Summary of The Changing World Order, by Ray Dalio

Short summary reading time: 2 min

Long summary reading time: 47 min

Book reading time: 13h27

Score: 9/10

Book published in: 2021

Main Idea

Countries rise and fall following economic and financial cycles.

At any moment in time, one country is more powerful than all the others and broadly directs the world order.

The world order changes every 200 years or so, as the leading country loses its power while another one rises.

Table of Content


Short Summary

Summary of The Changing World Order Written by Ray Dalio


Part I: How the World Works

Part II: How the World Has Worked Over the Last 500 Years

Part III: The Future


The Changing World Order, whose full name is Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail, is a book written by Ray Dalio.

I was looking forward to reading the book because it promised a glimpse into the political and economic changes of the future.

It didn’t disappoint in this regard. In fact, it over-delivered.

After reading Nassim Taleb’s Incerto, I adopted Taleb’s conclusion that predicting the future was futile because it was too random and too different from the past.

This book demonstrates the opposite. Because history is a cycle, we can anticipate what’s to come provided we know where we are in the cycle.

History as a cycle (instead of history as a straight line) is not a farfetched idea.

Humans have a hard time learning the lessons of their elders. Pushed by envy, jealousy, and laziness, they make the same mistakes – and so the whole thing starts again, in a never-ending…well, cycle.

Because Ray Dalio shows how history repeats over lifetimes, this book is one of the most important books ever written.

It’s a blueprint for the development of an empire, and a manual against its decadence.

It’s a book every politician in the world should read.

Yet, it’s not without default. The book is too long, too specific at times, and too repetitive. The author introduces too much of what he is about to say.

For example, Dalio wrote an entire chapter to present parts I and II, only to give a detailed explanation of these two parts in the subsequent chapters.

Some parts, like the part about Chinese culture and history, were completely irrelevant and painful to go through (especially for a book that promised to take you through economic cycles, not Confucianism.)

Like most books, the most important part is the first 20% of the book. The rest is interesting, but not as much as the beginning.

About this Summary

Throughout the book, the author dispenses his principles. I highlighted them in red in the summary.

Also, Ray Dalio made a video illustrating the thesis of his book.

I watched it, and would recommend you do too, before or after reading the summary (it is below).

I also wrote an executive summary if the long-form summary is too long for you.

So, should you buy the book?

If you’re a history and economics freak like I am, definitely yes.

But if you’re merely interested, the video and both summaries will be more than enough.



Get the book here.

Short Summary of The Changing World Order

Two cycles govern the rise and fall of nations and empires.

The first one is the long-term debt cycle. In the beginning, debt levels are low, borrowers borrow money, they invest and create wealth so the productivity, wealth, and standards of living of the country rises.

When the country peaks economically, the population becomes lazy and decadent. People no longer borrow to invest and create. They borrow to consume and rest. As a result, the country becomes less innovative and its power declines until the high level of debt triggers financial and socio-economic crises, and sometimes, wars.

This leads the country to collapse and the cycle starts again. Low levels of debt, etc.

The second cycle is the Cycle of Internal Order. It dictates how people behave with each other. Do they respect the law? Do they help each other? Are they well educated? Do they work hard?

When people are poor, they are willing to work hard to become rich and improve their lives. When they’re already rich, they’re not willing to do so. They become lazy and entitled. The country loses economic power, people become poorer, and start to fight over resources.

The country declines and sometimes, disappears.

These two cycles (which happen simultaneously on top of each other) influence the World Order Cycle. Whichever country is the strongest establishes its own World Order. When this country declines while another one rises, the World Order is up for a change.

The World Order switch happens when the upcoming country is clearly stronger than the former country, which is often decided in a war.

This is how the two Internal Cycles influence the External Cycle, the World Order.

All nations have risen and fallen in the same way by doing the same things.

This is why nations that rise, eventually fall.

Summary of The Changing World Order Written by Ray Dalio


The decline of an empire (USA) and the rise of another one (China) have never happened in our lifetime. But they have happened many times before in a series of events called a Big Cycle, lasting roughly 250 years.

The Big Cycle produces swings between:

  1. Peaceful and prosperous times
  2. Depression, revolutions, and war periods
  • The swinging in the cycle from one extreme to another is the norm, not the exception.

Depression and war periods mark the transition from one world order to another. While they create a lot of suffering, they also get rid of the weaker elements and excess (debt, bad behavior, etc).

The Big Cycle includes the long-term debt cycle which lasts 100 years; and the short-term debt cycle which lasts around eight years.

When cycles align, the world order changes.

  • The peaceful and depression periods come once in a lifetime, which explains why they always surprise people.
  • Our future will likely be very different from our past (but not different from a further past).
  • No system of government, no economic system, no currency, and no empire lasts forever. Yet everyone is surprised when they fail.
  • Dealing with the future comes from understanding how things change. You can understand how things change by studying how they changed in the past.

There are three forces constantly at play, that influence life.

  1. The Long-Term Debt and Capital Markets Cycle: debt has never been neither so low (in terms of interest rates) nor so abundant.
  2. The Internal Order and Disorder Cycle: Wealth, values, and political inequalities are larger than they have ever been since the 1950s.
  3. The External Order and Disorder Cycle: China is becoming as strong, if not stronger, than the US.
The world order changes when all cycles are aligned, in blue.
The world order changes when all cycles are aligned (the blue line).
  • When wealth and value gaps are large, conflict often ensues.

The author studied the Dutch Empire, the US Empire, and the British Empire at large. Then he looked at the French, German, Chinese, Japanese, Indian, and Russian empires.

He noticed that they all rose and fell in the same way, which will be outlined in the book.

  • To see the bigger picture, you can’t focus on the details.

We will therefore remain imprecise.

Part I: How the World Works

Chapter 1: The Big Cycle in a Tiny Nutshell

The biggest thing that impacts people is the struggle to make, take, and distribute power.

Wealthy people are those who own the means of production. They work in symbiosis with politicians to set rules. This happened equally in all empires.

In the long term, fewer people own more and more wealth and power. Then they overextend and fail. This hurts the poor and leads to revolutions and civil wars.

The empire disappears and a new empire takes over, which leads to a new world order, and the cycle starts again.

The Big Cycle.

The Big Cycle governs the rising and decline of empires and influences everything about them.

The next three important cycles are:

  1. The Long-Term Debt and Capital Markets Cycle
  2. The Internal Order and Disorder Cycle
  3. The External Order and Disorder Cycle
The Big Cycle evolves with the three cycles.

These cycles don’t change, because human nature doesn’t change: we still deal with fear, greed, and jealousy as we did since the dawn of time.

What changes is technology. Countries still rise and fall, but in the long term, people are getting richer.

Why? Because of evolution.

Evolution is the single force that persists across time – and across all of these empires.

To quote the author: evolution is the upward movement toward improvement that occurs because of adaptation and learning. It evolves in cycles: people get richer, then poorer, then richer, then poorer, etc.

