"All models are wrong, but some are useful."
— George Box (1976), British statistician

"When the world economists drew inside their sterile flasks met the reality that runs on blood and sweat, their models shattered. More refined models took their place. The next to come will perhaps be one we cannot understand."
— Central thesis of this column

Author: Dennis Kim (김호광)
CEO of Cyworld · CEO of Betalabs · Developer · Web3 Investor
📧 [email protected]
🔗 GitHub @gameworkerkim
🔗 vibe-investing repository

Published: April 21, 2026
Categories: Monetary Theory · Geopolitics · AI Economics · History of Economic Thought
Series: vibe-investing — Sequel to the LTCM Column

Executive Summary

This column reinterprets the past fifty years of monetary and economic history through the lens of the recurring mismatch between economic models and reality. It advances four central arguments:

Four Core Arguments

  1. The Inevitable Incompleteness of Models: The collapse of the gold standard (1971), the 2008 global financial crisis, the 2020 pandemic economy, and the 2022 inflation surge — none of these four events was adequately predicted by the dominant economic models of the time.

  2. The Interpretive Ambiguity of the Petrodollar: The dollar-oil linkage since 1974 is an empirical fact, but its political implications — particularly in the cases of Iraq (2003), Libya (2011), and Iran (present) — remain contested in academia. This column presents both sides.

  3. The Substance of the MMT Debate: Modern Monetary Theory became one of the defining macroeconomic debates of the 2020s. It was rejected by DSGE-based empirical tests (Liu, Minford, Ou 2024) during 2024–2025, but rebuttals from MMT proponents (Wray 2025) continue.

  4. The Arrival of AI-Managed Economics: Central banks, hedge funds, and exchanges are already deploying AI in decision-making. Within the next 10–20 years, we may see the emergence of economic management systems whose operating principles humans cannot fully understand.

🚨 Important Disclaimers

  • This column is written for research and educational purposes. It is neither investment advice nor a political argument.
  • The causal relationship between the petrodollar system and geopolitical events is academically contested. This column presents one interpretation of the hypothesis alongside opposing views.
  • It does not endorse or condemn any specific country, politician, or political party.
  • MMT is a living debate with both supporters and critics. This column does not definitively take either side.
  • Predictions regarding AI-driven economic management are speculative analysis, not confirmed futures.

1. Introduction — Economics Inside the Flask

1-1. The Beautiful Equations of a Sterile World

Modern economics has produced beautiful models.

Keynes's General Theory (1936), Friedman's monetarism, Lucas's rational expectations, the Black-Scholes option pricing model (1973), DSGE models, and the recent wave of behavioral economics — each model was remarkably useful for explaining the economic phenomena of its time.

But all of these models share a common trait: they all assumed a sterile environment inside a transparent flask.

Examples of Underlying Assumptions

  • Rational economic agents with complete information (Homo Economicus)
  • Frictionless markets (no frictions)
  • Homogeneous preferences (representative agent)
  • Linear relationships
  • Time-invariant structures

1-2. Reality Shatters the Flask

But the real economy is not a sterile laboratory.

In reality, there are:

  • Political decisions (Saddam Hussein's euro conversion, Trump's tariffs)
  • Geopolitical shifts (Gulf War, Iraq War, Ukraine War)
  • Institutional path dependency (historicity of financial supervision)
  • Technological shocks (internet, smartphones, AI)
  • Human irrationality (FOMO, fear, contagion)

1-3. The Journey of This Column

This column traces four major moments over the past fifty years when economic models collided with reality:

  • 1971: Collapse of the gold standard → End of the Bretton Woods system
  • 1974: Birth of the petrodollar → A new engine for dollar hegemony
  • 2008: Global financial crisis → The shaking of the 'efficient market hypothesis'
  • 2020s: MMT debate + return of inflation → Reconstruction of monetary theory

And a fifth moment is approaching: the dawn of AI-managed economic systems, from 2025 onward.

2. The First Crack Between Model and Reality — The End of the Gold Standard

2-1. The Bretton Woods System (1944–1971)

Immediately after World War II, the United States held roughly 70% of the world's gold reserves (Steil 2013, The Battle of Bretton Woods). The Bretton Woods system was designed on the basis of this overwhelming concentration:

  • 1 ounce of gold = $35 (dollar-gold peg)
  • Other currencies pegged to the dollar
  • Effectively a "dollar standard"

This system provided roughly twenty-five years of global economic stability.

