October 10, 2023
Dear Friends and Family,
In the last nine segments we have analyzed today’s conditions in our country against the eight reasons for the decline and fall of the Roman Empire. The objective in doing so was to determine independently the state of our nation. This segment returns to Ray Dalio’s Big Model projections that was the focus of segment 2 & 3. We left segment 3 with three points of wisdom.
Segment 14 provides us with Ray Dalio’s perspective on the state of our nation based on a different historical look than our Roman Empire analysis. It is based on historical conflicts/wars that precede an all-out military war -- a trade/economic conflict (war), a technological conflict (war), a geopolitical conflict (war), a capital conflict (war), and in some cases a cultural war or conflict with ourselves (war). I prefer to think of these as conflicts using the term war only as an all-out war, but Dalio uses the term war in his excerpts, so that’s how it will be phrased.
As you read Dalio’s excerpts in this segment think about how well they mesh with the wisdom captured in the last nine segments, and whether you concur with his analysis based on our previous readings.
Happy Learning,
Harley
Dear Friends and Family,
In the last nine segments we have analyzed today’s conditions in our country against the eight reasons for the decline and fall of the Roman Empire. The objective in doing so was to determine independently the state of our nation. This segment returns to Ray Dalio’s Big Model projections that was the focus of segment 2 & 3. We left segment 3 with three points of wisdom.
- Our country is in a state of decline and if the trend continues history would indicate we will likely be in a major war within the next decade.
- If we wish to remain a major power in the world, we need to protect the dollar as the world’s reserve currency.
- China is an emerging world power and is close to being able to match the United States in military and economic power.
Segment 14 provides us with Ray Dalio’s perspective on the state of our nation based on a different historical look than our Roman Empire analysis. It is based on historical conflicts/wars that precede an all-out military war -- a trade/economic conflict (war), a technological conflict (war), a geopolitical conflict (war), a capital conflict (war), and in some cases a cultural war or conflict with ourselves (war). I prefer to think of these as conflicts using the term war only as an all-out war, but Dalio uses the term war in his excerpts, so that’s how it will be phrased.
As you read Dalio’s excerpts in this segment think about how well they mesh with the wisdom captured in the last nine segments, and whether you concur with his analysis based on our previous readings.
Happy Learning,
Harley
SEEKING WISDOM FOR AMERICA – SEGMENT 14
WHAT MIGHT THE FUTURE HOLD? – EXCERPTS
THE BIG PICTURE: CHINA and the UNITED STATES: Because the U.S. and China are now rival powers in a number of domains, they are in “conflicts” or “wars” in these domains. The United States appears to be in decline and China appears to be on the rise.
Destiny and the big debt cycle led the U.S. to find itself now in the late-cycle phase of the long-term debt cycle in which it has too much debt and needs to rapidly produce much more debt which it can’t service with hard currency. So, it has to monetize its debt in the classic late-cycle way of printing money to fund the government deficits. Ironically, and classically, being in this bad position is the consequence of the U.S. successes leading to these excesses. Specifically, it is because of the United States’ great global successes that the US dollar became the world’s dominant reserve currency, which allowed Americans to borrow excessively from the rest of the world (including from China) a lot of money which has put those other countries in the tenuous position of holding the debt of an overly indebted country that is rapidly increasing and monetizing its debt.
History has shown that all countries’ success depends on sustaining the strengthening forces without producing the excesses that lead to countries’ declines. The really successful countries have been able to do that in a big way for 200-300 years. No country has been able to do it forever.
The immediate goal is to put where we are in the context of the big-picture stories that got us here so we can see the cause/effect patterns of how things work so that we can put where we are into better perspective. History has taught us that there are five major types of wars: 1) trade/economic wars, 2) technology wars, 3) geopolitical wars, 4) capital wars, and 5) military wars. To these I would add 6) culture wars and 7) the war with ourselves. We see these wars transpiring in varying degrees now. They should not be mistaken for individual conflicts but rather recognized as interrelated conflicts that are the extensions of one bigger evolving conflict. In watching them transpire we need to observe and try to understand each side’s strategic goals.
