra rather tricky to foIIow?

WeII, that was just fine by the quants.

In order to make money
from this kind of thing,

they needed markets to be fuII of peopIe
who had no idea how to price options.

ln its first two years,
Merton and Scholes's company,

Long Term Capital Management,
made megabucks by selling options

that were never exercised because
the buyers had guessed wrong

and Long Term had got it right.

They also made a killing by buying up
all kinds of different securities

that the rocket scientists
thought were mispriced.

Greenwich's luxury car dealers
had never had it so good.

Admittedly, to generate these
huge returns, Long Term had to borrow.

This additional ''leverage'',

or gearing, allowed them to bet
more than just their own money.

By August 1 997, the fund's capital
was just under $7 billion,

but the assets funded by borrowing
amounted to 1 26 billion.

You might have thought that a coupIe
of academics Iike Merton and SchoIes

wouId have been scared siIIy
by this enormous piIe of debt.

But not a bit of it. According to
their magicaI mathematicaI formuIa,

there wasn't the sIightest risk
in being so highIy geared.

Apart from anything eIse,
Long Term was pursuing muItipIe,

supposedIy uncorreIated trading
strategies, around a hundred in aII,

with over 7,600 different positions.

One of these might go wrong,
or possibIy even two.

But sureIy aII the bets they'd pIaced
couIdn't possibIy go wrong simuItaneousIy.

Long Term was trading
in markets all over the world.

But the firm's biggest business

was selling options on American
and European stock markets...

..options that would be cashed in

if there were big future stock price
movements, up or down.

At the time, the high prices
these options were fetching

implied that the markets
would become particularly volatile.

But Long Term
thought this was wrong.

According to their calculations,
market volatility would actually decline,

and that meant the chances of investors
exercising their options would be low too.

So Long Term piled the options
high and sold them cheap.

Sounds risky?

They estimated their risk of going bust
at one in ten to the power of 24.

ln other words, virtually zero.

lt was as if they really were
on another planet,

far from the mundane
ups and downs of terrestrial markets.

ln October 1 997,

as if to prove that Long Term
really was the ultimate Brains Trust,

Merton and Scholes were awarded
the Nobel Prize in economics.

APPLAUSE

It seemed as if inteIIect
had triumphed over intuition,

as if rocket science
had taken over from risk-taking.

Equipped with
their magicaI bIack box,

the partners in LTCM
seemed poised to make money

far beyond the wiIdest imaginings
of even George Soros.

And then, in the summer of 1998,

when every seIf-respecting
hedge fund manager

shouId have been pIaying with his yacht,

something happened that
threatened to bIow the Iid right off

the NobeI Prize-winners' bIack box.

ReaIity started to misbehave.

ln evolution, big extinctions
tend to be caused by outside shocks,

like an asteroid hitting the Earth.

On Monday August 1 7th, 1 998,

a giant asteroid smashed
into Planet Finance.

And - surprise, surprise - it struck
on the other side of the world

in an especially flaky emerging market.

Weakened by political upheaval,
declining oil revenues

and a botched privatisation, the ailing
Russian financial system collapsed.

A desperate Russian government
was driven to default on its debts,

fuelling the fires of volatility
throughout the world's financial system.

Stock markets plunged.

Remember all those low-cost
options Long Term had sold

based on their prediction
of low stock market volatility?

The ones they thought
no-one would ever exercise?

Well, now they did.

The quants had predicted
that Long Term was highly unlikely

to lose more than $35 million
in a single day.

On Friday August 21 st,
it lost $550 million -

1 5% of its entire capital.

Now that, according to the Long Term
risk models, was next to impossible.

The traders in Greenwich stared

slack-jawed and glassy-eyed
at their screens.

lt couldn't be happening.

But it was.

By the end of the month,
Long Term was down 45%.

The only chance of survival was to find
a financial white knight to rescue them.

And the most powerfuI knight in town
was none other than George Soros.

It was the uItimate humiIiation -

the quants from PIanet Finance
begging for a baiI-out

from the prophet of irrationaI,
unquantifiabIe refIexivity.

(NiaII) That must have been
a very tense meeting.

Do you remember the atmosphere
in the room, or am I...?

I remember he came for breakfast
and it wasn't at aII tense, because...

Of course, he was tense

but I wasn't because
I wasn't putting in the money.

There was to be no
white knight for Long Term.

I feIt that it was too dangerous
and that I didn't have enough capitaI

and, in fact, it reaIIy required
the coordinated actions

of aII the banks to baiI out LTCM.

And that's precisely what happened.

Fearful that Long Term's failure could
trigger a general financial meltdown,

the New York Federal Reserve hastily
brokered a multi-billion-dollar bail-out

by 1 4 Wall Street banks.

What on earth had happened?

Why was Soros so right and
the giant brains at Long Term so wrong?

For one thing, this wasn't
a coolly logical Planet Finance.

lt was still dear old Planet Earth,
inhabited by emotional human beings

with a stampede mentality.

There was, however, another
reason why Long Term failed.

Their risk models were working
with just five years' worth of data.

lf they'd gone back even 1 1 years,

they'd have captured
the 1 987 stock market crash.

