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(dramatic music)
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- [Ray Dalio] The changing world order.
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The times ahead will
be radically different
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from those that we've
experienced in our lifetimes,
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though similar to many times before.
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How do I know that?
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Because they always have been.
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Over my roughly 50 years of
global macroeconomic investing,
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I've learned the hard way
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that the most important
events that surprised me,
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did so because they never
happened in my lifetime.
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These painful surprises led me to study
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the last 500 years of history
for similar situations
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where I saw that they had indeed
happened many times before
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with the ups and the downs of the Dutch,
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British,
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and US empires.
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And every time they did,
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it was a sign of the changing world order.
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This study taught me valuable lessons
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that I'm going to pass along to you here
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in a distilled form.
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You can find the comprehensive
version in my book,
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Principles for Dealing with
the Changing World Order.
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Let me begin with a story
that brought me to this point,
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about how I learned to
anticipate the future
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by studying the past.
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In 1971, when I was a young clerk
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on the floor of the New
York Stock Exchange,
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the United States ran out of money
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and defaulted on its debts.
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That's right. The US ran out of money.
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How?
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Well, back then gold was the money
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used in transactions between countries.
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Paper money, like the dollar,
was like checks in a checkbook
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in that it had no value
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other than it could be exchanged for gold,
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which was the real money.
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At the time, the United
States was spending
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a lot more money than it was earning
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by writing a lot more of
these paper money checks
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than it had gold in the
bank to exchange for them.
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As people turned these checks
into the bank for gold money,
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the amount of gold in the
US started to dwindle.
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It soon became obvious
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that the US couldn't keep its promises
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for all the existing paper money,
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so people holding dollars
rushed to exchange them
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before the gold ran out.
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Recognizing that the US
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was going to run out of real money,
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on Sunday evening, August 15th,
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President Nixon went on
television to tell the world
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that the US was breaking its promise
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to let people exchange
their dollars for gold.
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Of course, he didn't say it that way.
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He said it more diplomatically,
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without making it clear
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that the United States was defaulting.
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- [President Nixon] The
strength of a nation's currency
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is based on the strength
of that nation's economy.
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And the American economy is by far
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the strongest in the world.
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Accordingly, I have directed
the secretary of the treasury
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to take the action necessary
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to defend the dollar
against the speculators.
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I have directed Secretary
Connally to suspend temporarily
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the convertibility of the dollar into gold
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or other reserve assets,
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except in amounts and conditions
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determined to be in the
interest of monetary stability
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and in the best interest
of the United States.
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- [Ray] I watched in awe
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realizing that money as we
understood it was ending.
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What a crisis!
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I expected the stock market
to plunge the next day,
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so I got on the exchange
floor early to prepare.
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When the opening bell rang,
pandemonium broke out,
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but not the kind I expected.
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The market was up - way up -
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and went on to rise nearly 25%.
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That surprised me
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because I never experienced a
currency devaluation before.
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When I dug into history,
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I discovered that the exact
same thing happened in 1933
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and had the exact same effect.
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Then, paper dollars were
also linked to gold,
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which the US was running out of
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because it was spending
more paper money checks
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than it had gold to exchange for them.
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And President Roosevelt
announced on the radio
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that he would break the country's promise
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to exchange dollars for gold.
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- [President Roosevelt] It
was then that I issued the
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proclamation providing for
the national bank holiday.
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And this was the first step
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in the government's reconstruction
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of our financial and economic fabrics.
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The second step, last
Thursday, was the legislation
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promptly and patriotically
passed by the Congress
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confirming my proclamation
and broadening my powers
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so that it became possible
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in view of the requirement of time
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to extend the holiday and
lift the ban of that holiday
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gradually in the days to come.
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This law also gave authority
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to develop a program...
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- [Ray] In both cases,
breaking the link to gold
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allowed the US to continue
spending more than it earned
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simply by printing more paper dollars.
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Since there was an increase
in the number of dollars
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without an increase in
the country's wealth,
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the value of each dollar fell.
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As these new dollars entered the market
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without a corresponding
increase in productivity,
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they went to buy lots of
stocks, gold and commodities,
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and hence caused their prices to rise.
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As I studied more history,
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I saw that the exact same thing happened
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many, many times before.