The Trade/Economic War: Like all wars, the trade war can go from being a polite dispute to being life-threatening, depending on how far the combatants want to take it. Thus far we haven’t seen the US-China trade war taken very far.
The Technology War: The technology war is much more serious than the trade/economic war because whoever wins the technology war will probably also win the military wars and all the other wars. The Chinese tech sector has rapidly developed domestically to serve the Chinese in China and to become a competitor in world markets. At the same time China remains highly dependent on technologies from the United States and other countries. The United States appears now to have greater technology abilities overall, though it varies by type of technology and the U.S. is losing its lead. China will probably advance its technologies, and the quality of decision making that is enabled by them, faster than the US will because big data+ AI + big computing = superior decision making.
The amount of resources that are being poured into these and other technology areas is far greater in China than those in America. Further, the number of science, technology, engineering, and math graduates that are coming out of college and pursuing tech careers in China is about eight times that in the US.
The Geopolitical War: Sovereignty, especially as it relates to the Chinese mainland, Taiwan, Hong Kong, and the East and South China Seas, is probably China’s biggest issue. Beyond these are several other areas of strategic economic importance, such as those countries involved in China’s Belt and Road Initiative. Probably the most dangerous sovereignty issue is Taiwan.
Regarding influence around the world, for both the U.S. and China there are certain areas that each finds most important, primarily on the basis of proximity and/or of obtaining essentials and to a lesser extent of their export markets. Generally speaking, the Chinese appear to want tributary-like relationships with most non-rival countries, though the closer their proximity to China, the greater the influence China wants over them. In reaction to these changing circumstances most countries, in varying degrees, are wrestling with the question of whether it is better to be aligned with the United States or with China, with those in closest proximity needing to give the most consideration to this question. Over the last few years Chinese influence over other countries has been expanding while U.S. influence has been receding. Over the next five to ten years, in addition to there being decoupling in other areas, we will be seeing which countries align themselves with each of these leading powers. It will be important to see what these alliances will look like because throughout history, the most powerful country is typically taken down by alliances of countries that are less powerful but collectively stronger.
The Capital War: As history has shown, one of the biggest risks in a conflict is that access to one’s money/capital can be shut off. This can happen by a) the moves of one’s opponents and/or b) self-inflicted harmful actions (e.g., getting into too much debt and devaluing one’s money) that lead those who provide capital to not want to provide it.
The goal in capital war is to cut the enemy off from capital because no money = no power.
The United States’ greatest power comes from having the world’s leading reserve currency. However, the United States is at risk of losing its reserve currency status, because the U.S. government and the U.S. central bank are increasing the amounts of dollar-denominated debt and money at an extraordinary fast pace, so it will likely be hard to find adequate demand for U.S. debt without the Federal Reserve having to monetize a lot of it.
The dollar’s role as a reserve currency largely depends on its being freely exchanged between countries, so to the extent that the U.S. might in the future put controls on its flows and/or run monetary policy in ways that are contrary to the world’s interests in pursuit of its own interests, that would make the dollar less desirable as the world’s leading reserve currency.
Today there are no good currency alternatives because: (a) the dollar (51% of central bank reserves), but has weakening fundamentals; (b) the euro (20%) is a weakly structured fiat currency made by smaller, uncoordinated countries with weak finances that are tenuously held together by a highly fragmented currency union; (c) gold (12%) is a relatively dead asset since there are no significant international trade and capital transactions in it; (d) the yen (6%) is a fiat currency that is also not widely used internationally by non-Japanese people and Japan has too much debt; (e) the pound (5%) is an anachronistically held fiat currency that has relatively weak fundamentals and the UK is relatively weak in almost all of our measures of a country’s economic/geopolitical power and (f) the renminbi (2%) is the only fiat currency to be chosen as a reserve currency because of its fundamentals. China’s potential is sizable. The negatives are that China has a relatively large amount of domestic debt that has to be restructured, the renminbi is not a currency that is widely used for global trade, China’s clearing system is underdeveloped, and money is not allowed to freely flow in and out of the currency.