Evolution goes upward to represent improvements, and it occurs in cycles.

Wealth rises over time due to human productivity. The more we produce, the richer we get.

Productivity in a system depends on the capacity of said system to turn ideas into economic outputs.

Evolution drives the trend up. As time goes by, we produce more, so our wealth increases.

Learning and productivity don’t cause major big shifts in society. They are not the cause that lead to important events.

So, what is?

Booms, busts, revolutions, and wars. These are driven by the cycles we have talked about.

  • Throughout time, the formula for success has been a system in which people would borrow money, innovate, and turn these innovations into means of production, then reap the profits.

Capitalism, while responsible for creating enormous wealth, also created gaps in wealth and overindebtedness that have led to economic downturns, depressions, etc.

All fights that ever happened, happened due to fighting over wealth and power. These events, and natural events, have been the ones that influenced the course of history the most.

Countries that fail in these moments are weak countries.

  • Countries with large savings, low debts, and a strong reserve currency can resist better than those with low savings, huge debts, and no reserve currencies.

Past Big Cycle Shifts in Wealth and Power

Throughout history, various groups of people (tribes, countries, etc) have gathered power. When they got more power than anyone else, they became world leaders and established a world order.

When they lost their wealth and power, the world order changed.

Illustration from the book.

Empires’ power and wealth can be measured with the help of eight determinants.

  1. Education
  2. Competitiveness
  3. Innovation and technology
  4. Economic output
  5. Share of world trade
  6. Military strength
  7. Financial center strength
  8. Reserve currency status

These determinants usually rise and decline at the same time.

The rise and decline of the eight determinants of wealth and power

The Big Cycle starts with a new order, then follows with the rise, the top, and the decline, until a new world order is established.

The Big Cycle

The rise is the period of building. It happens because of:

  1. Low debt
  2. Low social-economic inequalities and low value and political gaps
  3. People work together
    1. This includes the government, businesses, and the military
  4. Education and infrastructure are good
    1. There is innovation and invention
    2. People are open-minded
  5. There is good leadership
    1. Strong characters and work ethics taught in schools, families, or by religious institutions.
  6. Peace

-> the country becomes more productive and competitive -> shares of world trade rise -> military strength increases.

The result is that people in the country earn more, hence become less competitive. The technology is copied by other countries, so innovation declines. Since people are richer, they get lazier. People borrow more, thinking that it will help them do better.

This is when we’ve reached the top. The top is characterized by:

  1. High debt
  2. High social-economic and value gaps
  3. Conflict between people
  4. Bad education and low-quality infrastructures
  5. Struggle between countries

The decline comes with economic weakness and social conflicts.

It happens when, internally:

  1. Debt becomes large, the country may default so it prints excessively.
  2. Great internal conflicts between the poor and the rich -> political extremism.
  3. The rich get taxed -> they flee.

These internal changes don’t necessarily lead to a new world order. They need to be aligned with external characteristics such as:

  1. Another great power rising
  2. A conflict emerges and weakens even more the declining power
  3. Poverty increases
  4. The decline is achieved when those that own the debt of the former empire which was the world reserve currency, sell those debts.

A Preview of Where We Are Now

In 1950, the US was at its peak. 75 years later, we are in the decline period.

It’s likely that the upcoming events (in a few years) will be traumatic for many people.

Chapter 2: The Determinants

Countries, like humans, are born, grow up, and die.

The Internal Order describes what happens inside countries; the External Order describes what happens between countries; and the World Order describes…the world order.

At any moment, you have the conditions that determine these orders on one hand, and timeless forces that influence these orders. Most people focus on the orders, but you should focus on what influences them instead – the determinants.

If we understand what are the results that determinants create when associated with one another, we can more or less predict the future.

There are 18 determinants.

The three most important determinants are:

  1. The Cycle of Debt and Capital market (the Long-Term Debt Cycle)
  2. The Internal Order Cycle
  3. The External Order Cycle

We can also add:

4. Pace of Innovation
5. Act of Nature (volcanoes, drought, flood)

These are the big 5 determinants. When they move in the same direction, everything else follows.

The rest of the determinants are:

6. Education
7. Cost competitiveness
8. Military Strength
9. Trade
10. Economic Output
11. Markets and Financial Center
12. Reserve Currency Status
13. Geology
14. Resource-Allocation Efficiency
15. Infrastructure and Investment
16. Character/civility/determination
17. Governance/Rule of Law
18. Gaps in Wealth, Opportunity, Values

These determinants can be classed in two ways:

  1. Inherited:
    1. Geography: the US is one country because of its geography. Europe, for the same reason, is several.
    2. Geology: having access to natural resources.
    3. Acts of Nature: pandemics, drought, etc.
    4. Genealogy: genes play partially in behavior, and the behavior plays in how a country performs.
  2. Human Capital:
    1. Self-interest: strong indicator for the will to survive, but depends on the scale: individual, familial, national, etc.
    2. The Drive to Keep and Gain Wealth and Power: those that earn at least as much as they spend are more likely to survive.
    3. Capital Markets
    4. The Ability to Learn from History: it’s useless to learn from your lifetime since history is mostly a cycle.
    5. The Big Multigenerational Psychological Cycle: generations do and act differently due to being born in different worlds. It starts with the first generation that is poor, think of themselves as poor. Then the next one is rich, but think themselves as poor. Then we have the rich-rich. Then the rich-poor. Then the poor-poor again.
    6. Favoring Short-Term Gratification Over Long-Term Well-Being
    7. Human’s inventiveness
    8. Culture: It matters enormously
    9. Openness to Global Thinking: open-minded people fare better because they improve their methods.
    10. Leadership
    11. Wealth Gaps
    12. Value Gaps
    13. Class Struggle
    14. The Political Left/Right Cycle
    15. No Prisoner’s Dilemma: this dilemma states that since you don’t know if the other will attack you, you attack him first. In reality, the best is to always cooperate.
    16. Win-win VS lose-lose relationships
    17. The Balance of Power Cycle
    18. Military Strength and the Peace/War Cycle
  • While the inherited determinants are important, human determinants are far more important.
  • When humans produce more than they spend, they can be self-sufficient -> countries, people, and companies should aim at that for financial security.
  • Human capital is more important as it exists forever – resources don’t.

These determinants come together and influence cycles.

  • Cycles are constantly evolving.
  • Meritocratic (opposed to “woke”) societies are the most successful in the long term because
    • 1. they put the best people in the best places.
    • 2. they have a diversity of perspectives.
    • 3. meritocracy is perceived as the fairest system, which fosters peace.

Chapter 3: The Big Cycle of Money, Credit, Debt, and Economic Activity

You can learn about short and long-term debt cycles by reading the summary of Ray Dalio’s video called How the Economic Machine Works.

What everyone wants is wealth and power. The rise of wealth and power is heavily influenced by money and credit.

To understand how the system works, you need to understand money and credit.

