Principles for Dealing with the Changing World Order

1. The Big Cycle: Empires rise and fall in predictable patterns

"Everything that has happened and everything that will happen has had and will have determinants that make it happen."

The Big Cycle framework explains the rise and fall of empires throughout history. This cycle typically unfolds over 250 years (plus or minus 150 years) and consists of several stages:

1. Rise: A new order begins with strong leadership and institutions
2. Top: The empire reaches its peak of wealth and power
3. Decline: Internal conflicts and external challenges emerge
4. Crisis: Economic, social, and political pressures culminate
5. Depression/Revolution/War: The old order breaks down
6. New Order: A new cycle begins with restructured systems

Key factors driving this cycle include:

• Economic strength and productivity
• Technological innovation and education
• Military power and global influence
• Debt levels and financial stability
• Social cohesion and wealth distribution

2. Money, credit, and debt drive economic cycles and power shifts

"If you don't understand how money and credit work, you can't understand how the system works, and if you don't understand how the system works, you can't understand what's coming at you."

The debt cycle plays a crucial role in shaping economic and power dynamics. This cycle consists of two main parts:

1. Short-term debt cycle (5-8 years):

   • Expansion: Easy credit leads to economic growth
   • Contraction: Tightening credit causes recession

2. Long-term debt cycle (75-100 years):

   • Debt accumulation over decades
   • Debt bubble and eventual crisis
   • Deleveraging and economic restructuring

Understanding these cycles helps predict:

• Economic booms and busts
• Inflation and deflation trends
• Currency valuations and exchange rates
• Shifts in global economic power

3. Internal order and disorder shape a nation's trajectory

"How people are with each other is the primary driver of the outcomes they get."

Internal stability is crucial for a nation's success and longevity. The cycle of internal order and disorder typically follows these stages:

1. Strong leadership consolidates power
2. Effective institutions are built
3. Peace and prosperity flourish
4. Excesses in spending and debt accumulate
5. Wealth gaps widen, leading to social tensions
6. Internal conflicts escalate, potentially leading to civil war

Factors influencing internal order:

• Quality of leadership and governance
• Strength of institutions and rule of law
• Economic opportunities and social mobility
• Wealth distribution and social cohesion
• Education and shared values

4. External conflicts and geopolitics influence global power dynamics

"All countries through time have had systems or orders for governing how they deal with each other."

Geopolitical relationships shape the global balance of power. Key aspects of external order and disorder include:

1. Formation of alliances and rivalries
2. Economic and trade relationships
3. Military conflicts and arms races
4. Diplomatic negotiations and treaties
5. Competition for resources and influence

Types of conflicts between nations:

• Trade/economic wars
• Technology wars
• Geopolitical wars
• Capital wars
• Military wars

Understanding these dynamics helps predict shifts in global power and potential areas of conflict.

5. Education, innovation, and competitiveness fuel national success

"Human productivity is the most important force in causing the world's total wealth, power, and living standards to rise over time."

Human capital development is crucial for a nation's long-term success. Key factors include:

1. Education system quality and accessibility
2. Investment in research and development
3. Entrepreneurial culture and support
4. Technological innovation and adoption
5. Workforce skills and adaptability

Benefits of strong human capital:

• Increased economic productivity
• Higher living standards
• Greater global competitiveness
• Enhanced ability to solve societal challenges
• Resilience in the face of change

Countries that prioritize these areas tend to rise in global power rankings and maintain their positions for longer periods.

6. Wealth gaps and social unrest precede major power shifts

"Throughout history various forms of groups of people (e.g., tribes, kingdoms, countries, etc.) have gained wealth and power by building it themselves, taking it from others, or finding it in the ground."