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I saw that since the beginning of time,
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when governments spent much
more than they took in taxes
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and conditions got bad,
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they ran out of money
and they needed more.
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So, they printed more, a lot more,
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which made its value fall
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and made the prices of most everything,
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including stocks, gold
and commodities rise.
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That's when I first
learned the principle that
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when central banks print a lot
of money to relieve a crisis,
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buy stocks, gold and commodities
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because their value will rise
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and the value of paper money will fall.
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This printing of money is
also what happened in 2008
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to relieve the
mortgage-driven debt crisis,
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and in 2020 to relieve the
pandemic-driven economic crisis.
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And it almost certainly
will happen in the future.
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So, I suggest that you keep
this principle in mind.
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These experiences gave me
another principle, which is,
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to understand what is coming at you,
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you need to understand
what happened before you.
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That principle led me to study
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how the roaring twenties bubble
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turned into the 1930s depression,
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which gave me the lessons
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that allowed me to anticipate
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and profit from the 2007 bubble
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turning into the 2008 bust.
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All these experiences led me to develop
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an almost instinctual urge
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to look to the past for similar situations
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to learn how to handle the future well.
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Changing orders.
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(man whistles)
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(machine beeping)
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Over the last few years,
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three big things that hadn't
happened in my lifetime
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prompted me to do this study.
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First, countries didn't have enough money
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to pay their debts,
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even after lowering
interest rates to zero.
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So their central banks
began printing lots of money
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to do so.
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Second, big internal conflicts emerged
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due to growing gaps in wealth and values.
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This showed up in political populism
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and polarization between the left,
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who want to redistribute wealth,
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and the right, who want to
defend those holding the wealth.
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And third, increasing external conflict
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between a rising great power
and the leading great power,
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as is now happening with
China and the United States.
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So, I looked back.
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I saw that all these had happened
together before many times
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and nearly always led to changing
domestic and world orders.
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The last time this sequence
happened was from 1930 to 1945.
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What exactly is an order? You might ask.
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It's a governing system for
people dealing with each other.
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There are internal orders for
governing within countries,
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typically laid out in constitutions.
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And there is a world order for
governing between countries,
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typically laid out in treaties.
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Internal orders change at
different times than world orders,
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though whether within
or between countries,
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these orders typically change after wars.
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Civil wars within countries,
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international wars between countries.
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They happen when revolutionary new forces
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defeat weak old orders.
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For example, the US internal order
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was laid out in the constitution in 1789
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after the American Revolution,
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and it is still operating today,
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even after the American Civil War.
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Russia got rid of its old
order and established a new one
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with the Russian revolution in 1917,
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which ended in 1991 with a
relatively bloodless revolution.
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China began its current
internal order in 1949
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when the Chinese Communist
Party won the civil war.
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You get the idea.
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The current world order
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commonly called the American world order,
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formed after the allied
victory in World War II
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when the US emerged as
the dominant world power.
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It was set out in agreements and treaties
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for how global governance
and monetary systems work.
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In 1944, the new world monetary system
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was laid out in the
Bretton Woods Agreement
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and established the dollar
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as the world's leading reserve currency.
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A reserve currency is a currency
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that is commonly accepted
around the world,
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and having one is a key factor
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in a country becoming the
richest and most powerful empire.
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With a new dominant power and
monetary system established,
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a new world order begins.
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These changes take place in a
timeless and universal cycle
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that I call the big cycle.
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I'll start with a quick overview,
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then give you a more complete version
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and then direct you to
my book if you want more.
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As I studied the 10 most powerful empires
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over the last 500 years
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and the last three reserve currencies,
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it took me through the rise and decline
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of the Dutch empire and the guilder,
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the British empire and the pound,
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the rise and early decline
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in the United States
empire and the dollar,
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and the decline and rise
of the Chinese empire
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and its currencies,
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as well as the rise and
decline of the Spanish, German,
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French, Indian, Japanese,
Russian, and Ottoman empires,
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along with their significant conflicts
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as measured in this chart.
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To understand China's patterns better,
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I also studied the rise and fall
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of Chinese dynasties and their
monies back to the year 600.
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Because looking at all
these measures at once
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can be confusing,
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I'll focus on the four
most important ones,
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the Dutch, British, US and Chinese.