  • All entities—people, companies, nonprofit organizations, and governments—deal with the same basic financial realities, and always have.

This is how it works: everyone has money coming in (revenue) and money going out (expenses).

Revenue – expenses = net income.

If your net income is positive, you have bigger savings. If it’s negative, you have to borrow money, or take it from your savings.

If you have a lot of assets, you can spend more than you earn and sell your assets to make up for the difference.

If you have more liabilities than debt, you’ll have to cut your expenses or restructure your debt.

Assets and liabilities are shown in the balance sheet.

The way entities collectively handle their finances is the biggest driver of changes in internal and world orders.

If you look at everyone’s finances and link them to each other, you will see how the whole system works.

One’s spending is someone else’s income. As a result, if one decreases their spending, someone else earns a lower salary.

By the same token, one’s debt is someone else’s asset. If one defaults on his debt, someone else’s net worth will decrease, hence, he will be forced to decrease spending too.

-> when spending is widely cut, there is economic contraction.

  • Debt eats equity.

The amount of debt is not capped but can be created infinitely by banks and the central bank. Everyone in the economy loves it when the state prints money as it enables them to spend more.

Asset value increases, so people feel richer. What they ignore is that at some point, the debt must be repaid – meaning that at some point, they will have to spend less money.

-> this explains how the economy is essentially cyclical.

But…what if the debt is not repaid?

Then, the interest rate is really low, so it hurts those who own cash and bonds, as it means they are not getting any return.

The situation we are in at the moment is one where:

  1. The expenses of governments are way bigger than their revenue.
  2. Their debts are way bigger than their assets.

While they are financially weak, they look rich because they’re spending so much.

These basic economics work for everyone, except countries that create money out of thin air – those with reserve currencies.

  • Debt eats equity…but central banks can avoid the debt crisis dynamic by printing money and giving it to borrowers so they can refund their debt.

Not all money from all governments is equal.

Money from reserve currencies is worth much more. At this moment, the USD is the main reserve currency, followed by the euro, then the British pound, the Chinese renminbi, and the Japanese Yen.

  • A reserve currency gives you enormous buying and spending power.

Because of this power, the country is going to borrow and spend much more than it should, and will eventually lose its reserve currency status.

If you are another country with debt in the reserve currency, then you’ll need that reserve currency to refund the debt (you won’t be able to print it). If you somehow don’t get it, you’ll go bankrupt.

What Is Money

Money is a medium of exchange that can also be used as a store of wealth.

Money and credit are often associated with wealth because they can buy wealth, but they’re not the same.

You can’t create more wealth by printing money. Wealth is created when you actually make stuff. You have to be productive and create things.

The relationship between money creation and wealth creation is often confused. One is the financial system. The other is the real economy, with real things.

On the right, the real economy that makes stuff. On the left, the financial economy that dictates who receives and enjoys the stuff that is made.

When the demand for goods is higher than the supply of goods, the price rises (it often happens due to too much money in the economy), this is the phenomenon of inflation. So the central bank raises interest rates to limit the volume of money and curb down inflation.

When there is not enough demand for things, the central bank decreases interest rates to put more money in the economy and stimulate growth.

This is the short-term debt cycle.

The problem of the central bank is that it does not control where the money goes. If people use it to stuff, good! But if they use it to buy foreign currencies or stocks, it doesn’t stimulate the economy.

And it’s a problem. The excessive supply of money makes money lose its value; hence, prices rise.

Since there is little demand for goods, people that make the goods aren’t earning much money. Prices rise, salaries decrease. This is called inflationary depression. Cash is losing value, and no one is buying anything.

-> both the movement of goods and money need to be watched.

People also confuse the price and the value of things.

When the government prints money, prices go up because people are buying more. Two things need to highlighted.

  1. They’re buying with debt, and the debt will have to be paid back (which will decrease the economic activity).
  2. The price is rising, but the intrinsic value does not change.

This game of printing money then hiking interest rates due to inflation is called the short-term debt cycle, and it lasts eight years on average (understand: you’ll have an economic crisis every eight years).

The long-term debt cycle plays out for 50-75 years. They happen once in a lifetime, so people don’t pay attention to them – and always get surprised.

These tend to happen when the economy only grows by means of printing, which artificially inflates the value of assets. Holders of these assets want to sell, and the whole system collapses.

The 6 Stages of the Long-Term Debt Cycle

1. Little or no debt, money is “hard”.

After the restructuration of the last cycle, there is a return to hard money such as gold, silver, copper, or the money is linked to another currency.

Because the money is backed by something (linked to another currency, or backed by gold) or is that something, there is trust.

People use gold as means of exchange. Gold is valuable.

2. Claims on hard money

Carrying gold is annoying, so the gold is stored away and money (“paper money”) is issued. Now credit can also be created, this is the beginning of banks. The paper money is actually a claim on gold, but people forget that and soon treat the money as gold itself.

This system is called a linked-currency system.

The paper money is directly backed by gold. That means it can be exchanged for gold.

3. Debt increases

Those who have money lend it to the banks which lend it to other people at a higher interest rate to make a profit. The borrowers buy stuff with that money, which leads to stimulating the economy and increases asset value.

-> everyone likes debt!

Problems arise when:

  • Borrowers aren’t earning enough to refund debt
  • The volume of debt increases faster than the services and goods available in the economy for purchase.

When lenders realize that they may not be enough money in the bank because the bank lent too much of it, there is a “run”. Everyone tries to exchange the debt they hold for money.

4. The central bank prints money to remedy the debt crisis, default, and devaluation. This breaks the link between the currency and the “hard money”.

The central bank prints money to enable debt holders to exchange their debt against money and keep interest rates low.

The key is to create enough money to offset the devaluation, but not too much so that it creates inflation.

If the bank prints too much, then people will not be able to exchange their money for the hard money (gold) that backs the currency, or for goods and services in the economy.

5. Then comes fiat money

When the amount of money is too big for the amount of hard money due to an extensive borrowing cycle, then the government debased the currency which becomes “fiat currency”.

  • We shouldn’t rely on the government to protect us financially.
  • When one can manufacture money and credit and pass them out to everyone to make them happy, it is very hard to resist the temptation to do so.

Printing money devalues the value of the asset (debt). It’s a way to shift the wealth from those who have it (the lenders) to those who don’t (the borrowers), and it’s much more efficient than taxing (rich people don’t like getting taxed).

  • All currencies devalue or die, and when they do, cash and bonds (which are promises to receive currency) are devalued or wiped out.

Once the debt burden is eliminated, the whole credit/debt expansion begins again.

There are four levers that countries can use to decrease debt:

  1. Austerity -> deflationary + painful.
  2. Debt default and restructuring -> the borrower goes broke and has his assets seized, and the lender also loses his asset. Too painful.
  3. Transfer of wealth (taxes) -> politically challenging.
  4. Printing money -> the easiest, in appearance.

6. Flight back into hard money.

When the money printing scheme is taken too far, people fly away from cash (as it devalues fast) and debt (that will never be repaid, or repaid with cash worth nothing) to go into hard assets, like gold.

