July 18, 2023
Dear Friends and Family,
This is the first of several segments to provide you information so you can determine for yourself whether our country is in decline. The means to do so is to utilize Ray Dalio’s half century study of the rise and fall of empires and superpowers from which he developed a model based on the patterns each exhibited. Such entities were in power for 100 to 250 years and each went through six stages which included their rise to power (stages 1 & 2), their patterns at the top of their power (stages 3 & 4), their decline (stage 5) and their fall (stage 6). Withing this Big Cycle each also exhibited similar patterns in three sub-cycles:
I am leading off with this model as history is often the best teacher to not only understand our current situation but also to predict the future or allow us to effectively alter the predicted trend.
Happy Learning.
Harley
Dear Friends and Family,
This is the first of several segments to provide you information so you can determine for yourself whether our country is in decline. The means to do so is to utilize Ray Dalio’s half century study of the rise and fall of empires and superpowers from which he developed a model based on the patterns each exhibited. Such entities were in power for 100 to 250 years and each went through six stages which included their rise to power (stages 1 & 2), their patterns at the top of their power (stages 3 & 4), their decline (stage 5) and their fall (stage 6). Withing this Big Cycle each also exhibited similar patterns in three sub-cycles:
- A long-term Debt and Capital Market Cycle
- An Internal Order and Disorder Cycle
- An External Order and Disorder Cycle.
I am leading off with this model as history is often the best teacher to not only understand our current situation but also to predict the future or allow us to effectively alter the predicted trend.
Happy Learning.
Harley
SEEKING WISDOM FOR AMERICA – SEGMENT 2
HOW THE WORLD HAS WORKED – EXCERPTS
NOTE: All excerpts in this segment are from The Changing World Order by Ray Dalio (2021).
INTRODUCTION: As I studied history all the empires and dynasties rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it. The Big Cycle produces swings between 1) peaceful and prosperous period of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish.
PAST BIG CYCLE SHIFTS: The four most important empires over the last 500 years were the Dutch, British, American, and Chinese. These empires held the last three reserve currencies – the dollar now, the British pound before it, and the Dutch guilder before that. China is included because it has risen to be the second most powerful empire/country and because it was so consistently powerful in most years prior to around 1850.
THE ARCHTYPICAL BIG CYCLE: The Rise: The rise is the prosperous period of building that comes after a new order. It is when the country is fundamentally strong because there are a) relatively low levels of indebtedness, b) relatively small wealth, values and political gaps between people, c) people working effectively together to produce prosperity, d) good education and infrastructure, e) strong and capable leadership, and f) a peaceful world order that is guided by one or more dominant world powers, which leads to …
The Top: This period is characterized by excess in the form of a) high levels of indebtedness, b) large wealth, values, and political gaps, c) declining education and infrastructure, d) conflict between different classes of people within countries, and e) struggles between countries as overextended empires are challenged by emerging rivals, which lead to …
The Decline: This is the painful period of fighting and restructuring that leads to great conflicts and great changes and the establishment of new internal and external orders. It sets the stage for the next new order and a new period of prosperous building.
Looking at each of these in more detail:
The rise phase begins when there is strong enough and capable enough leadership to gain power and design an excellent system to increase the country’s wealth; strong education; strong character, civility, and work ethic development; innovating and inventing new technologies, open to the best thinking in the world; the workers, the government, and the military all working well together.
As the result of all of these things, the country becomes more productive, more competitive in world markets, which shows up in its share of world trade, and develops great military strength. If done well, this virtuous cycle leads to a strong income growth which can be used to finance investments in infrastructure, education, and research and development. The country must develop systems to incentivize and empower those who have the ability to make or get wealth. To do that incentivizing and financial enabling well the country has to have developing capital markets that allow people to convert their savings into investments to fund innovation and development. As a natural consequence all of the greatest empires developed the world’s leading financial center: Amsterdam when the Dutch were preeminent, London when the British were on top, New York is now, and China is quickly developing Shanghai. As the country expands its international dealings to become the largest trading empire, its transactions can be paid in its currency, and the people around the world want to save in it, so it becomes world’s leading reserve currency, which enables the country to borrow more, and at lower rates, than other countries because others want to lend in it. All of the empires that became the most powerful in the world followed this path to the top.