2-2. August 15, 1971 — The Nixon Shock

However, as the costs of the Vietnam War and the welfare expansions of the 1960s accelerated U.S. gold outflows, President Richard Nixon announced the suspension of gold convertibility on August 15, 1971.

"I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold."
— Richard Nixon, national address, August 15, 1971

The word "temporarily" has now lasted approximately 55 years.

From that day forward, the dollar became a pure fiat currency — backed by no material collateral.

2-3. What the Model Failed to Predict

Economics textbooks of the 1960s predicted that the collapse of the gold standard would lead to an immediate decline in the dollar's value. But what actually happened was different:

  • The dollar retained its reserve currency status
  • The United States could continue running current account deficits

Why was this possible? The answer lies in the petrodollar system that emerged shortly afterward.

3. The Petrodollar — The Alchemy of Empire

3-1. The Secret Accord of 1974

In 1974, U.S. Treasury Secretary William Simon negotiated a pivotal agreement with Saudi Arabia (Spiro 1999; Wong 2016).

The Essence of the Agreement

  • Saudi Arabia would price its oil exports exclusively in U.S. dollars
  • Saudi Arabia would use its dollar revenues to purchase U.S. Treasury securities
  • In return, the U.S. would provide military and political protection

This was the birth of the petrodollar system.

3-2. Why This Was Genius

Consider the structural consequence: for the rest of the world to purchase oil, they had to acquire dollars. And dollars flowed back to the United States in the form of Treasury purchases. This created:

  • Artificial global demand for the dollar
  • Automatic financing channel for U.S. fiscal deficits
  • Perpetuation of dollar reserve currency status

Economist Barry Eichengreen called this the exorbitant privilege (Eichengreen 2011).

3-3. Paul Volcker's Recognition

Former Federal Reserve Chairman Paul Volcker publicly acknowledged at a 1978 Warwick University lecture that "one-way convertibility of the dollar into oil was a structural guarantee of the global dollar system."

3-4. Official Petrodollar Data (as of 2024)

Item Share
Dollar share of global foreign exchange reserves ~58%
Dollar share of international trade settlements ~49%
Dollar share of international bond issuance ~60%
Dollar share of global oil trade (estimated) ~80–90%

Source: IMF COFER Database (Q4 2024); BIS Triennial Survey (2022)

The dollar's global share has gradually declined from approximately 72% in the early 2000s, but remains unmatched.

4. MMT — Questioning the Boundaries of the Model

4-1. The Core Claims of Modern Monetary Theory

MMT (Modern Monetary Theory) has been the most heated macroeconomic debate of the past decade. Its principal theorists include Stephanie Kelton, L. Randall Wray, Warren Mosler, and Bill Mitchell.

Core MMT Claims (Wray 2015; Kelton 2020)

  • A country that issues its own sovereign currency cannot default on its debt
  • Inflation, not deficits, is the true constraint
  • Taxes destroy money — they do not finance spending
  • Full employment can be achieved through a Job Guarantee Program

4-2. Evidence Cited by MMT Proponents

Case 1 — The United States After 2008

U.S. public debt surged from $10 trillion in 2008 to $27 trillion in 2020. MMT proponents pointed out that CPI inflation did not break out during this period.

Case 2 — The 2020 Pandemic

During the pandemic, the United States executed fiscal expansions of $2 trillion and $1.9 trillion in succession. Initial CPI inflation remained muted.

4-3. But in 2022 — The Model Breaks Again

In June 2022, U.S. CPI inflation hit 9.1% — the highest in forty years (BLS, June 2022).

This number was largely outside the predictions of MMT proponents. Critics (Summers, Rogoff, Blanchard) declared it empirical refutation of MMT.

Arguments of MMT Critics (Rogoff 2019; King 2020; Blanchard 2022)

  • Fiscal expansion without constraint ultimately leads to inflation
  • 2022 proved this empirically
  • The "inflation anchor" argument of MMT is too slow and politically impractical

MMT Proponents' Rebuttal (Wray 2025; Kelton 2024)

  • 2022 inflation was supply-driven (COVID + Ukraine), not demand-driven
  • MMT has always emphasized the inflation constraint
  • Orthodox fiscal theory also failed equally
  • The problem was failing to raise taxes early

4-4. Current State of the Debate (2024–2026)

The debate continues intensely as of 2024–2026.