History has shown that whenever a) currencies are not desired and b) there are no other currencies that are attractive to go into, the currencies are still devalued and the capital finds its way into other investments (e.g., gold, commodities, stocks, property, etc.). As a result, there is no need to have a strong alternative for a devaluation of a currency to take place.
Things will change, To the extent that the U.S. and China are in a capital war, the development of Chinese currency and capital markets would be detrimental for the U.S. and beneficial for China.
The Military War: It is impossible to visualize what the next major military war will be like, though it probably will be much worse than most people imagine. That is because a lot of weaponry has been developed in secret and because the creativity and capabilities to inflict pain have grown enormously in all forms of warfare since the last time the most powerful weapons were used and seen in action. While nuclear warfare is a scary prospect, I have heard equally scary prospects of biological, cyber, chemical, space, and other types of warfare. Many of these are untested so there is a lot of uncertainty about how they would go.
The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.
When countries have big internal disorder, it is an opportune moment for opposing countries to aggressively exploit their vulnerabilities. History has taught us that when there are leadership transitions and/or weak leadership at the same time that there is a big internal conflict, the risk of the enemy making an offensive move should be considered elevated.
How people are with each other is of paramount importance in determining how they will handle the circumstances they jointly face and the cultures they have will be the biggest determinants of how they are with each other.
Chinese culture compels its leaders and society to make most decisions from the top down, demanding high standards of civility, putting the collective interest ahead of individual interests, requiring each person to know their role and how to play it well, and having filial respect for those superior in the hierarchy.
In contrast, American culture compels its leaders to run the country from the bottom up, demanding high levels of personal freedom, favoring individualism over collectivism, admiring revolutionary thinking and behavior, and not respecting people for their positions as much as for the quality of their thinking.
These core cultural values drove the types of economic and political systems each country chose. The main challenge the Chinese and Americans have with each other arises from some of them failing to understand and empathize with the other’s values and ways of doing things, and not allowing each other to do what they think is best. What works best varies according to a) the circumstances and b) how people using these systems are with each other.
The War with Ourselves: The enemy is Us: Our greatest war is with ourselves because we have the most control over how strong or weak, we are. Here are the specific items that help make a great empire.
Leadership that is strong enough and capable enough to provide the essential ingredients for success which include: strong education; strong character, civility, and a strong work ethic; low corruption and high respect for rules, such as the rule of law; people being able to work well together, united behind a common view of how they should be together; a good system for allocating resources; strong income growth; increased investments to improve infrastructure, education, and research and development; rapidly increasing productivity; new technologies; a strong military; strong and widely used currency, equity, and credit markets.
Whatever makes these measures go up is good and whatever makes them go down is bad. For this reason, it is wise for citizens of all countries to ask themselves how well they collectively and their leaders are doing at making the lines in these measures go up.
THE FUTURE: If we look back carefully to see how the present was created, we can see that evolutionary advances didn’t just happen on their own; every day, there were events that affected the present while people’s actions shaped them. At the same time, we know that we never could have anticipated them individually – if we had tried to predict each of the specific wars, droughts, pandemics, inventions, prosperous periods, declines, etc. we would have failed. But even without knowing about any of those specific developments, we could have pretty confidently said that advances would occur that would enable significantly larger populations to live significantly longer while enjoying significantly higher standards of living because of the evolution that has already occurred, and that we have every reason to expect to continue to occur, from humanity’s inventiveness.
Because everything that happens is the result of events that have happened before, I have some pretty good and logical, through imperfect, leading and coincident indicators of important changes. I found 18 determinants that explain most of the conditions and changes in wealth and power both within and between nations. There are five of these determinants that have had the biggest impacts on what happens in the year ahead: innovation, the debt/money/capital market cycle, the internal order and disorder cycle, the external order and disorder cycle, and acts of nature.
Humanity’s Inventiveness: Innovation and inventiveness are clearly the most powerful determinant of a country’s conditions. I believe that humanity’s evolution through its inventiveness is accelerating and that most people will benefit from it. The abilities of both computers and humans will improve at an increasing pace. Perhaps most importantly, advances in the wider use of quantum computing with AI will lead to unimaginable advances in rates of learning and improvement and changes in global wealth and power.
