Original subtitles

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.