In the top phase, the country sustains the successes that fueled its rise, but embedded in the rewards of the successes are the seeds of decline. Over time, obligations pile up, breaking down the self-reinforcing circumstances that fueled the rise. As people in the country, which is now rich and powerful, earn more, that makes them more expensive and less competitive relative to people in other countries who are willing to work for less. Other countries naturally copy the methods and technologies of the leading power, which further reduces the leading country’s competitiveness. As people in the leading country become richer, they tend to not work as hard. They enjoy more leisure, pursue the finer and less productive things in life, and the extreme become decadent. The new generation is less battle-hardened, steeped in luxuries, and accustomed to the easy life, which makes them more vulnerable to challenges. As people get used to doing well, they increasingly bet on the good times continuing – and borrow money to do that – which leads to financial bubbles. Within the capitalist systems, financial gains come unevenly so the wealth gap grows.
Having a reserve currency gives the country the “exorbitant privilege” of being able to borrow money, which gets it deeper into debt. Inevitably, the country begins borrowing excessively, which contributes to the country building up large debts with foreign lenders. This weakens the country’s financial health – and weakens the currency – over the longer term. In other words, when borrowing and spending are strong, the empire appears very strong, but its finances are in fact being weakened because the borrowing sustains the country’s power beyond its fundamentals by financing both domestic overconsumption and international military conflicts required to maintain the empire. If the empire begins to run out of new lenders, those holding their currency begin to look to sell and get out rather than buy, save, lend, and get in – and the strength of the empire begins to fall.
The decline phase typically comes from internal economic weakness together with internal fighting, or from costly external fighting, or both. Typically, the country’s decline comes gradually and then suddenly when debts become very large and there is an economic downturn, and the empire can no longer borrow the money necessary to repay its debts. So, the country is forced to choose between defaulting on its debts and printing a lot of new money. The country nearly always chooses to print a lot of new money. This devalues the currency and raises inflation.
There are also great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right. This is the “anti-capitalist phase,” when capitalism, capitalists and the elites in general are blamed for the problems. That’s when democracy is most challenged because it fails to control the anarchy and moves to a strong populist leader who will most likely bring order to the chaos. As conflict within the country escalates, it leads to some form of revolution or civil war to redistribute wealth and force the big changes. This can be peaceful and maintain the existing internal order, but it’s more often violent and changes the order.
Externally, when there is a rising great power that is capable of challenging the existing great power and existing world, there is a rising risk of great international conflict, especially if there is internal conflict going on within the existing great power. Typically, the rising international opponent will seek to exploit this domestic weakness. This is especially risky if the rising international power has built up a comparable military. Defending oneself against foreign rivals requires great military spending, which has to occur even as domestic economic conditions are deteriorating. Since there is no viable system for peacefully adjudicating international disputes, these conflicts are typically resolved through tests of power. The leading empire is faced with the difficult choice of fighting or retreating.
Poor economic conditions cause more fighting for wealth and power, which inevitably leads to some kind of war. Wars are terribly costly. At the same time, they produce the necessary tectonic shifts that realign the world order to the new reality of wealth and power. When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle. When all of these forces line up--- indebtedness, civil war/revolution at home, war abroad, and a loss of faith in the currency – a change in the world order is typically at hand.
UNDERSTANDING THE BIG CYCLE: The most important three cycles of the Big Cycle are the long-term debt and capital markets cycle, the internal order and disorder cycle and the extended order and disorder cycle.
