5 Answers to Questions You May Have (Part 1)

IP Theft, 1950s American Nostalgia, World's Reserve Currency, Ethiopia escaping colonialism, South Africa living Standards

I plan to publish twice a week now. One of the articles will be a series where I answer common questions about America, finance, African countries, China, and economics. I'll be sharing insights similar to those I've shared with friends and in my previous comments:

#1: We all know how China steals intellectual from America. But has America stolen intellectual property?

We have all heard the stories like a Chinese Coca-Cola scientist stole $120M of trade secrets from firms like Akzo-Nobel, BASF, and Dow Chemical to her home country in China.

Interestingly, stealing played a role in America's industrialization too. In the late 18th century and early 19th century the Treasury Secretary Alexander Hamilton, endorsed stealing British inventions, reverse engineering them, and then make American versions. In 1791, the American government paid $48 ($1561 in 2023 money) to English industrialists to replicate inventions for the American market. A notable example of this was Francis Cabot Lowell, an industrialist from Massachusetts, who toured textile factories in England and Scotland, committing their designs and inner workings to memory. Lowell then used this knowledge to establish a textile manufacturing powerhouse in Massachusetts.

#2: Was the Golden Age of America really the 1950s?

Nostalgia tends to cloud our perspective, but America's unique advantages from the past can't be replicated. Democrats and Republicans often romanticize the 'golden era of American capitalism' from 1945 to 1970, marked by strong unions and wages that allowed single-income households to buy homes. However, this era wasn't as flawless as some portray it.

America's dominance during this period was partly due to the fact that its industrialized rivals, Western Europe and Japan, had their industries decimated during WWII. They didn't pose serious competition until the 1960s and didn't surpass America until the 1970s and 80s. A perfect example of this was that America produced 80% of all cars in the world in 1950. Japan and West Germany started eating out market share by the 1960s. As of 2021, China leads car production making nearly 40% of all cars.

Moreover, material well-being improved significantly during this time. During the 1960s, 60% of Americans owned one car, by 2020, 60% of Americans on two or three cars. In the 1950s, air conditioning, washing machines, microwaves, and dishwashers were luxuries, by 2011, these are all basic items for most Americans.

Additionally, median home sizes have increased by 33% since the 1960s.

US Census Bureau.

In summary, America enjoyed relative dominance when the industrialized world was recovering from WWII (U.K. & Japan), dealing with newly independent countries (Ghana & Malaysia), or facing isolationist communist nations (USSR , China, or Cuba) or weaker competitors (Brazil or Argentina). However, living standards have significantly improved, and people now have access to superior technologies compared to the 1950s.

#3: What does it mean to be “The World’s Global Reserve Currency?”

In essence, holding the title of the 'world's global reserve currency' means you're the largest borrower from the rest of the world. In international trade, a country can either export more than it imports (trade surplus) or import more than it exports (trade deficit). Since 1976, the United States has consistently run a trade deficit every year.

America’s trade deficits used to be billions, now its hundreds of billions.

When China exports goods to the United States, it receives payment in US dollars. The Chinese company then pays its workers in yuan, requiring it to exchange dollars for yuan at a bank. Subsequently, the bank exchanges the dollars for yuan with China's Central Bank, known as the People's Bank of China. This central bank uses its dollars to purchase U.S. treasuries, which are debt instruments. By acquiring U.S. treasury bonds, China effectively lends money to the United States, earning interest on these bonds until they mature. In short, America being “the world’s reserve currency” means that many central banks and financial institutions are holding American denominated debt more than any other debt.

Is this a problem for America? Not really, at least not yet. As long as America can pay back the debt it doesn’t matter. As of 2022, America’s GDP is $25.46Trillion, America’s federal government collected $4.9Trillion, and spent $6.3Trillion. Since the government spent more than it earned, America borrowed $1.4Trillion in 2022. In terms of net interest it paid to bond holders (the difference between the money spent on servicing debt and the income from bond investments), America spent $475Billion on net interest, representing nearly 10% of the government budget ($475 billion out of $4.9 trillion).