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You'll quickly notice the pattern.
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Now let's simplify the form a bit.
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As you can see, they transpired
in overlapping cycles
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that lasted about 250 years
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with 10 to 20 year transition
periods between them.
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Typically, these two transitions
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have been periods of great conflict
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because leading powers don't
decline without a fight.
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So, how am I measuring an empire's power?
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In this study, I used eight metrics.
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Each country's measure of total power
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is derived by averaging them together.
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They are education,
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inventiveness and technology development,
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competitiveness in global
markets, economic output,
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share of world trade, military strength,
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the power of their financial
center for capital markets
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and the strength of their
currency as a reserve currency.
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Because these powers are measurable,
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we can see how strong each
country is now, was in the past,
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and whether they're rising or declining.
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By examining the sequences
from many countries,
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we can see how a typical cycle transpires.
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And because the wiggles can be confusing,
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we can simplify it a bit
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to focus on the pattern of
cause-effect relationships
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that drive the rise and
decline of a typical empire.
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As you can see, better
education typically leads
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to increased innovation
and technology development,
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and with a lag, the
establishment of the currency
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as a reserve currency.
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You can also see that these forces
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then declined in a similar order,
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reinforcing each other's decline.
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Let's now look at the
typical sequence of events
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going on inside a country
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that produces these rises and declines.
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In a nutshell, the big
cycle typically begins
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after a major conflict, often a war,
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establishes the new leading
power and the new world order.
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Because no one wants to
challenge this power,
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a period of peace and
prosperity typically follows.
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As people get used to
this peace and prosperity,
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they increasingly bet on it continuing.
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They borrow money to do that,
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which eventually leads
to a financial bubble.
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The empire's share of trade grows.
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And when most transactions
are conducted in its currency,
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it becomes a reserve currency,
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which leads to even more borrowing.
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At the same time, this
increased prosperity
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distributes wealth unevenly.
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So the wealth gap typically grows
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between the rich "haves"
and the poor "have-nots".
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Eventually, the financial bubble bursts,
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which leads to the printing of money,
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an increased internal conflict
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between the rich and the poor,
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which leads to some form of revolution
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to redistribute wealth.
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This can happen peacefully
or as a civil war.
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While the empire struggles
with this internal conflict,
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its power diminishes relative to
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external rival powers on the rise.
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When a new rising power
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gets strong enough to compete
with the dominant power
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that is having domestic breakdowns,
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external conflicts, most
typically wars, take place.
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Out of these internal and external wars
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come new winners and losers.
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Then the winners get together
to create the new world order.
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And the cycle begins again.
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As I looked back,
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I saw that these cause
and effect relationships
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drove the cycles of rises and declines
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all the way back to the Roman empire.
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I saw how the stories of
each one of these cycles
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blended together with others
before, during, and after
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in the same way as each individual
story blends with others
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to make the epic 500 year story
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that is our collective history.
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And like human life cycles,
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no two are exactly the
same, but most are similar.
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They're driven by logical
cause and effect relationships
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that progress through stages from birth
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to strength and maturity
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to weakness and inevitably decline.
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However, that's like saying
a person's life cycle
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takes 80 years on average
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without recognizing that
many are much shorter
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and many are longer.
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While age can be a good
indicator of future longevity,
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a better way is to look
at health indicators.
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One can do that with empires
and their vital signs too.
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I found that by watching the
indicators of power change,
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I was able to see what
stage a country was in,
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which helped me to anticipate
what was likely to come next.
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Now, I'll take you through
the big cycle in more detail.
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Give me 20 minutes
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and I'll give you the
last 500 years of history
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and show you the similar patterns across
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the Dutch, British, US
and Chinese empires.
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500 years of big cycles.
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(wind whooshing)
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I'm going to describe the typical cycle
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by dividing it into three phases.
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The rise, the top, and the decline.
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The rise.
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Successful new orders that rise,
both internal and external,
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are typically started by
powerful revolutionary leaders
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doing four things.
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First, they win power
00:19:00
by gaining more support
than the opposition.
00:19:03
Second, they consolidate power
00:19:06
by converting, weakening, or
eliminating the opposition
00:19:10
so they don't stand in their way.
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Third, they establish
systems and institutions
00:19:15
that make the country work well.