The Big Cycle of Money, Credit, Debt, and Economic Activity: If an entity has more assets than liabilities, it can spend above its income by selling assets until the money runs out, at which point it has to slash its expenses. If it doesn’t have much more in assets that it has in liabilities and its income falls beneath the amount it needs to pay out to cover the total of its operating expenses and its debt-service expenses, it will have to cut its expenses or will default or restructure its debts. Debts have to be paid above all else. Debt eats equity but central banks can feed debt by printing money instead. 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. Having a reserve currency is one of the greatest powers a country can have because it gives the country enormous buying power and geopolitical power.
There are four levers that policy makers can pull to bring debt and debt-service levels down relative to the income and cash flow levels required to service debts.
Stage 6: When taken too far, the overprinting of fiat currency leads to the selling of debt assets and a “bank run” dynamic, which ultimately reduces the value of money and credit, which prompts people to flee out of both the currency and the debt. When the devaluation and defaults become so extreme that the money and credit systems break down, necessity generally compels governments to go back to some form of hard currency. When the ratio of the claims on hard money to the actual hard money held rises, it eventually leads to a run on the banks. The result is a) defaults, when the bank closes its doors and depositors lose their hard assets, and/or b) devaluations of the claims on money, which mean depositors get back less.
2) The Big Cycle of Internal Order and Disorder: How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or “orders” for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce consequences.
The Six Stages of the Internal Cycle:
Internal orders typically (though not always) change through a relatively standard sequence of stages, like the progression of a disease. From studying history, it appears to me that the stages of the archetypical cycle from internal order to internal disorder and back are as follows:
Delving Into the Six Stage of the Cycle:
Stage 5: When There Are Bad Financial Conditions and Intense Conflict: The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and non-debt obligations, 2) large income wealth, and values gaps within that entity, and 3) a severe economic shock. A classic market of being in Stage 5 and a leading indicator of the loss of borrowing and spending power, which is one of the triggers for going into Stage 6, is that the government has large deficits that are creating more debt to be sold than buyers other than the government’s own central bank are willing to buy. That leading indicator is turned on when governments that can’t print money a lot of it and buy a lot of government debt.
To be more specific, when the government runs out of money (by running a big deficit, having large debts, and not having access to adequate credit), it has limited options. At the time of this writing (2021), this late-cycle debt dynamic is now playing out in the United States at both the state and federal levels, with the main difference between them being that state governments have large deficits, large debts, and large wealth gaps, and the central bank (the Federal Reserve) has the power to print money. So, at the time of this writing, the central bank is printing a lot of money and buying a lot of federal government debt, which finances the government spending that is much bigger than the federal government’s intake.
In stage 5, class warfare intensifies. During times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies. A classic market in Stage 5 that increases in Stage 6 is the demonization of those in other classes who are commonly believed to be the source of the problems. This leads to a drive to exclude, imprison or destroy them, which happens in Stage 6. Ethnic, racial and socioeconomic groups are often demonized. Rich capitalists are commonly demonized, especially those who are viewed to be making their money at the expense of the poor. Demonizing and scapegoating are a classic symptom and problem that we must keep an eye on.
When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution. This typically happens in a couple of ways.
Stage 6: When There Are Civil Wars: Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of without them, it is better to be wary and look for the markers to indicate how close one is.
During this civil war/revolution stage of the cycle, the government in power almost always had an acute shortage of money, credit, and buying power. To make matters even worse, when there was internal disorder, foreign enemies were more likely to challenge the country. Almost all civil wars have had some foreign powers participating in an attempt to influence the outcome to their benefit.
3) The Big Cycle of External Order and Disorder: The six-stage cycles for internal order and disorder work the same way between countries, with one big exception. International relations are driven more by raw power dynamics. That is because all governance systems require effective and agreed-upon 1) laws and law-making abilities, 2) law enforcement capabilities (e.g., police), 3) ways of adjudicating (e.g., judges), and 4) clear and specified consequences that both suit crimes and are enforced (e.g., fines and incarcerations) and those things either don’t exist or are not as effective in guiding relations between countries as they are in guiding relations within them.