In 2024, International Journal of Finance & Economics published Liu, Minford, and Ou's formal DSGE rejection of MMT. Meanwhile, in July 2025, L. Randall Wray's Levy Economics Institute Working Paper No. 1084 argued that:

"Post-pandemic inflation was triggered by supply shocks, and MMT explains the structure better than orthodox theory."

Both camps remain locked in fierce conflict. This is the living front line of the "mismatch between model and reality."

4-5. The Position of This Column

This column does not claim that MMT is correct or wrong. What matters is:

  • Observation 1: The very existence of the MMT debate reveals the uncertainty in modern economic models.
  • Observation 2: Neither the 2020 pandemic economy nor 2022 inflation were accurately predicted by existing models.
  • Observation 3: As a result of this uncertainty, real-time judgment errors by policymakers occur.

This is precisely the theme of "the gap between model and reality."

5. Three Masters Who Challenged Dollar Hegemony

5-1. Saddam Hussein (2000–2003) — Iraq

The Precise Historical Timeline

Date Event
September 24, 2000 Saddam Hussein announces intent to switch Iraqi oil export settlements to euros
November 2000 Euro settlements actually begin under UN Oil-for-Food program
2001–2002 Iraq converts approximately $10 billion in foreign reserves from dollars to euros
2002 Hussein accelerates the euro conversion of remaining dollar holdings
March 19, 2003 U.S.-led coalition invasion of Iraq begins
After 2003 New Iraqi government immediately reverts oil settlements to dollars

Critical point: The gap between Hussein's euro transition announcement (September 2000) and the invasion (March 2003) = approximately 2 years 6 months.

Academic Interpretations — Both Sides

Argument A (Petrodollar Causation Thesis): Some authors including W. Clark (2005, Petrodollar Warfare) argue that the euro switch was a central cause of the invasion.

Argument B (Mainstream Academic View): Most mainstream historians and political scientists view the invasion as driven by the complex of WMD allegations, post-9/11 geopolitics, and neoconservative ideology (RSIS 2003 analysis).

Synthesis of Both Sides

  • The euro switch was certainly not the sole cause.
  • However, it may have been one factor among several, a possibility even some mainstream scholars partly acknowledge.
  • It particularly functions as a hypothesis explaining the gap between Cheney's 1994 interview (opposing Iraq invasion) and his 2003 reversal.

5-2. Muammar Gaddafi (2009–2011) — Libya

Gaddafi's Proposal

In 2009, Libyan leader Muammar Gaddafi proposed the creation of a Pan-African Gold Dinar for African oil trade. His vision:

  • A common African currency backed by gold
  • Replacing the dollar in African oil settlements
  • Enabling an African monetary integration, similar to the EU's euro

Timeline

  • December 2010: Arab Spring begins
  • February 2011: Libyan civil war erupts
  • March 19, 2011: NATO begins military intervention in Libya
  • October 20, 2011: Gaddafi is killed

Interpretive Ambiguity

Again, the causes of NATO intervention are contested:

  • The direct trigger was humanitarian concerns over Gaddafi's regime's crackdown on civilians
  • But subsequent disclosures of Hillary Clinton's emails revealed that "Gaddafi's gold dinar" was discussed as a concern
  • Some analysts argue this was "one of many factors"

5-3. Nicolás Maduro (2018–Present) — Venezuela

Maduro's Actions

  • 2017: Announces oil sales in yuan and rubles, not dollars
  • 2018: Launches the "Petro" cryptocurrency
  • 2019: Partial oil settlements in Chinese yuan

The Outcome

  • The United States froze $30 billion in Venezuelan foreign reserves
  • Sanctions hit Venezuela's PDVSA oil company
  • Venezuela's economy experienced one of the largest GDP collapses in modern history

Compared to Iraq and Libya, Venezuela faced economic sanctions rather than military action, but the effects were ultimately similarly devastating.