00:19:17
And fourth, they pick
their successors well,
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or create systems that do that,
00:19:23
because a great empire
requires many great leaders
00:19:27
over several generations.
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At this stage soon
after winning the fight,
00:19:32
there was typically a period
of peace and growing prosperity
00:19:36
because the leadership is clearly dominant
00:19:39
and has broad support so
no one wants to fight it.
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During this phase,
leaders within the country
00:19:45
have to design an excellent system
00:19:47
to raise the country's wealth and power.
00:19:50
First and foremost, to be great
00:19:52
they must have strong education,
00:19:55
which is not just teaching
knowledge and skills,
00:19:58
but also strong character,
civility and work ethic.
00:20:03
These are typically taught in the family,
00:20:05
schools and religious institutions.
00:20:08
That provides a healthy
respect for rules and laws,
00:20:11
order within society, low corruption,
00:20:14
and enables them to unite
behind a common purpose
00:20:18
and work well together.
00:20:20
As they do this,
00:20:21
they increasingly shift from
producing basic products
00:20:25
to innovating and
inventing new technologies.
00:20:31
For example, the Dutch rose
to defeat the Habsburg empire
00:20:36
and become superbly educated.
00:20:38
They became so inventive that
they came up with a quarter
00:20:42
of all major inventions in the world.
00:20:44
The most important of which
was the invention of ships
00:20:48
that could travel around the
world to collect great riches
00:20:51
and the invention of
capitalism as we know it today
00:20:55
to finance those voyages.
00:20:57
They, like all leading empires,
enhanced their thinking
00:21:01
by being open to the best
thinking in the world.
00:21:04
As a result,
00:21:05
the people in the country
become more productive
00:21:08
and more competitive in world markets,
00:21:11
which shows up in their
growing economic output
00:21:15
and rising share of world trade.
00:21:19
You can see this happening now
00:21:21
as the US and China are roughly comparable
00:21:24
in both their economic outputs
00:21:26
and their shares of world trade.
00:21:30
As countries trade more globally,
00:21:32
they must protect their trade routes
00:21:34
and their foreign interests from attack.
00:21:36
So they develop great military strength.
00:21:40
If done well, this virtuous cycle
00:21:42
leads to strong income growth,
00:21:45
which can be used to finance investments
00:21:48
in education, infrastructure,
and research and development.
00:21:53
They must also develop systems
to incentivize and empower
00:21:57
those that have the ability
to make or take wealth.
00:22:02
In all of these cases, the
most successful empires
00:22:06
used a capitalist approach
00:22:10
to develop productive entrepreneurs.
00:22:13
Even China, which is run by
the Chinese Communist Party,
00:22:17
used a form of this capitalist approach.
00:22:21
(cash registers ringing)
00:22:27
Deng Xiaoping, when
asked about this, said,
00:22:30
"It doesn't matter if it's
a white cat or a black cat,
00:22:33
"as long as it catches mice."
00:22:35
And "it's glorious to be rich."
00:22:39
To do this well, they must
develop their capital markets.
00:22:43
Most importantly, their
lending, bond and stock markets.
00:22:48
That allows people
00:22:49
to convert their savings into investments,
00:22:53
to fund invention and development
00:22:57
and share in the successes
00:22:59
of those who make great things happen.
00:23:03
The Dutch created the first
publicly listed company,
00:23:06
the Dutch East India Company,
00:23:08
and the first stock market to fund it,
00:23:11
which were integral parts of the system
00:23:13
that produced massive wealth and power.
00:23:17
As a natural consequence, the
greatest empires developed
00:23:20
the world's leading financial centers
00:23:23
for attracting and distributing
the world's capital.
00:23:27
Amsterdam was the world's financial center
00:23:30
when the Dutch were preeminent,
00:23:33
London when the British were on top,
00:23:35
New York is now,
00:23:37
and China is quickly developing
its financial centers.
00:23:41
Most importantly, the
capitalists, the governments
00:23:45
and the military must work together.
00:23:48
Not only did the Dutch work well together,
00:23:51
they were one in the same.
00:23:53
The Dutch East India Company
00:23:55
was granted a trade
monopoly from the government
00:23:58
and had its own officially
sanctioned military
00:24:01
to go out into the global
markets to make and take wealth.