When individual countries have more power than the collectives of countries, the more powerful individual countries rule. For example, if the US, China, or other countries have more power than the United Nations, then the US, China or other countries will determine how things go rather than the United Nations. That is because power prevails, and wealth and power among equals is rarely given up without a fight. The international order follows the law of the jungle much more than it follows international law.
There are five major kinds of fights between countries:
All-out wars typically occur when existential issues (ones that are so essential to the country’s existence that people are willing to fight and die for them) are at stake and they cannot be resolved by peaceful means. The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters.
The two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined. The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.
CONCLUSION: Every world power has its time in the sun, thanks to the uniqueness of their circumstances and the nature of their character and culture, but they all eventually decline. Some do so more gracefully than others, with less trauma, but they nevertheless decline. Traumatic declines can lead to some of the worst periods in history, when big fights over wealth and power prove extremely costly both economically and in human lives.
Still, the cycle needn’t transpire this way if countries in their rich and powerful stages stay productive, earn more than they spend, make the system work for most of their population, and figure out ways of creating and sustaining win-win relationships with their most significant rivals. A number of empires and dynasties have sustained themselves for hundreds of years, and the United States, at 245 years old, has proven itself to be one of the longest-lasting.
Source: 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.
HOW THE WORLD HAS WORKED – EXCERPTS
NOTE: All excerpts in this segment are from The Changing World Order by Ray Dalio (2021).
INTRODUCTION: As I studied history all the empires and dynasties rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it. The Big Cycle produces swings between 1) peaceful and prosperous period of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish.
PAST BIG CYCLE SHIFTS: The four most important empires over the last 500 years were the Dutch, British, American, and Chinese. These empires held the last three reserve currencies – the dollar now, the British pound before it, and the Dutch guilder before that. China is included because it has risen to be the second most powerful empire/country and because it was so consistently powerful in most years prior to around 1850.
- China was dominant for centuries (consistently out-competing Europe economically and otherwise), though it entered a steep decline starting in the 1800s.
- The Netherlands, a relatively small country, became the world’s reserve currency empire in the 1600s.
- The UK followed a very similar path, peaking in the 1800s.
- Finally, the US rose to become the world’s superpower over the last 150 years, though particularly during and after World War II.
- The US is now in relative decline while China is rising again.
THE ARCHTYPICAL BIG CYCLE: The Rise: The rise is the prosperous period of building that comes after a new order. It is when the country is fundamentally strong because there are a) relatively low levels of indebtedness, b) relatively small wealth, values and political gaps between people, c) people working effectively together to produce prosperity, d) good education and infrastructure, e) strong and capable leadership, and f) a peaceful world order that is guided by one or more dominant world powers, which leads to …
The Top: This period is characterized by excess in the form of a) high levels of indebtedness, b) large wealth, values, and political gaps, c) declining education and infrastructure, d) conflict between different classes of people within countries, and e) struggles between countries as overextended empires are challenged by emerging rivals, which lead to …
The Decline: This is the painful period of fighting and restructuring that leads to great conflicts and great changes and the establishment of new internal and external orders. It sets the stage for the next new order and a new period of prosperous building.
Looking at each of these in more detail:
The rise phase begins when there is strong enough and capable enough leadership to gain power and design an excellent system to increase the country’s wealth; strong education; strong character, civility, and work ethic development; innovating and inventing new technologies, open to the best thinking in the world; the workers, the government, and the military all working well together.
As the result of all of these things, the country becomes more productive, more competitive in world markets, which shows up in its share of world trade, and develops great military strength. If done well, this virtuous cycle leads to a strong income growth which can be used to finance investments in infrastructure, education, and research and development. The country must develop systems to incentivize and empower those who have the ability to make or get wealth. To do that incentivizing and financial enabling well the country has to have developing capital markets that allow people to convert their savings into investments to fund innovation and development. As a natural consequence all of the greatest empires developed the world’s leading financial center: Amsterdam when the Dutch were preeminent, London when the British were on top, New York is now, and China is quickly developing Shanghai. As the country expands its international dealings to become the largest trading empire, its transactions can be paid in its currency, and the people around the world want to save in it, so it becomes world’s leading reserve currency, which enables the country to borrow more, and at lower rates, than other countries because others want to lend in it. All of the empires that became the most powerful in the world followed this path to the top.