At this stage, there are great social-economic differences. The state tries to tax the rich who flee, so the state prevents them from doing so by establishing control of capital.

Devaluation and default have become so extreme that to reestablish trust, the government goes back to hard money.

The Long-Term Debt Cycle
The Long-Term Debt Cycle

I wrote an in-depth article about how money works if you want to know more.

Chapter 4: The Changing Value Of Money

Out of 750 currencies that have existed in 400 years, 80% disappeared due to being worthless.

Now, what do they devalue against?


The money is devalued to make it easier to repay debt.

When devaluation hurts the lender too much, the lender sells the debt and invests in another asset.

So, the best time to hold cash is at the very beginning, when cash is backed by gold and interest rates are quite high.

Once cash starts to get devalued against gold, then the link to gold is broken. Cash becomes a fiat currency, and holding it isn’t interesting (and so it goes for holding debt).

Chapter 5: The Big Cycle of Internal Order and Disorder

This cycle depends on how people behave with each other.

  • The struggle over the making, taking, and distributing of wealth and power is what influences people’s behavior the most. Though they also struggle over other things, like ideology and religion.

Let’s have a look at the 6 stages of the Internal Cycle.

  1. A new order begins when a new leadership consolidates power. This leads to…
  2. The build-up of bureaucracy and resource-allocation systems in the country. They lead to…
  3. Peace and prosperity. Which leads to…
  4. Too much spending, debt, and social-economic differences. They lead to…
  5. Bad financial health and conflicts. They lead to…
  6. Civil wars and revolution

And the whole cycle starts again.

The Internal Order Cycle

These cycles take roughly 100 years.

They are linked to each other and oriented upwards due to the tech improvements over time.

Illustration from the book.

Let’s have a closer look at the stages.

Stage 1: A New Order Begins

Stage 1 happens after a revolution is over. Revolutions have two steps:

  • Step 1: take down the established order and win
  • Step 2: build back power and remove everyone that was loyal to the former order (purge).

Purges are sometimes more brutal than the revolution itself, especially if the winning power struggles.

Leaders that won the revolution must understand the need to go from a military strategy (destroy the enemy) to a political strategy (build and cooperate).

Stage 1 ends when everyone wants to rebuild.

Stage 2: Building Phase

This phase is a phase of early prosperity.

  • To be successful the new system has to produce prosperity for most people, especially the large middle class.

The best leaders in this phase are those that can build and compromise.

Eg: Mao was a war leader, Deng Xiaoping was a peacetime leader.

Stage 3: Peace and Prosperity

A lot of creativity, innovation, and production. Debt can be refunded because income rises.

This is when a leader is a visionary who can inspire. The leader can:

  • Paint an exciting picture of the future.
  • Actually realize it.
  • Reap the rewards and reinvest them
  • Maintain healthy finances
  • Pursue good international relations

Eg: William Gladstone, Bismarck, Deng Xiaoping.

The longer the country stays there, the better it is.

Leaders should avoid the following risks:

  • The broadening of social-economic, work, value, opportunity, and income differences
  • The development of an elitist cast that gets accessed to privileges due to their status
  • Declining productivity
  • Bad finances that lead to over-borrowing

Stage 4: The Period of Excess

  • Productivity declines as people get lazy. Money and time are spent on luxury and good times, and less on investment and research.
  • Debt is used to keep a similar standard of living, which leads to bubbles, which leads to them popping up.
  • Lots of military spending
  • The country’s capacity to repay decreases.
  • Wealth and opportunity differences widen, resentment between classes increases.

The best leaders are good managers that understand the need for restraint, and ensure their people don’t become too soft.

However, few leaders have the courage to do it.

Most countries, after becoming rich, become decadent (Nero in the Roman Empire, Louis XIV in France).

Stage 5: Bad Finances and Conflicts

Many countries are in Stage 5 right now due to bad finances. The countries that have always had good finances are in relatively good shape (Switzerland, Singapore, etc).

The US is in Stage 5 currently, due to the Classic Toxic Mix.

The Classic Toxic Mix

This Mix happens under three conditions:

  1. Both the country and its people are in bad financial shape.
  2. Large social-economic and value differences.
  3. A severe negative economic shock: bubble burst, act of nature, war, etc.

Because governments’ sole responsibility is to avoid total collapse, financial health is the most important.

If the government runs out of buying power, the system collapses.

Revolutions seem to happen when the government goes bankrupt and there are big social-economic inequalities.

One of the central indicators of Stage 5 is when the government creates debt that no one but the central bank is willing to buy.

This is what’s happening in the US currently.

  • Places with large social-economic inequalities, large debts, and the worst declines in incomes are most likely to have the greatest conflicts.

-> cities with high salaries and wealth are also the most indebted!

  • Higher taxes and more spending in situations of huge social-economic inequalities and a bad economy is a leading indicator of civil wars or revolutions.

When gaps in wealth are large, communities don’t speak to each other, and tensions increase.

This is partly created by policies that “sound good for society”: trade agreements, globalization, technology that replaces people, etc.

Politicians don’t think about the fact that society is an average of those who win it all, and those who lose it all.

And when those who lose get angry, they threaten the entire system.

  • Averages don’t matter as much as the number of people who are suffering and their power.
  • To have peace and prosperity, a society must have productivity that benefits most people.
  • When debt is printed to remedy these problems, it must be used to acquire gains in productivity. If it is distributed to be spent, money will keep its devaluation and the situation will be even worse.
  • Debt should be spent on an asset that will help repay it off.

These are education, infrastructure, and research.

The Toxic Mix is often accompanied by the following.

Decadence: defined by the inclination to spend on luxury goods, expensive real estate, art, etc. Decreases productivity.

  • When a society spends money on increasing productivity, it improves its future.

Bureaucracy: as time goes by, things complexify, and bureaucracy increases. It becomes a problem when it stands in the way of good deeds. At this stage, there is a need for revolutionary changes.

  • Early in the cycle, the bureaucracy is low. At the end of it, it’s high.

Populism and extremism: populism happens when a leader with a strong personality comes in to defend “the people”, the common man. It’s a sign of gaps (values and wealth) between people.

Class warfare: it happens when one group demonizes another and makes it a scapegoat. This can lead to genocides, imprisonment, etc.

  • During hard times, members of classes look at others in a stereotypical way.

The Loss of Truth in the Public Domain: polarization and propaganda increase which leads nobody to know what’s true from what isn’t. Fighters often work with the media to gain support and destroy the opposition.

The media then attacks anyone that doesn’t fit their agenda. Free speech takes a hit since people become afraid to speak up due to not wanting to have their lives destroyed.

Raw Fighting Begins

  • When people value a cause more passionately than the system it takes place in, the law is in jeopardy.

When two parties care more about winning than the system, fight and revolt break out.

Late in Stage 5, those that control the system use it as a weapon. Some organizations create paramilitary groups to exercise power over people.