5-4. Synthesis of the Three Cases

Commonalities

  • All three attempted to challenge dollar hegemony
  • All three saw their regimes collapse or the country face catastrophic outcomes
  • All three were reincorporated into the dollar system after the fact

Important Differences

  • Iraq: Military intervention
  • Libya: Military intervention (NATO-led)
  • Venezuela: Financial sanctions

The Realm of Academic Honesty

  • The petrodollar challenge was likely a contributing factor, but not the sole cause.
  • The hypothesis is partly supported but partly contested.
  • The truth is probably somewhere in between.

6. Iran — An Ongoing Grand Experiment

6-1. Iran's Dollar Avoidance Strategy (2010s–Present)

Following U.S. sanctions, Iran has systematically pursued dollar alternatives:

  • 2012: Launches oil-for-gold trade with Turkey and India
  • 2019: Oil-yuan barter trade with China
  • 2022: Settles over 90% of Iran-Russia trade in rubles and rials
  • 2024: Joins BRICS

6-2. Recent Points of Tension

Major Events of 2024–2025

  • Iran's entry into BRICS expands the dedollarization bloc
  • Tensions rise over control of the Strait of Hormuz (through which 20% of global oil transits)
  • Negotiations for Iran's return to the nuclear deal stall
  • Proxy conflicts escalate with Israel

6-3. The Ambiguity of the Current Situation

Is Iran the next Iraq/Libya/Venezuela? Or is the United States losing its former hegemonic influence?

This column presents this only as an ongoing experiment and predicts no specific outcome.

6-4. BRICS and the Dedollarization Movement

Objective Data (IMF, BIS, 2024)

  • Dollar share of global foreign exchange reserves: 72% (2001) → 57.8% (Q4 2024)- Central bank gold purchases:1,045 tonnes in 2024 (third consecutive year above 1,000 tonnes)
  • CIPS (Chinese payment system) transactions: $245 trillion in 2025
  • BRICS expansion: from 5 members to 9 members + 9 partner states

However

  • Dollar settlements still account for over 85% of intra-BRICS trade
  • Creating a BRICS common currency faces significant structural obstacles
  • The yuan's share of global reserves remains under 3%

This is "partial change, not complete transition."

7. Cracks in Pax Americana

7-1. What Is Pax Americana?

Since 1945 — the end of World War II — the international order led by U.S. military and economic hegemony is called Pax Americana. Its three core pillars:

  • Military: Overwhelming U.S. military spending (roughly 40% of global total)
  • Financial: Dollar reserve currency status
  • Institutional: IMF, World Bank, UN Security Council, SWIFT

7-2. Signs of Strain in the 2020s

Economic Signals

  • U.S. federal debt: $34 trillion (2024), exceeding 120% of GDP
  • Interest payments approaching 15% of the federal budget
  • Dollar share declining

Geopolitical Signals

  • Ukraine war reveals limits of NATO coordination
  • Saudi-China energy cooperation
  • BRICS expansion

Technological Signals

  • Chinese semiconductor self-sufficiency efforts
  • Attempts to bypass Western internet infrastructure
  • AI competition (US-China tension)

7-3. Pax Americana Endism vs. Extensionism

Endists (Ray Dalio, Nouriel Roubini)

  • U.S. is in the same position as Britain in 1914
  • Multiple reserve currency era coming within 10–20 years
  • Structural decline is inevitable

Extensionists (Niall Ferguson, Ian Bremmer)

  • No alternative to the dollar exists
  • China's internal problems delay transition
  • U.S. financial market depth irreplaceable

The position of this column: Both views have merit. The only certainty is that change is underway.

8. The Dawn of an AI-Managed Economy

8-1. AI Economic Management Has Already Begun

A Fact Most People Overlook

AI is already deeply involved in economic decision-making.

Current Areas of AI Involvement

  1. Central bank economic forecasting: The Federal Reserve, ECB, and Bank of Japan have deployed neural networks in economic forecasting (BIS 2024 Annual Economic Report, Chapter III).

  2. Hedge funds and proprietary trading: Major institutions like Renaissance Technologies, Two Sigma, and Citadel derive the majority of trading decisions from AI.

  3. Cryptocurrency markets: On exchanges such as Binance, OKX, and Bybit, AI market makers dominate pricing. Dennis Kim's own vibe-investing 5-part series documents this empirically.