The Debt/Money/Capital Market/Economic Cycle: The big risk is not that those big debtors will default; it is that creditors will hold assets that will be devalued – i.e., that the returns from holding debt assets will be less than the inflation rate. What does that mean for the dollar (most importantly) and the other more minor reserve currencies? Most probably they will decline analogously to past reserve currency declines: slowly for a long time and then very quickly.
Of importance is the U.S.’s debt burden. The debt burden gauge is based on a combination of a) debt levels relative to asset levels, b) the sizes of external and internal surpluses and deficits, c) the sizes of debt service costs relative to GDP, d) the amount of debt in a country’s own currency versus foreign currency, e) the amount of debt held by its own citizens versus foreigners, and f) its credit rating. U.S.’s debt burdens are high, its debt is denominated in dollars, the world’s leading reserve currency, so it has the ability to print money to service its debts. This reduces its risk of default but increases its devaluation risk. If the U.S. lost its reserve currency status, it would be in serious financial trouble.
The Internal Order and Disorder Cycle: As of this writing (2021) there are varying amounts of conflict going on within different countries. Internal conflict is especially high in the United States which appears to be in Stage 5 of the cycle (when there are bad financial conditions and intense conflict), while China appears to be in Stage 3 (when there is peace and prosperity).
While I think that the odds of the U.S. devolving into a Stage 6 (civil-war-type) dynamic within the next 10 years (i.e., 2031) are only around 30%, that is a dangerously high risk that must be protected against and watched closely. There is an exceptional amount of polarization in the U.S. right now, as reflected in the stats.
History shows that reversing a decline is very difficult because it requires undoing so many things that have already been done. The question is whether we Americans can face our challenges honestly and adapt and change to meet them. The fact that the U.S. is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both the Americans and to non-Americans who depend on them. Can it remain strong and united, or will it continue to allow division and internal struggles to lead to decline?
The External Order and Disorder Cycle: Looking back over the last 500 years, one can see that military wars between major empires started on average about once every 10 years, give or take a couple of years, and it has been about 75 years since the last really big one (World War II) From that perspective the odds of a big military war in the next 10 years are about 50/50.
If the U.S. continues to decline and China continues to rise, what matters most is whether or not each can do so gracefully. The big risk is that when existential irreconcilable differences exist and there is no mutually agreed-upon party or process to adjudicate the conflict, there is a good chance that there will be a fight. The main seemingly irreconcilable difference between the U.S. and China is over Taiwan.
As the Chinese know very well, the best way to fight a war is to get strong and show one’s opponent one’s strength so they don’t want to fight violently. I think the odds favor intensifying trade/economic wars, technology wars, capital wars, and geopolitical wars as China becomes even more competitive and increasingly global in these areas.
Acts of Nature: Throughout history, droughts, floods, pandemics, and other severe natural and biological disasters have inflicted harm on people than people have inflicted on themselves, killing millions, disrupting economies, and contributing to the falls of many empires and dynasties.
In Summary: Based on just these five indicators, it appears to me that: humanity’s inventiveness will probably lead to great advances while the debt/economic cycle, the internal order cycle, the external order cycle, and worsening acts of nature will almost certainly pose problems. In other words, there will be a battle between humanity’s inventiveness and these other challenges.
Computer Analysis of the Conditions of, and Prospects for the United States and China.
For the U.S.: As of August 2021. Based on the latest reading of key indicators, the United States appears to be a strong power (No. 1 among major countries today) in gradual decline. As shown in the table below, the key strengths of the United States that put it in this position are its strong capital markets and financial center, its innovation/technology, its high level of education, its strong military, its reserve currency status, and its high economic output. Its weaknesses are its unfavorable economic/financial position and its large domestic conflicts. The eight major measures of power are very strong today but are, in aggregate, trending downward. In particular, the United States’ relative position in education, its importance to global trade, and its relative military strength are declining.
To understand a country, we start by looking at the Big Cycles, as well as measures of power that both reflect and drive the rise and fall of a country. For the United States, the big cycles look unfavorable. The United States is in an unfavorable position in its economic and financial cycles, with a high debt burden and relatively low expected real growth over the next 20 years. Internal disorder is at high risk. Wealth, income, and values gaps are large. External disorder is a risk. Most importantly, the United States and China, which is fast-rising, and the No. 2 power are having significant conflict.