00:24:07
The British followed with the
British East India Company
00:24:10
and had a similar coordination
00:24:12
of their government, business
and military operations.
00:24:17
The US Military Industrial
Complex followed suit,
00:24:21
as does the Chinese system today.
00:24:26
As the country becomes
00:24:28
the largest international trading empire,
00:24:30
its transactions can be
paid with its currency,
00:24:34
making it the preferred
global medium of exchange,
00:24:38
and because their currency
00:24:40
is so widely accepted and frequently used,
00:24:43
people around the world
want to save in it,
00:24:47
making it the preferred
store hold of wealth.
00:24:50
And thus the world's
leading reserve currency.
00:24:55
The guilder was the world's
main reserve currency
00:24:58
when the Dutch led world trade.
00:25:00
The pound was when the British led.
00:25:03
And the dollar has been since the US led.
00:25:07
Naturally, China's currency
is increasingly being used
00:25:10
as a reserve currency.
00:25:12
Having a reserve currency
enables the empire
00:25:15
to borrow more than other countries.
00:25:19
That advantage is huge.
00:25:22
Think about it.
00:25:23
People all over the
world are eager to save
00:25:27
and hence lend back their
currency to the empire.
00:25:31
Countries without a reserve
currency don't have that.
00:25:34
And when the empire runs
out of its own money,
00:25:37
remember the United States in 1971,
00:25:41
they can always print more.
00:25:43
The exorbitant privilege
00:25:45
afforded by the empire's reserve currency
00:25:48
leads borrowing to increase
00:25:51
and the beginning of a financial bubble.
00:25:54
This series of cause and
effect relationships,
00:25:57
leading to mutually supportive
00:26:00
financial, political and military powers,
00:26:03
bolstered by the borrowing
power of a reserve currency,
00:26:06
have gone together since
history began to be recorded.
00:26:10
All the empires that became
the most powerful in the world
00:26:14
followed this path to the top.
00:26:27
While in the top phase,
00:26:29
most of these strengths are sustained,
00:26:31
embedded within the
fruits of their success
00:26:34
are the seeds of their decline.
00:26:37
As a rule,
00:26:38
as people in these rich and
powerful countries earn more,
00:26:42
that makes them more
expensive and less competitive
00:26:45
relative to people in other countries
00:26:47
who are willing to work for less.
00:26:50
At the same time, people in
other countries naturally copy
00:26:54
the methods and technologies
of the leading power,
00:26:57
which further reduces the
leading power's competitiveness.
00:27:01
For example, British ship builders
00:27:04
had less expensive workers
than Dutch ship builders.
00:27:08
So, they hired Dutch designers
to design better ships
00:27:12
that were built by less
expensive British workers,
00:27:16
making them more competitive,
00:27:18
which led the British to rise
and the Dutch to decline.
00:27:22
Also, as people become richer,
00:27:24
they tend not to work as hard.
00:27:27
They enjoy more leisure,
00:27:28
pursue the finer and less
productive things in life,
00:27:32
and at the extreme, become decadent.
00:27:35
Values change from
generation to generation
00:27:38
during the rise to the top
00:27:40
from those who had to fight
to achieve wealth and power
00:27:43
to those who inherited it.
00:27:45
(boy groans)
(boy blows raspberry)
00:27:46
They're less battle
heartened, steeped in luxuries
00:27:49
and accustomed to the easy life,
00:27:51
which makes them more
vulnerable to challenges.
00:27:54
The golden era of the Dutch empire
00:28:00
(glasses clink)
00:28:02
and the Victorian era
of the British empire
00:28:08
(glasses clink)
00:28:11
were such high prosperity
periods like this.
00:28:15
As people get used to doing well,
00:28:17
they increasingly bet on
the good times continuing
00:28:21
and borrow money to do that,
00:28:23
which grows into the financial bubbles.
00:28:27
Naturally, the financial
gains come unevenly.
00:28:30
So, the wealth gap grows.
00:28:33
Wealth gaps are self-reinforcing
00:28:35
because rich people use
their greater resources
00:28:38
to reinforce their powers.
00:28:40
For example, they give greater
privileges to their children,
00:28:44
like better education,
00:28:46
and they influence the political
system to their advantage.
