The Changing World Order

Introduction

The history and the future of humanity can be seen as just the aggregate of all the individual life stories evolving through time.

Look at the past, determine the cause and effect structure, adapt it to our situation, decide on actions for a better future.

Big Cycles - Rise and Fall, Peace and War. 5:1 ratio.

Cycles, especially the change from one to the other affect living standards in a massive way. Periodicity of the Cycle is around 100 years. In a human life there is only at most 1 cycle change. Hence it's hard to take them into account.

No system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.

Cause/Effect understanding gives predictive power over the future.

We are like ants, missing the bigger picture of the ant hill and the forest fires that happen every once in a while.

Gaps in income lead to societal unrest.

Reserve Currency: Currency, accepted around the world, for transactions and savings.

Empires lasted for 250+-150 years, economic, debt, political cycles for 50-100.

To see the big picture, you can't focus on the details.

Part I - How the World Works

Chapter 1 - The Big Cycle in a Tiny Nutshell

Figuring out how the world works and how to deal with it is a necessity.

Write, test, fail, improve, write, repeat until the point of diminishing returns. That's the road to quality. It's very similar to what Pixar us doing.

The big Cycles don't change much because they are driven by human tendencies and emotions that don't change much over time either.

Human inventiveness is more powerful than the cycles.

Education, Inventiveness (Creativity) and Capital are the sources of wealth.

Savings, the amount of debt, and the strength of the currency determine how well a country can weather disasters like wars or pandemics.

Changes that are small in the long term seem gargantuan to us now.

While these revolution/ear periods typically lead to a lot of human suffering, we should never, especially in the worst times, lose sight of the fact that one can navigate them well—and that humanity's power to adapt and quickly get to new and higher levels of well-being is much greater than all the bad stuff that can be thrown at us.

(except nuclear weapons and other things that could wipe us cleanly off the planet)

There is an alternative over fighting for wealth and power. It's to guard and nurture peace and human lives.

8 metrics for wealth and power

• education

• competitiveness

• innovation

• economic output

• share of world trade

• military

• financial center strength

• reserve currency status

Archetypical Cycle:
Rise, Top, Decline

Rise:
strong values => innovation + work => high output => financial system to fuel growth => reserve currence

Top:
values weaken as generations change => people work less + save less and borrow more + spend more => financial system weakens

Decline:
Internally => wealth gap is strong enough to divide population, people want change => extre left/right results, haves vs. havenots => revolution, redistribution of wealth
Externally => if at same time other power is rising, major conflicts, wars etc.

Good times hold in them the seed for bad times.

Chapter 2 - The Determinants

How to get good at any game:

Play, observe closely, gather data, find patterns, make models, test models, codify them, test, repeat.

Systems of how people/countries interact with each other are "orders". Different flavours - internal, external, and world orders.

Orders are changing. Always. Orders want to maintain themselves, but in doing so, change the environment that caused them, leading to their decline. This is inevitable.

Cause and effect are linked. This moments effects are part of next moments causes. The future depends on the past and the future builds upon itself.

Big Five
Finance, Internal Order, External Order, Pace of Innovation, Acts of Nature

People earning more than they spend stabilize the country. And the economy. An economy as a whole should earn more than it spends.

People prefer short term over long term.

The culture plays a role in whether or not a country declined or flourishes.

Only a hundred or so people of each generation make a difference.

The exchange with other countries is important to not fall behind in technology.

People sort themselves into classes, they like to stereotype. At the top of the cycle the classes happily coexist without much tension. At the bottom of the cycle there is conflict. Conflict between classes destroys internal order.

Chapter 2 - Determinants Addendum

What are you willing to die for - hierarchy, reminds a LOT of the hierarchy of emergence from WaitButWhy.

Going down emergence levels from the universe over humankind and state to family and the individual.

The important size of grouping can change over time.

Wealth is not money. But wealth is tied to productivity. Productivity produces wealth.

Humanity's capacity to invent solutions to it's problems and to identify how to make things better had proven to be far more powerful than all of its problems combined.

Innovation + Commerical Spirit+ Thriving Capital Markets lead to Great productivity increases which lead to Wealth and Power.

All internal orders are run by certain classes of people who have wealth and power and who operate in symbiotic relationships with each other to maintain the order.

People organize in classes because they hang around people that are similar to them.

Meritocracy is the way to run a country.

Another problem at the heart of capitalism is that capitalism makes inequalities worse and thereby destabilizes society in the long run.

