In China, private sector money is considered a public utility. In the United States, finance is an industry. This single distinction explains more about the divergent trajectories of both economies than any amount of GDP comparison. When finance is a utility, capital serves production. When finance is an industry, production serves capital.
Simple Picture
Imagine two restaurants. In one, the kitchen runs the building — the dining room exists to serve the food. In the other, the dining room runs the building — the kitchen exists to provide a reason for people to sit in the dining room. Same structure, opposite causation. Finance-as-utility is the kitchen-first restaurant: money exists to fund the making of things. Finance-as-industry is the dining-room-first restaurant: making things exists to justify the movement of money. The US is increasingly the second kind.
Money Is Spent Into Existence
Money is spent into existence by the state and taxed out of existence. This is the fundamental circuit. Soldiers paid in state-issued money distributed it among the conquered — the original stimulus program. The government’s deficit is the public’s asset — the amount of money remaining that was not taxed back. When this pool grows too fast, inflation. When it shrinks, the private sector’s ability to spend is constrained.
During WWII, the government spent massively but controlled inflation by selling war bonds — effectively burying money into the future, taking it out of present circulation. This is the Dalio mechanism in reverse: instead of pulling future spending into the present, the government pushed present money into the future to prevent overheating.
Taxes are necessary for two reasons. First, to prevent inflation — new government spending competes with existing money for goods, and taxes remove excess money that would otherwise bid up prices. Taxes “sharpen” the government’s ability to spend by clearing space for new spending. Second, to prevent the wealthy from accumulating enough gravity to shape the world against government policy. Capital accumulation without taxation produces a private sector powerful enough to override democratic governance — which is exactly what happened with the dollar hegemony system.
The Private Money Machine
When the private sector does not have enough money, it creates it through loans. Most of the money driving the economy is private-sector credit, not government-issued currency. Unregulated money-creators also spring into existence: buy-now-pay-later, credit cards, fintech apps — all create IOUs that push economic activity without government authorization.
The “boss” in any monetary system is whoever knows where the money is. Shadow banks use monetized IOU streams to compete with government fiat. They create credit, securitize it (converting debts into income streams for investors), and build a parallel financial system outside regulatory control. Ant Financial’s IPO would have threatened China’s monetary sovereignty because it could create enormous amounts of money outside government control. Its primary income was high-interest pawn-brokering — lending to people who could not get bank credit, at rates that would make a payday lender blush.
China shut it down. The Chinese model treats this as a feature: tightening conditions force capitalists to start making things instead of expanding by deploying capital. Companies had to be profitable and pay from the profit stream rather than rely on constant new funding. This spurred capital flight to assets outside the system — gold, bitcoin, real estate — because capital that cannot generate financial returns seeks any available exit.
The American Inversion
In the US, finance is not a utility but an industry — and during 2020, it diverted the entire stimulus to itself and then crushed the productive economy through rent-seeking. The two-economies split: the financial economy inflated while the real economy stagnated, because the stimulus flowed through financial channels that kept the money in asset markets rather than directing it to goods and services.
Financial companies rely on investors instead of profits from happy customers to stay afloat. Uber and Lyft exist only because Saudi royals have enough private-sector money to warp reality — subsidizing rides below cost to destroy the taxi industry and establish a monopoly. The restaurant sector is being laid waste even as the platform companies themselves lose money. These companies exist not to serve customers but to serve the capital deployment needs of their investors.
This is the cash flow game turned predatory: burn money now to engrave behavioral patterns into society, then harvest those patterns forever. The bet is that monopoly status, once achieved, converts captured customers into infinite cash flows. But the burning period destroys real productive businesses — restaurants, taxis, local delivery — that were profitable and serving real needs. The financial economy eats the productive economy and calls it innovation.
Dimwit / Midwit / Better Take
The dimwit take is “China is authoritarian — shutting down Ant Financial was about political control, not economics.”
The midwit take is “both systems have tradeoffs — the US has innovation and the free market, China has stability and control.”
The better take is that the distinction between finance-as-utility and finance-as-industry determines whether capital formation serves production or production serves capital formation. When finance is an industry, shadow banks can create money at scale, securitize it, and build parallel monetary systems that compete with democratic governance. The person who controls the money creation is the real sovereign — not the elected government but the financial system that determines who gets credit and at what price. China’s approach has enormous costs (financial repression, capital flight, trapped savers), but it maintains the government’s ability to direct capital toward production. The American approach has enormous costs too (rent-seeking, productive economy destruction, wealth concentration), but they are less visible because they manifest as rising asset prices rather than falling wages.
Main Payoff
The deepest insight: a financial company that relies on investors instead of profitable customers is not a business — it is a capital deployment vehicle. The purpose is not to serve the market but to convert investor capital into market share that can later be monetized. This is not innovation. It is the financial economy colonizing the productive economy, using cheap capital as its weapon and regulatory arbitrage as its shield. The question for any economy is not “how much financial innovation do we allow?” but “who is the master — the people who make things, or the people who move money?” The answer to that question determines everything downstream.
References:
- Cory Doctorow, Jack Ma and the Long Grift