Furthermore protests become more and more violent.

  • If people die, the fight will likely continue to stage 6.
  • Stage 5 becomes stage 6 when the system to resolve disputes stops working.
  • The biggest question is when will the system break?
  • The biggest risk to democracies is that they produce fragmented and antagonistic decision-making that can be ineffective. This leads to bad policies, which leads to revolutions led by populist autocrats who represent large segments of the population who want to have a strong, capable leader that reestablishes order.
  • Different stages require different types of leaders to get the best results.

Stage 6: Revolution

  • Civil wars always end up happening. Don’t assume they won’t. Instead, look for the signs that they will.
  • When they take place, civil wars install a new internal order.

When the system stops working for the majority, a revolution ensues and changes the system.

Revolutions that succeeded or failed all did so for the same reason: their capacity to create a system that is an economic success (more wealth better redistributed).

Revolutions are always led by the higher middle-class, never by the “people” they often claim to defend. Revolutionaries are charismatic and can work well with others.

Wealth gaps often are the main reason for revolution, but there can be other reasons, such as restricted freedom, or a fight for power.

Sometimes, other countries jump into the revolution to influence it.

  • Almost all civil wars had foreign interferences.
  • The beginning of revolutions isn’t clear, but the middle clearly is.

The best leaders in civil wars are inspirational generals. They have to be brutal enough to win the battles, and charismatic enough to rally people to their cause.

-> nothing lasts forever – except evolution.

As a result, there isn’t a best system. There is only a best system for each situation, hence systems should evolve often to adapt to the situation at hand.

Chapter 6: The Big Cycle of External Order and Disorder

The Cycle of Internal Order dealt with the inside of countries. This cycle deals with relations countries have with one another.

The stages of this cycle work a bit like the ones of the Internal Cycle, except for one difference.

  • International relations are driven by raw power.

Power always prevails, which is why the League of Nations and the UN projects have failed. Countries more powerful than these institutions literally directed them.

There are five types of war between countries:

  1. Trade/economic wars: establishing tariffs.
  2. Technology wars: restricting access to certain technologies
  3. Geopolitical wars: territorial conflicts resolved by negotiating (not by fighting).
  4. Capital wars: establishing sanctions.
  5. Military wars: actual fighting.
  • All-out wars happen when an existential issue that cannot be solved by any other means is at stake.

Long cycles of peace and prosperity often plant the seed of terrible, violent wars.

  • Two certainties about war: 1. It won’t go as planned. 2. It will be far worse than imagined.

Everyone is looking for power. Power is having a strong military. A strong military can be developed if the economy is good enough.

  • Military and domestic power go hand in hand.

It takes money to buy military and domestic power, so, if you run out of money, you become weak.

If a country is strong enough to give its people good living standards and protects them from outside, it will survive. Chances for conflict arise when a country is losing power while another is gaining some.

  • The greatest risk of war is when two countries have: 1. equal military capacities. 2. irreconcilable and existential differences.

Fighting VS backing down is a tough choice. Both are costly. One, in terms of resources and life, and the other, in terms of status and soft power.

  • Win-win outcomes are obtained when both parties know what’s the most important thing for the other.

These negotiations should divide wealth and power well so that everyone is happy.

So, why do stupid wars happen?

  • The prisoner’s dilemma: one cannot be sure that the other won’t attack, so one attacks first.
  • Escalation
  • Cost of backing down is too high
  • Misunderstandings when a decision needs to be taken fast

In any ways, win-win or lose-lose relationships are cyclical. Win-win relationships happen when times are good, and the other way around.

If you want to win wars:

  • Have power, respect power, and use power wisely.

Those who have power will get what they want.

Chapter 7: Investing In Light Of The Big Cycle

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

Investing in something is merely the act of giving money today, to get more money tomorrow.

Your likelihood to get more money tomorrow depends on:

  • Economic growth: if growth is low, the central bank decreases interest rates to stimulate the economy.
  • Inflation: if inflation is low, the central bank decreases interest rates to stimulate the economy.
  • Risk premium: how much risk are you willing to take
  • Discount rate: it’s the rate of return on risk-free assets (US treasury bonds.)

The Big Cycle (the one that helps empires rise then fall) is the Cycle that explains the boom induced by capitalism, and the subsequent bust.

It’s been happening forever.

Up until 1350, lending money with an interest was forbidden by all main religions because it caused so many disputes.

Rules first changed in Italy where lending became allowed. Cash deposits, bonds, and stocks were “invented”.

This meant entrepreneurs could borrow money and create wealth, promising to repay later. Credit was a promise.

The Medicis excelled at this game. They lent a lot of money and became really rich doing so.

The problem was when they lent too much money that didn’t exist.

Remember that when credit is created, it stimulates the economy in the short term, but it is depressing in the long term.

As a reminder:

  1. Borrowers borrow money -> debt increases.
  2. Borrowers spend the money they borrowed -> the economy grows.
  3. Financial wealth is higher than real wealth (bankers could lend 5X what they had in the bank).
  4. Too much borrowing -> borrowers won’t be able to repay.
  5. People run to the bank to get back their cash “in hard form”.
  6. The state prints money to settle debts
  7. The money is devalued
  8. Financial wealth goes back down and is low real relative to real wealth (adjusted for inflation).
  9. Borrowers borrow money -> debt increases
  10. Etc

-> this creates the cycle.

When investors invest, they have three risks:

  • That their investment does not generate enough returns (appreciation or dividend)
  • Having financial ruins (stock market crash)
  • Having their money seized (taxes, etc).

Virtually all countries on earth have had a devastating stock market crash at least once since 1900.

Now that we have seen what happens in theory, let’s have a look at what happens in practice.

Part II: How the World Has Worked Over the Last 500 Years

Chapter 8: The Last 500 Years In A Tiny Nutshell

The world was different in 1500, but worked the same way it’s working now.

It was bigger

You could travel roughly 35 km per day.

This meant that your capacity to impact a huge number of people was limited. Europe was one world, US was another one. Russia was another world. Everyone was split from each other. Threats were mostly contained.

Countries didn’t exist

Territories belonged to families that fought each other for wealth and power. When they grew bigger, they were called empires.

Religions were more powerful

Some leaders were said to be head of state by the will of God.

The world was less egalitarian

Serfdom still existed, and not everyone was treated equally.

The empires in Europe, were:

  • The Habsburgs: controlled Austria, part of Germany, Spain, and part of Italy.
  • The Bourbon: they controlled France
  • The rest were the republics of Milan, Venice, and Florence.
  • The Church controlled the Papal States.

In Asia:

  • The Ming family ruled over China. They were much more advanced and developed than Europe, with a good financial system, a good bureaucracy, an army made out of 1 million soldiers, and an enormous fleet. The Ming were so powerful that they closed China and retired in opulence, leaving the state to their ministers who fought for power. Corruption arose, and the whole Empire declined.
  • India and Japan were divided into several entities.