00:28:50
This causes the gaps in values, politics,
00:28:53
and opportunities to grow between
00:28:56
the rich "haves" and the poor "have-nots".
00:29:00
Those who are less well-off
feel the system is unfair,
00:29:04
so resentments grow.
00:29:06
But as long as the living standards
00:29:08
of most people are still rising,
00:29:10
these gaps in resentments
don't boil over into conflict.
00:29:14
Having the world's reserve currency
00:29:17
inevitably leads to borrowing excessively
00:29:20
and contributes to the country building up
00:29:23
large debts with foreign lenders.
00:29:26
While this boosts spending
power over the short term,
00:29:29
it weakens the country's financial health
00:29:32
and weakens the currency
over the long-term.
00:29:36
In other words, when borrowing
and spending are strong,
00:29:39
the empire appears very strong,
00:29:42
but its finances are
in fact being weakened.
00:29:46
The borrowing sustains the country's power
00:29:49
beyond its fundamentals
00:29:50
by financing both
domestic over consumption
00:29:54
and international military conflicts
00:29:57
required to maintain the empire.
00:30:00
Inevitably, the cost of maintaining
and defending the empire
00:30:04
becomes greater than the
revenue it brings in.
00:30:06
So having an empire becomes unprofitable.
00:30:10
For example, the Dutch empire
overextended around the world
00:30:14
and fought war after
increasingly expensive war
00:30:17
with the British and other European powers
00:30:20
to protect its territory and trade routes.
00:30:23
The British empire similarly
became massive, bureaucratic,
00:30:26
and lost its competitive
advantages as rival powers,
00:30:31
particularly Germany, soared,
00:30:33
leading to an increasingly
expensive arms race
00:30:37
and world war.
00:30:39
The US has spent about
eight trillion dollars
00:30:42
on foreign wars and their
consequences since September 11th,
00:30:47
and trillions more for
other military operations
00:30:51
and for supporting military
bases in 70 countries,
00:30:55
and it still isn't spending enough
00:30:57
to support its military
competition with China
00:31:00
in the area around China.
00:31:03
In this cycle, the richer countries
00:31:05
eventually get deeper into debt
00:31:07
by borrowing from poor
countries that save more.
00:31:10
It's one of the early signs
of a wealth and power shift.
00:31:13
This started in the
United States in the 1980s
00:31:16
when it had a per capita income
40 times that of China's,
00:31:21
and started borrowing from Chinese
00:31:23
who wanted to save in dollars
00:31:25
because the dollar was the
world's reserve currency.
00:31:29
Similarly, the British
borrowed a lot of money
00:31:31
from its much poorer colonies
00:31:34
and the Dutch did the same at their top.
00:31:37
If the empire begins to
run out of new lenders,
00:31:40
those holding their currency
00:31:42
begin to look to sell and get out
00:31:45
rather than to buy,
save, lend, and get in,
00:31:55
and the strength of the
empire begins to decline.
00:32:00
The decline.
00:32:02
The decline comes from
internal economic weakness
00:32:05
together with internal fighting
00:32:07
or costly external fighting or both.
00:32:11
Typically, the decline comes gradually
00:32:14
and then very suddenly.
00:32:16
When debts become very large,
00:32:19
and there is an economic downturn,
00:32:22
and the empire can no
longer borrow the money
00:32:24
necessary to repay its debts,
00:32:27
the financial bubble bursts.
00:32:30
This creates great domestic hardships
00:32:32
and forces the country to choose between
00:32:34
defaulting on its debts or
printing a lot of new money.
00:32:39
It always chooses to
print a lot of new money.
00:32:42
At first gradually, and
eventually massively.
00:32:48
That devalues the currency
and raises inflation.
00:32:52
For the Dutch, this was
the financial crisis
00:32:55
brought about by financial excesses
00:32:57
and paying for the Fourth Anglo-Dutch War.
00:33:00
Similarly, for the British,
00:33:02
it was paying for its financial excesses
00:33:04
and its debts from the two world wars.
00:33:07
And for the US, it's been three cycles
00:33:10
of debt, finance, booms,
and busts since the nineties
00:33:14
with the central bank
stepping in each time
00:33:17
with stronger measures.