  4. Lending and credit decisions: Firms like Goldman Sachs, JPMorgan, and ZestFinance increasingly delegate credit assessments to AI.

8-2. Possibilities Over the Next 10–20 Years

Realistic Projections (Conservative)

2026–2030:

  • Central banks directly incorporate AI recommendations into rate decisions (already begun)
  • Cross-border trade automation increases
  • CBDCs (central bank digital currencies) emerge worldwide

2030–2040:

  • Real-time automatic adjustment of monetary-fiscal policy by AI agents
  • International trade imbalance corrections optimized by AI
  • Stock market stabilization mechanisms auto-tune via AI

Post-2040 (Speculation):

  • An economic operating system whose internal logic humans cannot fully understand
  • Hybrid economic management where AI makes decisions and humans ratify them
  • AI-driven monetary policy increasingly difficult to audit via traditional economic theory

8-3. Before an Incomprehensible Model

In the 2016 AlphaGo vs. Lee Sedol match, there was a famous scene: AlphaGo's Move 37. Human professionals described it as "incomprehensible yet brilliant."

This is the metaphor for the future of AI-managed economics.

Imagine this in the future: the Federal Reserve's AI advisor raises rates by 0.75 percentage points. Economists ask why. The AI responds with:

"Based on the integration of 47 variables, 0.73 percentage points is optimal (rounded). Traditional Taylor Rule-based analysis would suggest 0.25–0.50. My recommendation is based on pattern detection beyond the range of conventional models."

Humans ask "why," but cannot fully understand the AI's logic.

8-4. Concerns of Economists

The BIS 2024 Annual Economic Report noted that:

"AI-driven monetary policy carries a trade-off between enhanced efficiency and decreased transparency. To avoid a democratic legitimacy crisis, humans must retain final authority. But if that authority becomes nominal, the existing theoretical frameworks of economics may be undermined." (BIS, 2024, Chapter III)

8-5. Optimism vs. Pessimism

Optimistic View

  • AI can execute more accurate, less political, more stable policy
  • Finally overcoming the flaws of human judgment (political pressure, biases, delays)
  • A second "golden age of economic growth" possible

Pessimistic View

  • Complete failure of democratic accountability
  • Political legitimacy crisis — "who do you appeal to when AI decides"
  • Systemic failure risk if AI error goes undetected
  • Widening gap between AI-owning nations and others

This column's position: Both scenarios are possible. Which unfolds depends on today's policy decisions and governance design.

9. Conclusion — Before an Incomprehensible Model

9-1. Five Lessons

Lesson 1 — All Models Are Necessarily Incomplete

This is George Box's 50-year-old insight. But more than ever, this lesson matters today. No model is complete, and a model is useful only within the limits it captures.

Lesson 2 — Reality Is Far More Political Than the Model

Economic models do not handle political decisions. But political decisions (Saddam's euro conversion, Trump's tariffs, Putin's invasion of Ukraine) powerfully shape the economy.

Lesson 3 — The Collapse of a Model Gives Birth to a New Model

  • Keynesian economics was born from the collapse of 1930s classical economics.
  • Monetarism was born from the collapse of 1970s Keynesianism.
  • DSGE models were born from the limitations of 1990s monetarism.
  • What comes next is probably AI-driven models.

The gap between model and reality is not the end of a discipline — it is the driver of its evolution.

Lesson 4 — AI Will Accelerate This Evolution

AI can capture patterns beyond the reach of human cognition. It can continuously update parameters in real time. It integrates massive data.

But it also brings an unprecedented challenge: an AI-created model may be impossible for humans to verify.

Lesson 5 — We Will Soon Face "Models We Cannot Understand"

This is the most important claim of this column.

20 years from now, when economics professors teach inflation in the classroom, they may tell their students:

"It's the AI that actually understands inflation. We have roughly the right idea. That's why rate decisions today are made by AI."

This is like AlphaGo's Move 37 — the result is visible, but the process is a black box.

9-2. What Investors and Citizens Must Prepare For

The Investor's Perspective

  • Do not treat models as absolute truth. Every model has a shelf life.
  • Understand the deep causes behind big shifts in the monetary system.
  • Recognize the gap between the petrodollar's decline and the dollar's persistence.