And if they'd gone back 80 years,

they'd have captured
the last great Russian default

after the 1 91 7 revolution.

To put it bIuntIy,
the NobeI Prize-winners

had known pIenty of mathematics,
but not enough history.

They'd perfectIy grasped
the beautifuI theory of PIanet Finance,

but not the messy reaIity
of PIanet Earth.

And that, quite simpIy, is why
Long Term CapitaI Management

turned out to be Short Term
CapitaI Mismanagement.

The big question is whether such a crisis
couId repIay itseIf today, ten years on,

onIy this time invoIving
so many hedge funds,

and on such a Iarge scaIe,
that it simpIy couIdn't be baiIed out?

WeII, the answer to that question

Iies not on another pIanet,
but on the other side of this one.

To some, financial history is just
so much water under the bridge -

ancient history,
like the history of lmperial China.

Some young traders don't even
remember the 1997 / 98 Asian crisis.

In fact, if they came into
the markets after 2000,

they had seven bumper years.

Stock markets worIdwide boomed.

So too did bond markets.
So did commodity markets.

So did derivatives markets. In fact,
every kind of asset market boomed.

And so too did the markets
for those products that are in demand

when the bonuses are big, Iike
vintage Bordeaux and Iuxury yachts.

But these boom years
were also mystery years.

For markets soared at a time
of rising short-term interest rates,

glaring trade imbalances
and escalating political risk.

The key to this seeming paradox
lay here in China.

Chongqing, on the banks
of the mighty River Yangtze,

is deep in the heart
of the Middle Kingdom,

over a thousand miles from the coastal
enterprise zones most Westerners visit.

Yet this is the fastest-growing city
on the planet.

I've traveIIed aII over the worId
making this series,

and I must say, I have never
seen anything Iike this.

WeIcome to Chongqing,
the fastest growing city in the worId.

It's construction heaven.
If you Iook over through the fog,

you can just about make out one of
the 30 bridges they're currentIy buiIding,

and down there,
one of the ten Iight raiIways.

AII around me, there used to be
prime farmIand, untiI six months ago,

when they started constructing
IiteraIIy miIIions of square metres

of new office space.

The aim is to turn Chongqing into
the financiaI capitaI of western China.

WeII, if they keep this up, it'II soon be
the financiaI capitaI of the worId.

Thanks to growth like this, there are now
345,000 dollar millionaires in China

and over 1 00 billionaires.

Not only has China
left the colonial era far behind,

the fastest-growing economy
in the world has also managed

to avoid the kind of crisis

that has periodically blown up
in the other emerging markets.

One reason for China's
crisis-free ascent has been the fact

that most Chinese investment
hasn't been financed by foreigners,

but out of China's own savings.

There has been foreign investment,

but most of it has been
direct investment

in the form of things Iike factories

which you can't easiIy Iiquidate
and send home in a crisis.

Indeed, so enormous have China's
savings become in recent years

that they have enabIed gIobaIisation
to do the most aImighty U-turn.

PreviousIy, it was the rich
EngIish-speakers who Ient money

to the poor Asian periphery.

But now it's the Chinese who are
Iending money to rich Americans.

WeIcome to the strange new hybrid
country of China and America.

I caII it ''Chimerica''.

This extraordinary place
is the South Western Stock Exchange.

lt's where hundreds of Chongqing's
residents come to have lunch,

play ping pong and invest -

or is it gamble? -
their savings on the stock market.

This is what defines
the Chinese economy today.

lncreasingly, it's what defines
the world economy.

Chinese investors trying to work out
what to do with their abundant savings.

After years of instability,

Chinese households save
an unusually high proportion

of their rapidly rising incomes,

in marked contrast to Americans,
who these days save none at all.

So plentiful are Chinese savings
that for the first time in centuries,

the direction of capital flow
is not from West to East,

but from East to West.

And it is a mighty flow.

ln 2007, the United States
needed to borrow around $800 billion

from the rest of the world.

That's more than $4 billion
every working day.

China, by contrast,
ran a current account surplus

equivalent to more than
a quarter of the US deficit.

And a remarkably large
proportion of that surplus

has ended up being lent
to the United States.

ln effect, the People's Republic of China

has become banker
to the United States of America.

lt may seem a little bizarre.

The average American has an income
of around $44,000 a year,

whereas the average Chinese, despite
this country's 100-pIus biIIionaires

and aII the ostentatious signs of
new money here in centraI Chongqing,

is on around $2,000.

So why wouId the Iatter
want to Iend money to the former

who's roughIy 22 times richer?

WeII, here's how it works.

Until recently,
from China's point of view,

the best way of employing
its vast population

was through exporting manufactures
to the insatiably spendthrift US consumer.

To ensure that those exports
were irresistibly cheap,

China had to stop its currency
strengthening against the dollar

by buying literally billions
of dollars on world markets.

And, until recently, this seemed
to be to America's benefit too.

Here in America, the best way
to keep the good times roIIing

in recent years has been to import cheap
Chinese goods by the container-Ioad

and seII them in out-of-town
superstores, Iike this one.