00:33:21
When the government has
problems funding itself,
00:33:24
when there are bad economic conditions
00:33:27
and living standards for
most people are declining,
00:33:31
and there are large wealth,
values, and political gaps,
00:33:36
internal conflict between
the rich and the poor,
00:33:39
as well as different ethnic,
religious, and racial groups
00:33:43
greatly increases.
00:33:45
This leads to political extremism
00:33:47
that shows up as populism
of the left or the right.
00:33:52
Those of the left seek to
redistribute the wealth
00:33:55
while those of the right
seek to maintain the wealth
00:33:57
in the hands of the rich.
00:33:59
Typically during such times,
taxes on the rich rise
00:34:03
and when the rich fear
their wealth and wellbeing
00:34:06
will be taken away,
00:34:07
they move to places,
assets, and currencies
00:34:11
they feel safer in.
00:34:12
These outflows reduce
the empire's tax revenue,
00:34:15
which leads to a classic,
self-reinforcing,
00:34:19
hollowing out process.
00:34:21
When the flight of wealth gets bad enough,
00:34:24
governments outlaw it.
00:34:26
Those seeking to get out begin to panic.
00:34:29
These turbulent conditions
undermine productivity,
00:34:33
which shrinks the economic
pie and causes more conflict
00:34:36
about how to divide the
shrinking resources.
00:34:40
Populist leaders emerge from both sides
00:34:42
and pledge to take control
and bring about order.
00:34:45
That's when democracy is most challenged,
00:34:48
because it fails to control the anarchy,
00:34:50
and it is when the move to
a strong populist leader
00:34:53
who will bring order to
the chaos is most likely.
00:34:57
As conflict within the country escalates,
00:34:59
it leads to some form of
revolution or civil war
00:35:03
to redistribute wealth and
force the necessary big changes.
00:35:08
This can be peaceful and
maintain the existing order,
00:35:13
but it's more often violent
and changes the order.
00:35:18
For example, the Roosevelt
revolution to redistribute wealth
00:35:21
was relatively peaceful
00:35:23
and maintained the
existing internal order,
00:35:26
while the French revolution,
the Russian revolution,
00:35:30
and the Chinese revolution
were much more violent
00:35:34
and led to new internal orders.
00:35:37
This internal conflict
makes the empire weak
00:35:40
and vulnerable to rising external rivals
00:35:44
who, seeing this domestic weakness,
00:35:46
are more inclined to mount a challenge.
00:35:49
This raises the risk of
great international conflict,
00:35:53
especially if the rival has
built up a comparable military.
00:35:57
Defending one's self and
one's empire against rivals
00:36:00
requires great military
spending, which has to occur
00:36:05
as domestic economic
conditions are deteriorating
00:36:08
and the empire can least afford it.
00:36:11
Since there is no viable system
00:36:13
for peacefully adjudicating
international disputes,
00:36:16
these conflicts are typically resolved
00:36:18
through tests of power.
00:36:22
As bolder challenges are made,
00:36:24
the leading empire is faced
with the difficult choice
00:36:27
of fighting or retreating.
00:36:30
Fighting and losing is the worst outcome,
00:36:32
but retreating is bad too as
it cedes progress to the rival
00:36:37
and signals that the empire is weak
00:36:39
to those countries that are
considering which side to be on.
00:36:43
Poor economic conditions
00:36:44
cause more fighting for wealth and power,
00:36:47
which inevitably leads
to some kind of war.
00:36:51
Wars are terribly costly.
00:36:54
At the same time, they
produce the tectonic shifts
00:36:57
that realign the new orders
00:36:59
to the new realities of
wealth and power in the world.
00:37:03
When those holding the
reserve currency and debt
00:37:06
of the declining empire
lose faith and sell them,
00:37:09
that marks the end of its big cycle.
00:37:12
Of the roughly 750 currencies
that existed since 1700,
00:37:17
less than 20% now exist,
00:37:20
and all of them have been devalued.
00:37:23
For the Dutch, this
happened after their defeat
00:37:25
in the Fourth Anglo-Dutch War,
00:37:28
when they weren't able to repay
00:37:30
the massive debts they built up during it.
00:37:33
This led to a run on the bank of Amsterdam
00:37:37
and a desperate sell off,
00:37:39
forcing massive money printing,
00:37:43
which devalued the currency
00:37:46
and the empire into irrelevance.