Chapter 3 - The Big Cycle of Money, Credit, Debt, And Economic Activity

Politics + Economics = How the World Works

If you understand both, how money and credit work, and also how factions, alliances, war and politics work, you have a good understanding that can help predict how the future is going to be like.

Every entity (people, countries, companies) has revenue and expenses. The difference is their net income. Positive net income means saving, negative means borrowing money. One is sustainable and the other isn't. Assets + Liabilities is what goes into a balance sheet.

One entity's spending is another's income.

Reducing spending will have trickle down effects and hurts a lot more than one entity.

Debt eats equity.

If you don't have enough to pay debts, you have to sell assets.

The supply of money is not fixed.

Being rich is a function of creating a lot of income while having little or no expenses.

Financial Safety Margin: How long could you survive if your income goes to 0 and your assets and savings halfed in value?

Debt eats equity but central banks can feed debt by printing money instead.

Wealth is productivity. While central banks can create more money and debt, that doesn't necessarily mean that there is increased productivity.

The financial and the real economy are different things. Related, yet, different.

Prices and values are not the same thing.

More money + credit => more spending.
More spending => higher demand => bigger prices => wealth on paper increases

Eventually credit has to be paid back and the bubble collapses, because money goes down in value, correcting for the higher prices.

The value of a house doesn't change because many people have the money (or credit) to buy it. While the price goes up, the value stays the same. It's the same house.

Credit stimulates an economy but paying it back depresses it.

Stimulation + Depression lead to short and long term debt cycles.

Long term debt cycles end, when central banks increase in money doesn't lead to a real increase in productivity anymore.

Creating money in that way weakens currencies.

Once it is widely perceived that money and debt assets are no longer good store holds if wealth, the long-term debt cycle is at its end and a restructuring of the monetary system has to occur.

Stages:

1. Hard Money
2. Paper Money
3. Increased Debt
4. Breaking the Peg from Paper to Hard Money
5. Fiat Money (no more link at all)
6. Flight back to hard money

Increasing supply of money doesn't necessarily lead to increases in productivity. If it doesn't, crisis looms. The bubble pops.

The bust of the long term cycle is a tragedy of the commons. Along the way everybody did what was in their best interest, hence, eventually the whole edifice comes crashing down.

Countries governments rack up debts to make people happy and vote for them, and then leave them for the next generations to pay.

Central banks bail out governments by printing money to pay off the govermbets debts which in turn devalues all money in existence in that currency.

This is an alternate and hidden way of taxation!!!

During those times people take on cheap cheap credit, to buy houses and other things of real value to then repay that credit with the increases in money that happen due to the printing of new money and the devaluation/inflation that occurs.

Cash is not safe. Currencies die and when they do, they wipe out cash.

Printing currency reduces debt burden, but devalues the currency.

4 levers:

• Austerity
• Debt Defaults/Restructuring
• Transfer via Taxes (rich to poor)
• Printing more money

Only thing not painful for people (immediately at least) is printing more money. That's what most governments do.

It's as if you changed the rules of Monopoly to allow the banker to make more money and redistribute it whenever too many players are going broke and getting angry.

Debt as an asset is good in beginning of cycle and bad late during the cycle.

Jubilee Year every 50 years in the old testament.

The cycle moves from Hard to Paper to Fiat Money. It lasts 50-75 years and the restructuring at the end from fiat back to paper lasts a few months to three years.

During the cycle - 2-4 debt crises. Not big enough to break system and go back to hard currency (only devaluing 30% or so of currency) .

Chapter 4 - The Changing Value of Money

Most people worry about whether their assets are going up or down; they rarely pay much attention to the value of their currency.

All currencies are devalued or die.

Currencies devalue against debt.

Giving more money to those who need it lessens their debt burden.

When I own stock, I own debt.

Book Recommendation: Principles for Navigating Big Debt Crisis — Ray Dalio

Conflicts over wealth within countries lead to greater conflicts between them.

Holding cash is risky, because it can devalue because it's currency devalues. Later in debt cycles it becomes riskier.

Signs of Devaluations:

• bank runs
• bank reserves fall
• significant debt problems
• first increasing short term interest rates
• next printing money

Chapter 5 - The Big Cycle of Internal Order and Disorder

People struggle over how to make, take, and distribute wealth and power. That makes the world go around.

The struggles follow patterns. These patterns of human behavior are the changing world orders.

6 stages of internal orders changing

• leadership consolidates power
• resource allocation + government systems are built
• peace + prosperity
• great excess, widening of wealth gaps
• bad financial conditions, conflict
• civil war/revolution

The way leaders deal with progressing through stages can prolong them.