For companies Iike WaI-Mart,
outsourcing to China

has been a way of reaping vast profits
from cheap Chinese Iabour.

In 2006 aIone,

WaI-Mart out-sourced no Iess than
$9 biIIion-worth of goods from China.

But at the same time,

by seIIing biIIions of doIIars of bonds
to the PeopIe's Bank of China,

the United States has been abIe
to enjoy much Iower interest rates

than wouId otherwise
have been the case.

It's what they caII at business schooI
a win-win situation.

This is the wonderful
dual country of ''Chimerica'',

accounting for 33%
of the world's economic output

and more than half of all global
growth in the past eight years.

Chimerica seemed like
a marriage made in heaven.

The East Chimericans did the saving.
The West Chimericans did the spending.

But there was a catch.

The more China was willing
to lend to the United States,

the more Americans
were willing to borrow.

Chimerica, in other words,

was the underlying cause
of the flood of new bank loans,

bond issues and derivative contracts
that swept Planet Finance after 2000.

That, in turn, was the underlying
reason why the US mortgage market

was so awash with cash in 2006

that sub-prime mortgages were
being sold to people with no income,

no job and no assets - Ninjas.

It wasn't as if the sub-prime mortgage
crisis of 2007 was hard to predict.

Months before it bIew up,
I was in Tennessee and in Michigan,

seeing for myseIf
how many poorer househoIds

were heading for mortgage defauIt
and forecIosure.

What was much harder to predict

was how a smaII tremor in America's
very own home-grown emerging market

wouId cause a financiaI earthquake
aII around the worId.

Not many people foresaw that
defaults on sub-prime mortgages

would send such a shockwave
around the world

that a British bank would suffer
the first run since 1 866

and end up being nationalised,

or that one of the greatest names
in American investment banking,

Lehman Brothers, would go bust.

And not many people saw

that as other banks started to write down
hundreds of billions of losses,

inter-bank lending
would simply seize up,

driving the US Treasury
to propose a $7 00 billion bail-out

for the financial system as a whole.

CertainIy, by June 2008.

an American recession
seemed more or Iess inevitabIe.

But the end of the worId?

Looking around
the streets of Hong Kong,

I don't see much sign
of a recession here.

Can it be that
the Chinese haIf of Chimerica

has successfuIIy decoupIed itseIf
from the American haIf?

The idea that China can somehow walk
away unscathed from the American crisis

is certainly seductive.

Despite declining exports
to the recession-hit West,

and a stock market crash,
booming domestic demand

seems set to keep China's economy
growing at at least 8% a year.

But remember, we've been here before.

A hundred years ago,

in the first age of globalisation,

many investors thought there was
similarly symbiotic relationship

between the world's
financial centre, Britain,

and Europe's most dynamic
industrial economy.

That economy was Germany's,

and the breakdown of that
relationship ended in war.

As before 1 91 4,

there's a fine line that separates
symbiosis from rivalry and conflict.

According to one estimate,
China's gross domestic product

could exceed that of
the United States as early as 2027.

By that time
some critics of free trade argue

that virtually nothing may remain
of American manufacturing industry.

And the worse things get
in the United States,

the louder such complaints will grow.

On a day Iike today, when the
Hong Kong stock market is down sharpIy,

it's tempting to ask whether
anything couId trigger

a comparabIe breakdown in gIobaIisation
Iike the one that happened in 191 4?

The obvious answer
is some kind of confIict

between the United States and China,
whether over trade, Taiwan, Tibet,

or some other unforeseeabIe
bone of contention.

What starts with competition
for Olympic medals

could end in a battle over dollars

if the Chinese one day decide to cut off
their credit line to the American empire.

Maybe, as its name suggests,

Chimerica is nothing more
than a chimera -

the mythical beast of ancient legend
that was part lion, part goat,

part dragon.

A Chinese-American conflict
may sound implausible,

but one of the key points of this series

is that the really big crises
come just seldom enough

to be beyond the living memory

of the people who run today's
companies, banks and funds.

Just because all the swans
you've ever seen are white

doesn't mean there are no black swans.

Today's financial world is the result
of four millennia of economic evolution.

Yet despite the unprecedented
complexity and diversity

of the modern financial system,

Planet Finance remains
as vulnerable as ever

to the age-old problem
of booms and busts,

irrational exuberance
and manic depression.

Maybe all this complexity has actually
increased our vulnerability to crisis.

For 4,000 years, from ancient
Mesopotamia to modern China,

the ascent of money has been one of
the key factors in human progress,

an extraordinary story of innovation,
intermediation and integration

that had done as much as anything

to heIp peopIe escape from the drudgery
of subsistence agricuIture.

And yet PIanet Finance
can never quite escape

from the gravitationaI force
of PIanet Earth,

because the quants can never take
fuII account of the human factor -

our tendency to underestimate
the probabiIity of bIack swans,

our propensity to veer from
euphoria to despondency,

our chronic inabiIity
to Iearn from history.

And that's why the course
of financiaI history -

Iike that most human of emotions,
Iove - never runs smooth, and never wiII,

not even here, on the magicaI and quite
possibIy mythicaI country of Chimerica.