For China: This is our computer reading for China as of August 2021. China appears to be a strong power (No. 2 among major countries today) in rapid ascent. The key strengths of China that put it in this position are its strong economic and financial position, its infrastructure and investment, its importance to global trade, its high economic output, its people’s self-sufficiency and strong work ethic, its high level of education, and its strong military. For China, the big cycles look somewhat favorable. China is in a somewhat favorable position in its economic and financial cycles. Internal disorder is a moderate risk. Wealth, income, and value gaps are relatively large. External disorder is a risk. Most importantly, China and the United States, which is declining but remains the No. 1 power (all things considered) are having significant conflict.
China is the largest exported among major countries. It exports 14% of global exports. In addition, China has the largest economy among major countries. China also has the second strongest position in education among major countries.
Source: Principles for Dealing with The Changing World Order: Why Nations Succeed and Fail by Ray Dalio (2021)
The unabbreviated version of the above can be found in the pdf document below.
WHAT MIGHT THE FUTURE HOLD? – EXCERPTS
THE BIG PICTURE: CHINA and the UNITED STATES: Because the U.S. and China are now rival powers in a number of domains, they are in “conflicts” or “wars” in these domains. The United States appears to be in decline and China appears to be on the rise.
Destiny and the big debt cycle led the U.S. to find itself now in the late-cycle phase of the long-term debt cycle in which it has too much debt and needs to rapidly produce much more debt which it can’t service with hard currency. So, it has to monetize its debt in the classic late-cycle way of printing money to fund the government deficits. Ironically, and classically, being in this bad position is the consequence of the U.S. successes leading to these excesses. Specifically, it is because of the United States’ great global successes that the US dollar became the world’s dominant reserve currency, which allowed Americans to borrow excessively from the rest of the world (including from China) a lot of money which has put those other countries in the tenuous position of holding the debt of an overly indebted country that is rapidly increasing and monetizing its debt.
History has shown that all countries’ success depends on sustaining the strengthening forces without producing the excesses that lead to countries’ declines. The really successful countries have been able to do that in a big way for 200-300 years. No country has been able to do it forever.
The immediate goal is to put where we are in the context of the big-picture stories that got us here so we can see the cause/effect patterns of how things work so that we can put where we are into better perspective. History has taught us that there are five major types of wars: 1) trade/economic wars, 2) technology wars, 3) geopolitical wars, 4) capital wars, and 5) military wars. To these I would add 6) culture wars and 7) the war with ourselves. We see these wars transpiring in varying degrees now. They should not be mistaken for individual conflicts but rather recognized as interrelated conflicts that are the extensions of one bigger evolving conflict. In watching them transpire we need to observe and try to understand each side’s strategic goals.
The Trade/Economic War: Like all wars, the trade war can go from being a polite dispute to being life-threatening, depending on how far the combatants want to take it. Thus far we haven’t seen the US-China trade war taken very far.
The Technology War: The technology war is much more serious than the trade/economic war because whoever wins the technology war will probably also win the military wars and all the other wars. The Chinese tech sector has rapidly developed domestically to serve the Chinese in China and to become a competitor in world markets. At the same time China remains highly dependent on technologies from the United States and other countries. The United States appears now to have greater technology abilities overall, though it varies by type of technology and the U.S. is losing its lead. China will probably advance its technologies, and the quality of decision making that is enabled by them, faster than the US will because big data+ AI + big computing = superior decision making.
The amount of resources that are being poured into these and other technology areas is far greater in China than those in America. Further, the number of science, technology, engineering, and math graduates that are coming out of college and pursuing tech careers in China is about eight times that in the US.
The Geopolitical War: Sovereignty, especially as it relates to the Chinese mainland, Taiwan, Hong Kong, and the East and South China Seas, is probably China’s biggest issue. Beyond these are several other areas of strategic economic importance, such as those countries involved in China’s Belt and Road Initiative. Probably the most dangerous sovereignty issue is Taiwan.
