Contrary to models where capital should flow to high-growth developing countries, it moves from these nations to rich, 'investor-friendly' ones like the US and UK. These developed economies run trade deficits while developing ones become net lenders, an inversion of the expected global financial order.
The memory of events like the 1997 Asian financial crisis instills a deep-seated fear of running deficits. This trauma drives countries like South Korea and China to prioritize export surpluses for stability, even if it creates global imbalances and is suboptimal for the world economy.
Foreign institutions, particularly sovereign reserve managers, buy US debt not necessarily because of its yield but because no other market is large or liquid enough to absorb trillions in capital. This creates a captive market and keeps US borrowing costs artificially low.
Despite its large collective economy and stable legal systems, Europe hasn't created a rival to US Treasuries because its government bond market is fragmented by country. Post-crisis austerity also discourages the large-scale borrowing needed to create a deep, unified, and liquid safe asset.
The decline of a dominant global currency is extremely slow. The US economy surpassed the UK's in 1875, but the US dollar didn't fully replace the British pound as the world's primary reserve currency for nearly 100 years. This historical precedent suggests de-dollarization will be a gradual erosion, not a sudden collapse.
Contrary to standard economic models, where a country's currency appreciates as its exports become more competitive, China's trade-weighted exchange rate has remained low. This prevents Chinese workers from seeing their international purchasing power increase and is a major source of friction with trading partners.
The massive money printing after the 2008 financial crisis did not cause immediate consumer inflation because it was channeled into asset prices, like US stocks and Chinese real estate. This created a delayed side effect: soaring wealth inequality, which in turn fuels social and political extremism.
The conviction that property prices could never fall was reinforced by the government's actions. Local governments relied on land sales for revenue, and the central government used real estate to boost short-term GDP, creating a powerful incentive structure that convinced citizens the government would always prop up the market.
China's trade surplus exploded post-pandemic because its factory output rebounded quickly while domestic demand lagged due to the housing bust and other factors. This imbalance between production and consumption is a primary driver of current global trade friction.