In terms of global reserves, the U.S. dollar's share has decreased from 71% to 59% as of 2022. This implies that financial institutions and central banks are diversifying their holdings beyond U.S. assets.

While it is true that nations are diversifying their reserve currencies, and as a result, the relative share of dollars is declining, nations are nonetheless are demanding larger volumes of dollars than ever before.

This means while the relative share of USD is falling, in terms of absolute volume, the US dollar is bought more than ever for global foreign exchange reserves. This is because in 1999, there was only around $2T dollars circulated on the foreign exchange market, and 71% of that was US dollars ($1.4T). Now we have $12T circulated and 59% of that is US dollars ($7.2T).

If America used to be 71% and shrunk to 59% isn’t that a bad thing? Not necessarily, most of the global diversification from the dollar has been done for the same reason why investment advisers diversify their assets from one asset class. Spread risk.

#4: How did Ethiopia Escape Colonialism?

In short, Ethiopia escaped European imperialism by becoming an imperialist project itself. Ethiopia back then was known as Abyssinia or the Solomonic Dynasty. Before the Berlin Conference of 1885, Europeans were slowly taking African territory. But not just Europe, also the Ottoman Turkish Empire. The Turks made Egypt a vassal state (that was basically autonomous) under the rule Muhammed Ali Pasha, an Albanian, and he had his own “Conquest of Africa”. Here was all the territory Muhammed Ali ruled.

Turkish Egypt's dominion stretched across modern-day Sudan, South Sudan, Eritrea, parts of Djibouti, parts of Somalia, the Harar region in modern Ethiopia, and more. Egypt wanted to conquer Africa to beat Europeans to the punch. In addition, Sudan temporally was independent, under Muhammad al-Mahdi, and tried to conquer Ethiopia.

Below, you'll discover how Ethiopia expanded from the Shewa region with autonomous vassals to its present-day borders. Emperor Tewodros II, after learning to manufacture firearms from European missionaries he captured, subdued city-states to centralize control and collect taxes. Following Tewodros II's defeat against the British, Tewodros committed suicide. Emperor Yohannes, hailing from Tigray in northern Ethiopia, took over and unified the country, expanded territory, and hired Western military officers to fend off Turkish Egypt and Mahdist Sudan.

Egypt’s imperialist campaign in North East Africa ended in the Battle of Gura, modern day Eritrea, where Egypt went bankrupt after losing to Ethiopia and Egypt sold the Suez Canal to Britian in 1875. This event left Egypt vulnerable to British conquest, and Ethiopia was free to expand territory throughout northeast Africa. The next Emperor Menelik was able to expand Ethiopia more and conquer the Muslim & Pagan states of the Oromo, the Kaffa Kingdom, Sidamo, Wolayta, the Ottomon Emirate of Harar, the Somalis in Ogaden and etc and attempted to convert them all to Christianity. See Ethiopia’s expansion below.

In 1895, Italy tried to take Ethiopia, but Ethiopia was able to smack Italy in the battle of Adowa, allowing Ethiopia to expand its empire and become the only African country to escape European colonialism. In short, modern Ethiopia is an empire inside a nation state. Ethiopia’s arrangement of being a multi-ethnic, former empire, inside a nation state has lead to many conflicts today.

#5: What Year Had Peak Incomes for the average South African?

There’s some people on Twitter who think peak South Africa was during the apartheid era. This is false. Now, South Africa does have energy issues, it’s income per capita has dropped since the commodity bust, and it’s income inequality is poor: top 10% make 65% of the income, worst on earth. But objectively speaking, income per capita was at its peak in 2011, which is well after apartheid.

The problem with South Africa is that is mainly a commodity exporter (although it does export billions of cars, trucks, and centrifuges a well). So when commodity prices decline, so does South Africa’s economy. In 2011, platinum, South Africa’s main export, was $1800 per troy ounce, now as of August 2023, platinum’s price is almost cut in half - $960 per troy ounce. Natural resources are not reliable sources of stable income.

I hope you enjoyed this series of Yaw’s Five Questions and Answers!