Regarding influence around the world, for both the U.S. and China there are certain areas that each finds most important, primarily on the basis of proximity and/or of obtaining essentials and to a lesser extent of their export markets. Generally speaking, the Chinese appear to want tributary-like relationships with most non-rival countries, though the closer their proximity to China, the greater the influence China wants over them. In reaction to these changing circumstances most countries, in varying degrees, are wrestling with the question of whether it is better to be aligned with the United States or with China, with those in closest proximity needing to give the most consideration to this question. Over the last few years Chinese influence over other countries has been expanding while U.S. influence has been receding. Over the next five to ten years, in addition to there being decoupling in other areas, we will be seeing which countries align themselves with each of these leading powers. It will be important to see what these alliances will look like because throughout history, the most powerful country is typically taken down by alliances of countries that are less powerful but collectively stronger.
The Capital War: As history has shown, one of the biggest risks in a conflict is that access to one’s money/capital can be shut off. This can happen by a) the moves of one’s opponents and/or b) self-inflicted harmful actions (e.g., getting into too much debt and devaluing one’s money) that lead those who provide capital to not want to provide it.
The goal in capital war is to cut the enemy off from capital because no money = no power.
The United States’ greatest power comes from having the world’s leading reserve currency. However, the United States is at risk of losing its reserve currency status, because the U.S. government and the U.S. central bank are increasing the amounts of dollar-denominated debt and money at an extraordinary fast pace, so it will likely be hard to find adequate demand for U.S. debt without the Federal Reserve having to monetize a lot of it.
The dollar’s role as a reserve currency largely depends on its being freely exchanged between countries, so to the extent that the U.S. might in the future put controls on its flows and/or run monetary policy in ways that are contrary to the world’s interests in pursuit of its own interests, that would make the dollar less desirable as the world’s leading reserve currency.
Today there are no good currency alternatives because: (a) the dollar (51% of central bank reserves), but has weakening fundamentals; (b) the euro (20%) is a weakly structured fiat currency made by smaller, uncoordinated countries with weak finances that are tenuously held together by a highly fragmented currency union; (c) gold (12%) is a relatively dead asset since there are no significant international trade and capital transactions in it; (d) the yen (6%) is a fiat currency that is also not widely used internationally by non-Japanese people and Japan has too much debt; (e) the pound (5%) is an anachronistically held fiat currency that has relatively weak fundamentals and the UK is relatively weak in almost all of our measures of a country’s economic/geopolitical power and (f) the renminbi (2%) is the only fiat currency to be chosen as a reserve currency because of its fundamentals. China’s potential is sizable. The negatives are that China has a relatively large amount of domestic debt that has to be restructured, the renminbi is not a currency that is widely used for global trade, China’s clearing system is underdeveloped, and money is not allowed to freely flow in and out of the currency.
History has shown that whenever a) currencies are not desired and b) there are no other currencies that are attractive to go into, the currencies are still devalued and the capital finds its way into other investments (e.g., gold, commodities, stocks, property, etc.). As a result, there is no need to have a strong alternative for a devaluation of a currency to take place.
Things will change, To the extent that the U.S. and China are in a capital war, the development of Chinese currency and capital markets would be detrimental for the U.S. and beneficial for China.
The Military War: It is impossible to visualize what the next major military war will be like, though it probably will be much worse than most people imagine. That is because a lot of weaponry has been developed in secret and because the creativity and capabilities to inflict pain have grown enormously in all forms of warfare since the last time the most powerful weapons were used and seen in action. While nuclear warfare is a scary prospect, I have heard equally scary prospects of biological, cyber, chemical, space, and other types of warfare. Many of these are untested so there is a lot of uncertainty about how they would go.
The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.
When countries have big internal disorder, it is an opportune moment for opposing countries to aggressively exploit their vulnerabilities. History has taught us that when there are leadership transitions and/or weak leadership at the same time that there is a big internal conflict, the risk of the enemy making an offensive move should be considered elevated.
How people are with each other is of paramount importance in determining how they will handle the circumstances they jointly face and the cultures they have will be the biggest determinants of how they are with each other.