In the top phase, the country sustains the successes that fueled its rise, but embedded in the rewards of the successes are the seeds of decline. Over time, obligations pile up, breaking down the self-reinforcing circumstances that fueled the rise. As people in the country, which is now rich and powerful, earn more, that makes them more expensive and less competitive relative to people in other countries who are willing to work for less. Other countries naturally copy the methods and technologies of the leading power, which further reduces the leading country’s competitiveness. As people in the leading country become richer, they tend to not work as hard. They enjoy more leisure, pursue the finer and less productive things in life, and the extreme become decadent. The new generation is less battle-hardened, steeped in luxuries, and accustomed to the easy life, which makes them more vulnerable to challenges. As people get used to doing well, they increasingly bet on the good times continuing – and borrow money to do that – which leads to financial bubbles. Within the capitalist systems, financial gains come unevenly so the wealth gap grows.
Having a reserve currency gives the country the “exorbitant privilege” of being able to borrow money, which gets it deeper into debt. Inevitably, the country begins borrowing excessively, which contributes to the country building up large debts with foreign lenders. This weakens the country’s financial health – and weakens the currency – over the longer term. In other words, when borrowing and spending are strong, the empire appears very strong, but its finances are in fact being weakened because the borrowing sustains the country’s power beyond its fundamentals by financing both domestic overconsumption and international military conflicts required to maintain the empire. If the empire begins to run out of new lenders, those holding their currency begin to look to sell and get out rather than buy, save, lend, and get in – and the strength of the empire begins to fall.
The decline phase typically comes from internal economic weakness together with internal fighting, or from costly external fighting, or both. Typically, the country’s decline comes gradually and then suddenly when debts become very large and there is an economic downturn, and the empire can no longer borrow the money necessary to repay its debts. So, the country is forced to choose between defaulting on its debts and printing a lot of new money. The country nearly always chooses to print a lot of new money. This devalues the currency and raises inflation.
There are also great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right. This is the “anti-capitalist phase,” when capitalism, capitalists and the elites in general are blamed for the problems. That’s when democracy is most challenged because it fails to control the anarchy and moves to a strong populist leader who will most likely bring order to the chaos. As conflict within the country escalates, it leads to some form of revolution or civil war to redistribute wealth and force the big changes. This can be peaceful and maintain the existing internal order, but it’s more often violent and changes the order.
Externally, when there is a rising great power that is capable of challenging the existing great power and existing world, there is a rising risk of great international conflict, especially if there is internal conflict going on within the existing great power. Typically, the rising international opponent will seek to exploit this domestic weakness. This is especially risky if the rising international power has built up a comparable military. Defending oneself against foreign rivals requires great military spending, which has to occur even as domestic economic conditions are deteriorating. Since there is no viable system for peacefully adjudicating international disputes, these conflicts are typically resolved through tests of power. The leading empire is faced with the difficult choice of fighting or retreating.
Poor economic conditions cause more fighting for wealth and power, which inevitably leads to some kind of war. Wars are terribly costly. At the same time, they produce the necessary tectonic shifts that realign the world order to the new reality of wealth and power. When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle. When all of these forces line up--- indebtedness, civil war/revolution at home, war abroad, and a loss of faith in the currency – a change in the world order is typically at hand.
UNDERSTANDING THE BIG CYCLE: The most important three cycles of the Big Cycle are the long-term debt and capital markets cycle, the internal order and disorder cycle and the extended order and disorder cycle.