00:37:50
For the British, this
happened after World War II,
00:37:54
when despite their victory,
00:37:56
they could not repay the
massive debts they borrowed
00:37:59
to fund their war effort.
00:38:01
This led to a series of
money printing, devaluations,
00:38:06
and selloffs in the British pound
00:38:08
as the US and the dollar emerged dominant
00:38:11
and created a new world order.
00:38:14
At the time of this recording,
00:38:16
the United States hasn't
yet reached this point.
00:38:19
While it has massive debt,
spends more than it earns
00:38:23
and funds this deficit with more borrowing
00:38:25
and printing huge amounts of new money,
00:38:28
the big sell off in
dollars and dollar debt
00:38:30
hasn't yet begun.
00:38:32
And while there are great
internal and external conflicts
00:38:36
occurring for all the classic reasons,
00:38:38
they've not yet crossed
the line to become wars.
00:38:41
Eventually out of these conflicts,
00:38:43
whether they're violent or not,
00:38:45
come new winners who get together
00:38:47
and restructure the losers'
debts and political systems
00:38:51
and establish the new world order.
00:38:54
Then the old cycle and empire ends
00:38:58
and the new one begins
00:39:00
and they do it all over again.
00:39:02
That's a lot of detail I just threw at you
00:39:05
to paint a picture of how the
typical big cycle transpires.
00:39:09
Of course, not all of them
transpire exactly this way,
00:39:13
but most largely do, so much so
00:39:16
that it seems like the
stories of rises and declines
00:39:19
stay essentially the same
00:39:21
and the only things that change
00:39:23
are the clothes the characters wear
00:39:25
and the technologies they use.
00:39:28
So, where are we heading?
00:39:39
The future.
00:39:48
Most empires have their time in the sun
00:39:50
and inevitably decline.
00:39:55
Reversing a decline is difficult
00:39:57
because that requires undoing a lot
00:39:59
that's already been
done, but it's possible.
00:40:02
By looking at these indicators,
it's pretty easy to see
00:40:06
which stage of the big
cycle an empire is in,
00:40:09
how fit it is,
00:40:11
and whether its condition
is improving or worsening,
00:40:16
which can help one estimate
how many years it has left.
00:40:21
Still, these estimates aren't precise
00:40:23
and the cycle can be extended
00:40:25
if those in charge pay
attention to their vital signs
00:40:28
and improve them.
00:40:30
For example, knowing that
a person is 60 years old,
00:40:34
how fit they are,
whether they smoke or not
00:40:38
and a few other basic vital signs,
00:40:40
one can estimate the person's longevity.
00:40:44
One can do that with empires
and their vital signs too.
00:40:48
It won't be precise, but it
will be broadly indicative
00:40:53
and give clear direction on steps to take
00:40:55
to increase longevity.
00:40:58
It's most often the case
00:41:00
that a nation's greatest
war is with itself
00:41:03
over whether or not it can
make the hard decisions
00:41:07
needed to sustain success.
00:41:10
As for what we need to do,
00:41:12
it comes down to just two things -
00:41:14
earn more than we spend,
and treat each other well.
00:41:19
All other things I mentioned -
00:41:21
strong education, inventiveness,
00:41:23
being competitive and all the rest -
00:41:26
are just ways of getting
at these two things.
00:41:29
It's easy to measure if we're doing them.
00:41:32
So like people who want to get fit,
00:41:35
let's get on the program
and improve our vitals.
00:41:38
Let's do that individually
and collectively.
00:41:45
My goal for sharing this
picture of how the world works
00:41:48
and a few principles
for dealing with it well
00:41:50
is to help you recognize where we are
00:41:53
and the challenges we face,
00:41:55
and to make the wise decisions needed
00:41:58
to navigate these times well.
00:42:06
Since there is a lot more to
discuss and we are out of time,
00:42:10
you can learn more in my book
00:42:12
Principles for Dealing with
the Changing World Order.
00:42:15
And I look forward to
continuing this conversation
00:42:19
at economicprinciples.org
00:42:21
and on social media.
00:42:23
Thank you,
00:42:24
and may the force of
evolution be with you.
00:42:32
(dramatic music)