Chinese culture compels its leaders and society to make most decisions from the top down, demanding high standards of civility, putting the collective interest ahead of individual interests, requiring each person to know their role and how to play it well, and having filial respect for those superior in the hierarchy.
In contrast, American culture compels its leaders to run the country from the bottom up, demanding high levels of personal freedom, favoring individualism over collectivism, admiring revolutionary thinking and behavior, and not respecting people for their positions as much as for the quality of their thinking.
These core cultural values drove the types of economic and political systems each country chose. The main challenge the Chinese and Americans have with each other arises from some of them failing to understand and empathize with the other’s values and ways of doing things, and not allowing each other to do what they think is best. What works best varies according to a) the circumstances and b) how people using these systems are with each other.
The War with Ourselves: The enemy is Us: Our greatest war is with ourselves because we have the most control over how strong or weak, we are. Here are the specific items that help make a great empire.
Leadership that is strong enough and capable enough to provide the essential ingredients for success which include: strong education; strong character, civility, and a strong work ethic; low corruption and high respect for rules, such as the rule of law; people being able to work well together, united behind a common view of how they should be together; a good system for allocating resources; strong income growth; increased investments to improve infrastructure, education, and research and development; rapidly increasing productivity; new technologies; a strong military; strong and widely used currency, equity, and credit markets.
Whatever makes these measures go up is good and whatever makes them go down is bad. For this reason, it is wise for citizens of all countries to ask themselves how well they collectively and their leaders are doing at making the lines in these measures go up.
THE FUTURE: If we look back carefully to see how the present was created, we can see that evolutionary advances didn’t just happen on their own; every day, there were events that affected the present while people’s actions shaped them. At the same time, we know that we never could have anticipated them individually – if we had tried to predict each of the specific wars, droughts, pandemics, inventions, prosperous periods, declines, etc. we would have failed. But even without knowing about any of those specific developments, we could have pretty confidently said that advances would occur that would enable significantly larger populations to live significantly longer while enjoying significantly higher standards of living because of the evolution that has already occurred, and that we have every reason to expect to continue to occur, from humanity’s inventiveness.
Because everything that happens is the result of events that have happened before, I have some pretty good and logical, through imperfect, leading and coincident indicators of important changes. I found 18 determinants that explain most of the conditions and changes in wealth and power both within and between nations. There are five of these determinants that have had the biggest impacts on what happens in the year ahead: innovation, the debt/money/capital market cycle, the internal order and disorder cycle, the external order and disorder cycle, and acts of nature.
Humanity’s Inventiveness: Innovation and inventiveness are clearly the most powerful determinant of a country’s conditions. I believe that humanity’s evolution through its inventiveness is accelerating and that most people will benefit from it. The abilities of both computers and humans will improve at an increasing pace. Perhaps most importantly, advances in the wider use of quantum computing with AI will lead to unimaginable advances in rates of learning and improvement and changes in global wealth and power.
The Debt/Money/Capital Market/Economic Cycle: The big risk is not that those big debtors will default; it is that creditors will hold assets that will be devalued – i.e., that the returns from holding debt assets will be less than the inflation rate. What does that mean for the dollar (most importantly) and the other more minor reserve currencies? Most probably they will decline analogously to past reserve currency declines: slowly for a long time and then very quickly.
Of importance is the U.S.’s debt burden. The debt burden gauge is based on a combination of a) debt levels relative to asset levels, b) the sizes of external and internal surpluses and deficits, c) the sizes of debt service costs relative to GDP, d) the amount of debt in a country’s own currency versus foreign currency, e) the amount of debt held by its own citizens versus foreigners, and f) its credit rating. U.S.’s debt burdens are high, its debt is denominated in dollars, the world’s leading reserve currency, so it has the ability to print money to service its debts. This reduces its risk of default but increases its devaluation risk. If the U.S. lost its reserve currency status, it would be in serious financial trouble.
The Internal Order and Disorder Cycle: As of this writing (2021) there are varying amounts of conflict going on within different countries. Internal conflict is especially high in the United States which appears to be in Stage 5 of the cycle (when there are bad financial conditions and intense conflict), while China appears to be in Stage 3 (when there is peace and prosperity).