The Big Cycle of Money, Credit, Debt, and Economic Activity: If an entity has more assets than liabilities, it can spend above its income by selling assets until the money runs out, at which point it has to slash its expenses. If it doesn’t have much more in assets that it has in liabilities and its income falls beneath the amount it needs to pay out to cover the total of its operating expenses and its debt-service expenses, it will have to cut its expenses or will default or restructure its debts. Debts have to be paid above all else. Debt eats equity but central banks can feed debt by printing money instead. 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. Having a reserve currency is one of the greatest powers a country can have because it gives the country enormous buying power and geopolitical power.
There are four levers that policy makers can pull to bring debt and debt-service levels down relative to the income and cash flow levels required to service debts.
- Austerity (spending less)
- Debt defaults and restructurings
- Transfers of money and credit from those who have more than they need to those who have less than they need (e.g., raising taxes).
- Printing money and devaluing it
Stage 6: When taken too far, the overprinting of fiat currency leads to the selling of debt assets and a “bank run” dynamic, which ultimately reduces the value of money and credit, which prompts people to flee out of both the currency and the debt. When the devaluation and defaults become so extreme that the money and credit systems break down, necessity generally compels governments to go back to some form of hard currency. When the ratio of the claims on hard money to the actual hard money held rises, it eventually leads to a run on the banks. The result is a) defaults, when the bank closes its doors and depositors lose their hard assets, and/or b) devaluations of the claims on money, which mean depositors get back less.
2) The Big Cycle of Internal Order and Disorder: How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or “orders” for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce consequences.
The Six Stages of the Internal Cycle:
Internal orders typically (though not always) change through a relatively standard sequence of stages, like the progression of a disease. From studying history, it appears to me that the stages of the archetypical cycle from internal order to internal disorder and back are as follows:
- Stage 1, when the new order begins and the new leadership consolidates power, which leads to …
- Stage 2, when the resource-allocation systems and government bureaucracies are built and refined, which if done well lead to …
- Stage 3, when there is peace and prosperity, which leads to …
- Stage 4, when there are great excesses in spending and debt and the widening of wealth and political gaps, which leads to …
- Stage 5, when there are very bad financial conditions and intense conflict, which leads to..
- Stage 6, when there are civil wars/revolutions, which leads …
- ….Stage 1, which leads to Stage 2, etc., with the whole cycle happening over again.
Delving Into the Six Stage of the Cycle:
Stage 5: When There Are Bad Financial Conditions and Intense Conflict: The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and non-debt obligations, 2) large income wealth, and values gaps within that entity, and 3) a severe economic shock. A classic market of being in Stage 5 and a leading indicator of the loss of borrowing and spending power, which is one of the triggers for going into Stage 6, is that the government has large deficits that are creating more debt to be sold than buyers other than the government’s own central bank are willing to buy. That leading indicator is turned on when governments that can’t print money a lot of it and buy a lot of government debt.
To be more specific, when the government runs out of money (by running a big deficit, having large debts, and not having access to adequate credit), it has limited options. At the time of this writing (2021), this late-cycle debt dynamic is now playing out in the United States at both the state and federal levels, with the main difference between them being that state governments have large deficits, large debts, and large wealth gaps, and the central bank (the Federal Reserve) has the power to print money. So, at the time of this writing, the central bank is printing a lot of money and buying a lot of federal government debt, which finances the government spending that is much bigger than the federal government’s intake.
In stage 5, class warfare intensifies. During times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies. A classic market in Stage 5 that increases in Stage 6 is the demonization of those in other classes who are commonly believed to be the source of the problems. This leads to a drive to exclude, imprison or destroy them, which happens in Stage 6. Ethnic, racial and socioeconomic groups are often demonized. Rich capitalists are commonly demonized, especially those who are viewed to be making their money at the expense of the poor. Demonizing and scapegoating are a classic symptom and problem that we must keep an eye on.
When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution. This typically happens in a couple of ways.
- Late in Stage 5 it is common for the legal and police systems to be used as political weapons by those who can control them. Also, private police systems form – e.g., thugs who beat people up and take their assets, and bodyguards to protect people from these things happening to them (Crime in the streets).