Book Recommendation:: Leadership Book — Henry Kissinger

Dealing with the things causing the symptoms of progressing to the next stage is important for a country to stay at the top in terms of power and wealth.

Revolutions come in two parts — the first part is the fight to bring down the established leaders and systems, and the second part is the fight to remove those who were loyal to the former leaders and the fight for power among those who won.

During stage 2 the type of leader necessary changes. Rebuilding needs "civil engineers". People who make the pie bigger.

Stage 3 - people work together, everything flourishes, visionaries are the best leaders. Risk of widening opportunity and wealth gaps and building of elites.

Stage 4 - people become decadent, fueling fake bubble growth with debt, best leaders would be people that hold back that decadence, but usuay leaders just partake in it

Stage 5 - bad financial shape, big gaps in wealth, severe shocks (like COVID). Governments without enough financial assets to keep the system going undergo violent revolution and civil war.

Averages don't matter as much as the number of people who are suffering and their power.

Productivity has to benefit most people, only then will there be peace and prosperity.

Taking on debts only makes sense if used to improve production. Education, Infrastructure, Machinery, R&D

Spending only makes sense as investment. How much of my money is spend that way?

Out of disorder and discontent come leaders who have strong personalities, are anti-elitist, and claim to fight for the common man. They are called populists.

Donald Trump, in a nutshell.

Decadence, Bureaucracy, Populism and Extremism, Class Warfare, the Loss of Truth, Non following of Rules - all are symptoms of progressing from Stage 5 to Stage 6.

Media is so far screwed that it becomes dangerous to be a high profile person.

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.

When in doubt, get out. Getting out becomes harder the closer to civil war a country is.

Democracies break when there is conflict, because people can't agree on what to do and decision making becomes ineffective.

Stage 6 - civil wars. Time of terror. Only thing determining whether or not Revolution is successful in the end is new found economic productivity - i.e. a fixed system.

Idealistic individuals change towards brutal revolutionaries in times of civil war.

Civil Wars are fights to the death and moderates lose in knife fights. During civil wars being a moderate is not a good option.

Nothing is fixed except evolution.

Systems have to change to adapt to the changing circumstances. No political system is "the best".

Chapter 6 - The Big Cycle of External Order and Disorder

Wars come in different flavors. Trade, Technology, Geopolitics, Capital, Military.

All out wars do the most damage and happen when there are irreconcilable differences between countries.

Financial Strength is the foundation for military strength. Money buys both butter and guns.

Have power, respect power and use power wisely.

But using those powers to force ones way is not necessary and most of the time not even beneficial.

There is nothing more powerful and rewarding for the individual and the collective than the cooperation of capable people who care for each other and who will give each other all they can.

Power is usually best handled like a hidden knife that can be brought out in the event of a fight.

Power comes with responsibilities, and that often makes unhappy.

Fascism is autocratic, capitalist and collectivist.

Top-down leadership, direction of companies, subordination of individual over collective.

You win wars by being able to sustain more pain than the other party.

Countries can, through their actions, prolong the cycle. Maybe even indefinitely.

Chapter 7 - Investing in Light of the Big Cycle

4 market predictors, growth, inflation, risk premiums and discount rates.

Is Ray Dalio setting up a narrative to make big investors move money to China, because that's what he and Bridgewater bet on? To destabilize the US by writing this kinds of books, sowing panic to create a personal benefit for themselves?

People invent new forms of money and because of that increase buying power and get rich from it.

However creating these new forms in the long run creates too much debt, and eventually collapses the system.

Risks for Investors:

• portfolios have too little return to sustain their spending
• portfolios collapse
• wealth is confiscated (through taxes or inflation)

Wealth is regularly wiped out at the end of the Big Debt Cycle, when internal order changes and the monetary system gets restructured. This is the biggest risk for investors, because it can wipe out 100% of their capital.

This risk has to be balanced against the possible returns one could get. Usually towards the ends of cycles this is not a good trade to be made. Instead simply buying stuff, any stuff that doesn't rot, is a better investment.

Part II - How the World has Worked over the Last 500 Years

Chapter 8 - The Last 500 Years in a Tiny Nutshell

Chapter 9 - The Big Cycle Rise and Decline of the Dutch Empire and the Guilder

The Dutch invented capitalism as we know it.

The Big Cycle Rise and Decline of the British Empire and the Pound

The rise of empires begins long before they clash with the current dominant power.