The Citizen's Perspective

  • AI governance is an ethical challenge the public must confront.
  • How much economic decision-making will we delegate to AI? This should be decided democratically.
  • The time to set boundaries is now — before it is already too late.

9-3. A Final Question

"All models are wrong, but some are useful." — George Box

This sentence will likely be the most apt description of economics in the second half of the 21st century. Our models will be wrong. AI-created models will be wrong. But some will be useful.

The task is to recognize useful models, see their limits, and quietly abandon them when they start to be wrong.

And this is what investors and citizens of the AI era must do.

References

Economic History / Monetary Theory

  • Eichengreen, B. (2011). Exorbitant Privilege: The Rise and Fall of the Dollar. Oxford University Press.
  • Steil, B. (2013). The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. Princeton University Press.
  • Friedman, M. & Schwartz, A. (1963). A Monetary History of the United States. Princeton University Press.

MMT — Both Sides

  • Kelton, S. (2020). The Deficit Myth. PublicAffairs.
  • Wray, L.R. (2015). Modern Money Theory. Palgrave Macmillan.
  • Mitchell, W., Wray, L.R., & Watts, M. (2019). Macroeconomics. Red Globe Press.
  • Rogoff, K. (2019). "Modern Monetary Nonsense." Project Syndicate.
  • Blanchard, O. (2022). "Why I Worry About Inflation, Interest Rates, and Unsustainable Deficits." PIIE.
  • Liu, C., Minford, P., & Ou, Z. (2024). "Can Modern Monetary Theory fit the post-Crisis US facts? Evidence from a full DSGE model." International Journal of Finance & Economics. ★ Key citation
  • Wray, L.R. (2025). Levy Economics Institute Working Paper No. 1084. ★ Recent rebuttal
  • Garzón Espinosa, E. (2026). "Modern Monetary Theory's View of Inflation." Journal of Economic Issues, 60(1).

Petrodollar / Geopolitics

  • Spiro, D.E. (1999). The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets. Cornell University Press.
  • Wong, A. (2016). The Federal Reserve System and the Militarization of American Foreign Policy. IDP.
  • Clark, W. (2005). Petrodollar Warfare: Oil, Iraq and the Future of the Dollar. New Society Publishers.
  • RSIS (2003). "The Euro Factor in Iraq War?" Commentary CO03010.
  • Foreign Policy (2009). "Debunking the Dumping-the-Dollar Conspiracy."
  • IMF (2024). COFER Database, Q4 2024.
  • World Gold Council (2024). Gold Demand Trends Annual Report.

AI / The Future of Economics

  • BIS (2024). Annual Economic Report 2024, Chapter III: Artificial intelligence and the economy: implications for central banks.
  • ECB (2024). Cipollone, P. "Artificial intelligence: a central bank's view." Speech delivered in Rome, July 4.
  • IMF (2024). "Advances in artificial intelligence: implications for capital market activities." Global Financial Stability Report, Chapter 3.

Statistics / Modeling

  • Box, G.E.P. (1976). "Science and Statistics." Journal of the American Statistical Association, 71(356), 791–799.

Dennis Kim's Previous vibe-investing Columns

Disclaimer

This column is for research and educational purposes only.

  • It is not investment advice.
  • It is not a political argument.
  • It does not endorse or condemn any specific country, politician, or political party.
  • Economic projections are provisional interpretations, not confirmed futures.
  • Causal claims regarding the petrodollar and geopolitical events are presented as one hypothesis alongside its counterarguments.

All content is released under the MIT License. Attribution required for citation.

About the Author

Dennis Kim (김호광)
CEO of Cyworld · CEO of Betalabs · Developer · Web3 Investor · AI Economics Researcher

Dennis Kim serves as CEO of Cyworld (Korea's legacy social network platform) and Betalabs (Web3 venture studio). Over 20 years of software engineering experience have been combined with crypto research to produce the vibe-investing series on GitHub, which has documented market microstructure anomalies including VTCLR, token unlocks, and exchange listing crashes.

This column is a philosophical and monetary-theoretic sequel to the LTCM column in the vibe-investing series — designed to illuminate the epistemological limits of economics itself.

Contact: [email protected]
GitHub: github.com/gameworkerkim
Repository: github.com/gameworkerkim/vibe-investing