Wealth inequality often leads to social and political instability. The typical progression:

1. Economic growth benefits a small elite
2. Wealth gaps widen over time
3. Social tensions increase
4. Populist movements gain traction
5. Political polarization intensifies
6. Potential for revolution or significant reforms

Factors contributing to wealth gaps:

• Uneven access to education and opportunities
• Technological disruption of labor markets
• Globalization and outsourcing
• Tax policies favoring capital over labor
• Concentration of corporate power

Addressing wealth inequality is crucial for maintaining social stability and preventing destructive conflicts.

7. Reserve currency status brings both privilege and vulnerability

"Having a reserve currency is great while it lasts because it gives a country exceptional borrowing and spending power and significant power over who else in the world gets the money and credit needed to buy and sell internationally."

Reserve currency dynamics play a crucial role in global economic power. Benefits and risks include:

Benefits:

• Lower borrowing costs for the issuing country
• Global demand for the currency and its debt
• Ability to run larger trade deficits
• Geopolitical influence through financial system

Risks:

• Pressure to maintain global confidence in the currency
• Potential for excessive debt accumulation
• Vulnerability to shifts in global sentiment
• Risk of eventual loss of reserve status

Historical reserve currencies:

1. Dutch guilder
2. British pound
3. US dollar

Understanding these dynamics helps predict potential shifts in global economic power and currency valuations.

8. The US-China rivalry echoes historical power transitions

"The world order is now rapidly shifting in important ways that have never happened in our lifetimes but have happened many times before."

The current US-China relationship mirrors historical patterns of rising and established powers. Key aspects of this rivalry include:

1. Economic competition:

   • Trade disputes
   • Technological race
   • Currency and capital markets

2. Geopolitical tensions:

   • Territorial disputes (e.g., South China Sea, Taiwan)
   • Competing spheres of influence
   • Military modernization and posturing

3. Ideological differences:

   • Political systems (democracy vs. state capitalism)
   • Human rights and governance philosophies
   • Global governance visions

Historical parallels:

• Athens and Sparta in ancient Greece
• Britain and Germany before World War I
• US and Soviet Union during the Cold War

Understanding these dynamics helps anticipate potential areas of conflict and cooperation between the two powers.

9. Investing strategies must adapt to long-term economic cycles

"All markets are primarily driven by just four determinants: growth, inflation, risk premiums, and discount rates."

Investment implications of long-term economic cycles are significant. Key considerations:

1. Asset allocation:

   • Diversify across countries, currencies, and asset classes
   • Consider the stage of the debt cycle when making decisions
   • Adapt to shifting economic and geopolitical landscapes

2. Currency risks:

   • Be aware of potential currency devaluations
   • Consider gold and other hard assets as hedges

3. Debt levels:

   • Monitor government and private sector debt levels
   • Be cautious of excessive leverage in the system

4. Technological disruption:

   • Invest in sectors and companies driving innovation
   • Be wary of industries vulnerable to technological change

5. Geopolitical risks:

   • Consider the impact of trade tensions and conflicts
   • Diversify across different geopolitical spheres

By understanding these long-term cycles, investors can better position themselves for future economic and market shifts.

10. Future world order will be shaped by current global trends

"To have peace and prosperity, a society must have productivity that benefits most people."

Emerging global trends will influence the future world order. Key factors to watch:

1. Technological advancements:

   • Artificial intelligence and automation
   • Biotechnology and healthcare innovations
   • Clean energy and sustainability solutions

2. Demographic shifts:

   • Aging populations in developed countries
   • Growing middle class in emerging markets
   • Migration patterns and urbanization

3. Climate change:

   • Environmental impacts on economies
   • Transition to sustainable energy sources
   • Potential for resource-driven conflicts

4. Evolving global institutions:

   • Reforms to international organizations
   • New alliances and economic blocs
   • Shifts in global governance models

5. Cultural and social changes:

   • Evolving work patterns (e.g., remote work)
   • Changing consumer preferences
   • Shifts in societal values and priorities

Understanding these trends can help individuals, businesses, and policymakers better prepare for and shape the future world order.

Last updated: September 19, 2024