In the Middle East, the Ottoman empire ruled with the Persians. In America, the Aztecs ruled in Mexico, and the Incas, in Peru.

Africa was split into dozens of kingdoms.

The most important changes that happened were caused by new ideas, mostly about how people should behave with one another.

The Commercial Revolution (1100-1500)

The numerous invasions of Europe by the Ottoman Empire led merchants to use the sea and not the land to trade, which developed commerce. A shift from autocracy to republics modeled on the Roman Empire led several Italian cities to develop trade. They became richer.

The Renaissance (1300-1600)

The Renaissance was a period during which Europe went from a system where God was the explanation for everything that happened, to a system where each phenomenon was believed to have a cause.

That led people to search for the cause, which led to many scientific discoveries, and a fast spreading of ideas thanks to the invention of the printing press in 1436.

The Age of Exploration and Colonialism (1400–1700)

The technological advances of the Renaissance enabled technology to improve, which led Europeans to travel in search of riches.

Spain and Portugal established trading empires in America, Asia, and Africa.

The amount of gold and other precious metals the Spanish brought back to Europe led to rising inflation.

Europe eventually started trade with China.

The Reformation (1517-1648)

This period was a period of revolt against the corrupt Catholic Church. It brought down the European order and established Protestantism.

Protestantism led to the Thirty Years’ War in the Holy Roman Empire (Germany mainly) that ended with one of the most important events ever to happen in internal relations: the Treaty of Münster and Osnabrück.

The New World Order Following the Thirty Years’ War (1648)

The Treaty of Münster and Osnabrück established the Peace of Westphalia. The idea was that countries would now have clear, delimited borders, and that people were sovereign within these borders.

The Dutch emerged out of this war as the leading economic power.

The Invention of Capitalism (1600s)

The development of equity markets enabled the rich to invest in entrepreneurs that created considerable amounts of wealth in returns.

The Scientific Revolution (1500s–1600s)

The Scientific Revolution was a heritage of the Renaissance. It led to the development of the scientific method (Francis Bacon) and many other discoveries.

European governments started to invest in and support research, particularly in the UK.

Economic output grew and European powers became more competitive.

The First Industrial Revolution

The scientific discoveries and the freeing of capital enabled the improvements and invention of machines that led countries to become much more productive.

First, agricultural techniques were improved, which led people in the countryside to move to cities that saw their population booming (due to more births and lower death rates).

The Enlightenment and the Age of Revolutions (1600s–1700s)

The Enlightenment was the application of the Scientific Method to people’s behavior. It increased the right of the individual and decreased the importance of the state, the group.

These ideas of rationality and individuality led to revolutions (1689 in the UK, 1765 in the US, 1789 in France).

The chaos brought up by revolutions led to the rise of Napoleon in France which changed the course of Europe.

The Napoleonic Wars and the New World Order that Followed (1803–1815)

Napoleon was defeated in 1815 in Waterloo (Belgium). The world order was redesigned in the Congress of Vienna and the British emerged as the leading power. They created the Pax Britannica (British Peace).

Western Powers Move into Asia (1800)

The British went to India and China, and the US went to Japan.

China and Japan realized they had to modernize themselves if they hoped to resist the Europeans.

Second Industrial Revolution (1850–early 1900)

The second industrial revolution mainly concerned steam-powered engines and benefitted the US.

Invention of Communism (1848)

Communism was invented to address the socio-economic gaps and the nature of capitalism itself. It led to several communist revolutions (Cuba, Russia, China, etc) in the 20th century.

The 20th century had two big cycles of boom and bust, two world wars, and two new world orders.

Chapter 9: The Big Cycle Rise And Decline Of The Dutch Empire And The Guilder

The Dutch rose as the previous world order led by the Habsburgs collapsed.

The Dutch gained independence from the Habsburg from Spain in 1581. The Dutch World Order came to be in 1648 after the Peace of Westphalia, and the empire definitely ceased to exist in 1795.

The Transition from the Spanish/Habsburg Empire to the Dutch Empire

From 1519 to 1556, the Habsburg Empire was made out of Spain, Austria, Germany, Belgium, Italy, and the Netherlands, and was the most powerful empire in the world (especially in Spain), ruled by Charles V.

The empire began to decline due to the rise of Protestantism and revolutions against power.

Charles signed a peace treaty in 1555 then divided his empire into two, (Germany on one hand, and the rest on the other) which he gave to his two sons.

Then the Empire followed the classic decadent scheme:

  • Military overextension
  • Bad finances
  • Inflation
  • Internal conflicts
  • Decadent leadership

The Rise

The Netherlands gained its independence in 1581 from the Habsburg, but they’d still keep on fighting for many years after (until 1648).

To punish them, the Habsburgs stopped trade with the Netherlands which forced the Dutch to open their own trade routes.

The Dutch society was open and inventive, which led them to innovate in a lot of domains. They made roughly 25% of all discoveries in the world.

Among these were capitalism as we know it, and better, faster boats.

The Capital Markets Cycle of the Dutch

The Dutch invented equity and the stock market with the first publicly traded company, the Dutch East India Company in 1602.

This made the country really rich. Since they had better boats, they beat the Spanish and Portuguese at trade, and obtained many routes.

Because there were 800 different coins, the Dutch invented the Bank of Amsterdam, an organ tasked to protect the merchants by exchanging these coins against one unified currency: the Dutch guilder.

Merchants that wanted to trade with the Dutch had to open an account in Amsterdam. The size of the Dutch trade empire, the fact that the guilder was 100% backed, and the promotion of its use made it the first world reserve currency.

The New World Order: The Thirty Years’ War and the Peace of Westphalia

The 30-year war lasted from 1618 to 1648.

The war opposed the Catholics from the Habsburg Empire and the Papal States, against the German Protestants nobles, allied with the Netherlands, Denmark, Sweden, and France (France, while being catholic, was an enemy of the Habsburg, so, they supported the Protestant revolution).

The Habsburgs lost. The Peace of Westphalia established borders, which decreased the power of the Church, as well as the frequent redrawing of maps within Europe.

The emergence of nations led to nationalism.

The war had been so exhausting that everyone was sick of it. 25% of people in Europe died because of it.

  • Wars are costly for everyone, both winners and losers.

The Dutch came out of this war reinforced, while both France and the Habsburg were weakened.

The Top

Rich, the Dutch became more interested in consuming than producing. The arrival of the Enlightenment combined with capitalism led to the industrial revolution, happening mainly in Britain.

As for the Dutch, their education lost quality; they became uncompetitive; they could no longer maintain their empire; more military conflicts led them to become indebted and militarily overextended; they lost the Fourth Anglo-Dutch War (1780-1784) to the British, which made the guilder lose its appeal.

In 1688, William III of Orange (Dutch) married Mary II (British). William III subsequently invaded Great Britain and took power. For a while, the Netherlands was allied with the UK.

Since GB became more competitive, Dutch merchants left Amsterdam for London, which advantaged the UK.