- Crossing the line from Stage 5 (when there are very bad financial conditions and intense internal and external conflict exist) to Stage 6 (when there is civil war) occurs when the system for resolving disagreements goes from working to not working.
- When one is in Stage 5 (like the US is now) the biggest question is how much the system will bend before it breaks. The democratic system, which allows the population to do pretty much whatever it decides to do, produces more bending because people can make leadership changes and only have themselves to blame. In this system regime changes can more easily happen in a peaceful way. However, the “one person, one vote” democratic process has the drawback of having leaders selected via popularity contests by people who are largely not doing the sort of thoughtful review of capabilities that most organizations would do when trying to find the right person for an important job. Democracy has also been shown to break down in times of great conflict.
- Different stages require different types of leaders to get the best results. Stage 5 is a juncture in which one path could lead to civil war/revolution and the other could lead to peaceful and, ideally, prosperous coexistence. The latter path requires a “strong peacemaker” who goes out of their way to bring the country together, including reaching out to the other side to involve them in the decision making and reshaping the order in a way that most people agree is fair and works well. There are few such cases in history. We pray for them.
Stage 6: When There Are Civil Wars: Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of without them, it is better to be wary and look for the markers to indicate how close one is.
During this civil war/revolution stage of the cycle, the government in power almost always had an acute shortage of money, credit, and buying power. To make matters even worse, when there was internal disorder, foreign enemies were more likely to challenge the country. Almost all civil wars have had some foreign powers participating in an attempt to influence the outcome to their benefit.
3) The Big Cycle of External Order and Disorder: The six-stage cycles for internal order and disorder work the same way between countries, with one big exception. International relations are driven more by raw power dynamics. That is because all governance systems require effective and agreed-upon 1) laws and law-making abilities, 2) law enforcement capabilities (e.g., police), 3) ways of adjudicating (e.g., judges), and 4) clear and specified consequences that both suit crimes and are enforced (e.g., fines and incarcerations) and those things either don’t exist or are not as effective in guiding relations between countries as they are in guiding relations within them.
When individual countries have more power than the collectives of countries, the more powerful individual countries rule. For example, if the US, China, or other countries have more power than the United Nations, then the US, China or other countries will determine how things go rather than the United Nations. That is because power prevails, and wealth and power among equals is rarely given up without a fight. The international order follows the law of the jungle much more than it follows international law.
There are five major kinds of fights between countries:
- Trade/economic wars: Conflicts over tariffs, import/export restrictions, and other ways of damaging a rival economically.
- Technology wars: Conflicts over which technologies are shared and which are held as protected aspects of national security.
- Geopolitical wars: Conflicts over territory and alliances that are resolved through negotiations and explicit or implicit commitments, not fighting.
- Capital wars: Conflicts imposed through financial tools such as sanction (e.g., cutting off money and credit by punishing institutions and governments that offer it) and limiting foreign access to capital markets.
- Military wars: Conflicts that involve actual shooting and the deployment of military forces.
All-out wars typically occur when existential issues (ones that are so essential to the country’s existence that people are willing to fight and die for them) are at stake and they cannot be resolved by peaceful means. The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters.
The two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined. The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.
CONCLUSION: Every world power has its time in the sun, thanks to the uniqueness of their circumstances and the nature of their character and culture, but they all eventually decline. Some do so more gracefully than others, with less trauma, but they nevertheless decline. Traumatic declines can lead to some of the worst periods in history, when big fights over wealth and power prove extremely costly both economically and in human lives.
Still, the cycle needn’t transpire this way if countries in their rich and powerful stages stay productive, earn more than they spend, make the system work for most of their population, and figure out ways of creating and sustaining win-win relationships with their most significant rivals. A number of empires and dynasties have sustained themselves for hundreds of years, and the United States, at 245 years old, has proven itself to be one of the longest-lasting.
Source: 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_2l_how_the_world_works_--_segment_2.pdf |