While I think that the odds of the U.S. devolving into a Stage 6 (civil-war-type) dynamic within the next 10 years (i.e., 2031) are only around 30%, that is a dangerously high risk that must be protected against and watched closely. There is an exceptional amount of polarization in the U.S. right now, as reflected in the stats.
History shows that reversing a decline is very difficult because it requires undoing so many things that have already been done. The question is whether we Americans can face our challenges honestly and adapt and change to meet them. The fact that the U.S. is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both the Americans and to non-Americans who depend on them. Can it remain strong and united, or will it continue to allow division and internal struggles to lead to decline?
The External Order and Disorder Cycle: Looking back over the last 500 years, one can see that military wars between major empires started on average about once every 10 years, give or take a couple of years, and it has been about 75 years since the last really big one (World War II) From that perspective the odds of a big military war in the next 10 years are about 50/50.
If the U.S. continues to decline and China continues to rise, what matters most is whether or not each can do so gracefully. The big risk is that when existential irreconcilable differences exist and there is no mutually agreed-upon party or process to adjudicate the conflict, there is a good chance that there will be a fight. The main seemingly irreconcilable difference between the U.S. and China is over Taiwan.
As the Chinese know very well, the best way to fight a war is to get strong and show one’s opponent one’s strength so they don’t want to fight violently. I think the odds favor intensifying trade/economic wars, technology wars, capital wars, and geopolitical wars as China becomes even more competitive and increasingly global in these areas.
Acts of Nature: Throughout history, droughts, floods, pandemics, and other severe natural and biological disasters have inflicted harm on people than people have inflicted on themselves, killing millions, disrupting economies, and contributing to the falls of many empires and dynasties.
In Summary: Based on just these five indicators, it appears to me that: humanity’s inventiveness will probably lead to great advances while the debt/economic cycle, the internal order cycle, the external order cycle, and worsening acts of nature will almost certainly pose problems. In other words, there will be a battle between humanity’s inventiveness and these other challenges.
Computer Analysis of the Conditions of, and Prospects for the United States and China.
For the U.S.: As of August 2021. Based on the latest reading of key indicators, the United States appears to be a strong power (No. 1 among major countries today) in gradual decline. As shown in the table below, the key strengths of the United States that put it in this position are its strong capital markets and financial center, its innovation/technology, its high level of education, its strong military, its reserve currency status, and its high economic output. Its weaknesses are its unfavorable economic/financial position and its large domestic conflicts. The eight major measures of power are very strong today but are, in aggregate, trending downward. In particular, the United States’ relative position in education, its importance to global trade, and its relative military strength are declining.
To understand a country, we start by looking at the Big Cycles, as well as measures of power that both reflect and drive the rise and fall of a country. For the United States, the big cycles look unfavorable. The United States is in an unfavorable position in its economic and financial cycles, with a high debt burden and relatively low expected real growth over the next 20 years. Internal disorder is at high risk. Wealth, income, and values gaps are large. External disorder is a risk. Most importantly, the United States and China, which is fast-rising, and the No. 2 power are having significant conflict.
For China: This is our computer reading for China as of August 2021. China appears to be a strong power (No. 2 among major countries today) in rapid ascent. The key strengths of China that put it in this position are its strong economic and financial position, its infrastructure and investment, its importance to global trade, its high economic output, its people’s self-sufficiency and strong work ethic, its high level of education, and its strong military. For China, the big cycles look somewhat favorable. China is in a somewhat favorable position in its economic and financial cycles. Internal disorder is a moderate risk. Wealth, income, and value gaps are relatively large. External disorder is a risk. Most importantly, China and the United States, which is declining but remains the No. 1 power (all things considered) are having significant conflict.
China is the largest exported among major countries. It exports 14% of global exports. In addition, China has the largest economy among major countries. China also has the second strongest position in education among major countries.
Source: Principles for Dealing with The Changing World Order: Why Nations Succeed and Fail by Ray Dalio (2021)
The unabbreviated version of the above can be found in the pdf document below.
| america_14l_the_future_--_segment_14_.pdf |