The alliance enabled the British to access the Dutch trade routes. When William III died without kids, the nations broke away.

By 1750, Britain had learned from the Dutch and became better.

The Decline

By 1750, the British and French were stronger than the Dutch.

The Dutch were weakened by:

  1. Too much debt
  2. Internal fighting over wealth and power
  3. Weak military

The British retaliated against the Dutch after they helped the Americans during their revolution. The Dutch East India Company lost its trade routes and had to borrow to stay alive.

The Bank of Amsterdam printed money, people went to exchange the money for gold, and the guilder lost all of its power.

The British pound replaced the guilder and France conquered the Netherlands (1795).

The Dutch Empire ceased to exist.

Chapter 10: The Big Cycle Rise and Decline of the British Empire and the Pound

The rise of a country starts before it becomes dominant. Likewise, the decline of a country extends long after another great power has overtaken it.

While the fall of the Dutch enabled the British to take place already in 1750, they didn’t peak before Napoleon was defeated in 1815.

Britain’s rise started in 1600. The Peace of Westphalia had created a new order (the Dutch one) while the British were struggling with the English Civil War (the parliament VS the king) that ended in 1651.

The King Charles I lost and was executed, and GB was directed by Oliver Cromwell.

The conflict established rule of law instead of the rule of the monarchy.

This led the system to become meritocratic instead of based on who the king liked and didn’t like.

Meritocracy had been widely influenced by the Enlightenment.

Debate was encouraged, the education improved, new ideas spread due to the printing press, which enabled the creation of the public sphere.

The system gained strength politically and intellectually while its financial power rose. The UK created a centralized tax system which enabled it to get twice as much tax as France.

The Bank of England was created in 1694.

The Industrial Revolution

Education + capital = new ideas and tech = prosperity.

First, agriculture was modernized which led the price of food to fall. The population boomed and moved en masse to cities where they worked in factories, which led the economic output to rise.

The revolution spread and Europe shifted from an agricultural society to an industrial one.

The UK developed an enormous navy which enabled it to establish trade routes and take over other EU countries’ colonies.

London became the world financial center and the British pound, the world currency reserve.

Why Not France

All indicators tended towards France becoming as great of a power as GB.

When France established its own “East India Company”, the price of the shares became a bubble. The bubble exploded and a new law prohibited charging more than 5% of interest when lending money.

As a result, companies did not have the capital they needed to develop.

Then wars damaged finances even more.

The monarchy wasn’t suited for economic development, and people started to protest for more freedom as the Enlightenment was making its way into the country.

Entered Napoleon

Chaos, wealth gaps and dissatisfaction opened the road for Napoleon. He led a coup, became emperor, and reformed the entire country.

Napoleon won a lot of battles, became overconfident, overreached, and was eventually defeated.

A New World Order: The Congress of Vienna

The Congress of Vienna was for the British what the Peace of Westphalia had been for the Dutch: the beginning of a new world order.

The purpose of Vienna was to establish a new balance that would prevent new wars in Europe.

British Power Approaches Its Peak

The UK was the big winner. No wars meant it didn’t have to spend money on expensive military campaigns and could focus on trade, which enabled the country to become even wealthier.

The rest of its rivals were weakened (Austria, Russia, Germany, France etc) so it had the entire world for itself.

The Top

At their peak in 1870, the British produced 20 percent of the world’s income, controlled 40 percent of global exports, 20 percent of the world’s landmass, and 25 percent of the world’s population.

60% of global trade was in British pounds between 1850 and 1914.

The Decline

The decline happened like all declines do.

  1. Decline in competitiveness.
  2. Internal conflict and rising inequalities.
  3. Rise of other great powers, namely the US (the next empire) and Germany

The UK lost its edge during the Second Industrial Revolution, which saw the invention of synthetic, electricity, the use of petroleum, the invention of the telephone, etc.

Germany and the US were at the forefront and the UK couldn’t keep up.

By the 1890s, the top 1% in the UK owned 70% of all wealth. The top 10% owned 93%.

The gap in wealth inequalities coincided with the peak of the British Empire. What follows was its downfall.

The UK also faced growing competition abroad, with France in Africa, Russia in the Middle East, and the US in America.

The biggest competitor was Germany. Back in 1815, Prussia was still divided. By the end of the 19th century, it had assembled into a big country under the leadership of Otto von Bismarck.

Germany simultaneously established research institutions, led credit flow, rewarded innovation, etc.

Germany’s share of world output increased from 5% to 13% from 1860 to 1900.

The UK competed with Germany which itself competed with Russia and Austria, who themselves competed with other powers.

The war eventually broke out in 1914 and it was monstrous.

It killed 21.5 million people, exhausted Europe, led Russia into a communist revolution in 1917, then the Spanish flu killed an additional 20 million people.

The victors (France, UK, Italy, Japan, US) met in Versailles for the Treaty of Versailles.

While the Congress of Vienna made sure no other war would break out, the Treaty of Versailles did the exact opposite.

It forced the losers of the war to repay. Crushed under debt, they had difficulty developing while the rest of the world experienced “the roaring twenties”.

Then the Great Depression happened, leading to large wealth gaps, which led to populism and extremism.

Wealth was redistributed in the UK and the US, but dictators seized power in Italy (Mussolini), Japan, Germany (Hitler), and Spain (Franco).

WWII eventually happened. Germany and Japan lost. The US, UK, and the USSR won, though the USSR and the UK were devastated – while the US was more powerful than ever before.

The new winners determined a new world order in 1945 during the Potsdam and Yalta conferences.

The British were left with an Empire more expensive to maintain than it was profitable, huge war debts, and an exhausted population.

The pound lost its power until 1967 when it was definitely devalued.

Europe After 1945

Powerful like it was, the US was the defacto leading world power, which created tensions with the second one, the USSR. The US created the defense alliance NATO, and the USSR, the Warsaw Pact.

The US was tasked to resolve world conflict through the establishment of the UN in New York after the failure of the League of Nations in Switzerland.

The Bretton Woods monetary system (1944) established the dollar as a reserve currency.

The IMF and the World Bank were designed to support the new financial system.

New York replaced London as the new global financial center.

Europe, which had been leading for the last 800 years or so, was dwarfed. There was a need for European unity to face the new giants, namely the US and the USSR (and later, China).

The EU was established to make war “not only unthinkable, but materially impossible”. The purpose of the founding fathers (Schuman etc) was to create some sort of European Federation, which began with the European Coal and Steel Community.

The economic integration led to political integration, and EU countries opened doors to each other, with more countries joining.

Today, Europe has a big debt, low inventiveness, important internal conflict, and its military is weak.

It has become a second world power.

Chapter 11: The Big Cycle Rise And Decline Of The United States And The Dollar

The US began to rise in 1750 to reach peak power in early 1900, topped in 1950.

It is currently declining as China is rising.

Overall, all the indicators are down, and projected to keep on declining.

Illustration from the book.

The Rise

The US went through a post-revolution period ideal for the rise of a country in a remarkably peaceful way.

After its revolution in 1765, the US became independent in 1776.

It created ideal conditions and good educational infrastructures for the rise of the country (with a notable pause during the Civil War).

The ascent really started in the 1800s, after the US Civil War (1861-1865) and before the Second Industrial Revolution.

The gains of that revolution were financed with a capitalist system where money was flowing freely.

This led to social-economic inequalities which were decreased with high taxes and the break up of monopolies.

The Long Ascent of the Dollar and US Capital Markets

In the beginning, the US did not have a central bank. Banks lent more money than they had, which led to the boom-bust cycle.

Banking panics were frequent.

New York became an established trading center long before it became the main one.

Banks innovated to solve problems that arose due to the growing importance of New York in the financial world scene.

The economy boomed, fed by capital coming from Europe.

The second period of the 19th century was extremely productive, created wealth, but also inequalities. The debt bust happened in 1907.

In 1913, the Federal Reserve was created to mitigate the boom-bust cycles.

In 1910, the US stock market was bigger than that of the UK.

WWI considerably weekend European currencies. The US was the only country to keep convertibility to gold during the war.

After the war, the US took a big role in shaping the new order with the Treaty of Versailles.

The post-war period of peace and productivity led to the inflation of assets due to excessive borrowing. The Fed tightened the borrowing in 1929, which led to the Great Depression.

All nations suffered, and people were fighting over wealth both between and inside countries. This set the basics for WWII in 1939.

1945 established a new world order where the US was the big winner, due to not being concerned with any fighting on its territory (except for Pearl Harbor).

The Top

In 1945, the US emerged as the de facto leader. The UK was bankrupt, Germany, Italy and Japan were devastated, like France. China was in the midst of a civil war.

Russia rose until 1980 when it began its decline, while China began its ascent.

Because international relations rest on raw power, NATO and the Warsaw pact emerged.

While the US remains today the dominant military power, there are many scenarios where they would lose if they were to face China.

  • Military spending takes government money away from social programs. Since they also depend on technology, the biggest risk for the leading powers is that they lose the economic and technology wars.

The Post-War Monetary and Economic Systems

  • Transactions between countries are very different from transactions within countries.

Bretton Woods made the US the world reserve currency due to its power, and the size of its economy.

Also, nobody wanted to use any other currencies.

The Fed controlled where the US money was going, and the US poured a lot of it into Europe and Japan for reconstruction (and to avoid having them fall into communism).

After the war, the economy boomed in the US and the stock market went on a mega bull cycle.

The stock market peaked in 1966, which was the end of good times.

The US was spending too much on wars. In the 60s, real GDP growth was at 0%. Americans didn’t realize they had to stop spending. So, they didn’t.

The 1970s: The Balance of Payments Problem Unfolds—Low Growth, High Inflation

The US printed too much money so it defaulted in 1971, then Nixon broke up the accord of Bretton Woods in 1973 and the US dollar, once backed by gold, became paper money.

Money was no longer constrained and a decade of stagflation started.

Meanwhile, Japan and Germany became competitive and could produce cheaper, better products, which led to economic difficulties in the US.

Most Americans had never experienced inflation. At the end of the decade, they were traumatized by it.

The 1979–1982 Move to Tight Money and Conservatism

Conservatives were elected during this period to limit inflation (Reagan, Thatcher, etc).

  • Economics and politics have swings between the left and the right in varying extremes as the excesses of each become intolerable and the memories of the problems of the other fade.

The world plunged into an economic recession of the likes of 1929. Mexico defaulted on its debt in 1982.

The Disinflationary and Booming 1980s

Inflation eventually decreased, and the stock market boomed. The debt-restructuring process went well.

Overall, the US going off the gold standard led to inflation, which led to restricting money printing, which led to currency strength, which led to falling inflation.

1990–2008: Globalizing, Digitalizing, and Booming Financed by Debt

The Soviet Union never could catch up with the US due to its disastrous economy. The country collapsed in 1991 and everyone moved away from communism, which had failed everywhere.

Since then, there were three economic cycles:

  1. One that peaked in 2000 with the Internet bubble
  2. One that peaked in 2008 with the real estate bubble
  3. One that peaked in 2019 just before the virus

During that period, China rose, and technology replaced people which was good for productivity but which widened social-economic gaps.

Factories moved to cheap countries which enabled them to develop (mainly China).

Overall, tech improvements (robots) and Chinese workers replaced the middle-class in developed countries, especially the US.

  • Most people pay attention to what they get instead of where the money used to buy stuff comes from. This encourages elected officials to spend a lot of borrowed money to give voters what they want. This creates problems down the road.

There are three types of monetary policy:

  1. One led by interest rates
  2. One led by buying financial assets with printed money (quantitative easing)
  3. One where the government issues bonds bought by the central bank

The 2008–2020 Money-Financed Capitalist Boom

After the crash, interest rates were at zero, which fueled a boom in financial assets, which were mostly owned by the rich, so social-economic inequalities widened.

This led to Trump in 2016. Trump cut taxes and ran a large deficit financed by debt, which worsened social-economic differences.

Meanwhile, the country became divided politically.

When the virus hit, all world governments borrowed even more.

  • When there is a great increase in money and credit, it drives down the value of money and credit, which drives up the value of other investment assets.

As a result, the stock market boomed.

Where the US Is Now in its Big Cycle

The US is 70% in its own World Order, and has not yet entered Stage 6, with a civil war.

Politically, the population is much more at the extreme, which increases the chances of internal conflict.

The main three indicators for the beginning of Stage 6 are:

  1. Disregarding the rules.
  2. Groups attacking each other.
  3. Blood.

Chapter 12: The Big Cycle Rise of China and the Renminbi

(This chapter is about China’s history and isn’t really relevant to the rest of the book. You can skip it).

Illustration from the book.

Unlike the other empires we’ve studied, China has been declining for the past 200 years.

Seven powers hit their lowest point in 1950, and most of them have been rising ever since.

Today, China is strong everywhere but is lagging as a reserve currency and financial center.

Chinese history has been a tale of ascent and decline. It began some 2000 years before Christ.

Illustration from the book.

China became a great power several times, and decadent several times too.

The last dynasty was the Qing. They led China during the Century of Humiliation, which began in 1839 and ended in 1949.

At the beginning of the 19th century, the British arrived in China seeking trade. The First Opium War happened (we explain below why) and it considerably weakened China, which declined until the end of the Qing in 1912.

China was also heavily influenced by Confucianism, which favors scholarship over commerce, technology, and military strength.

China VS America

Chinese history is old and well-documented. The Chinese know about the cycles and revolutions, so they are prepared. Americans, don’t.

The Chinese think differently about the present and the future, and know they must expect anything.

The Americans believe they’ll always live the way they do.

The Chinese plan for the future, a hundred years ahead. The Americans do what they want now.

The first phase of the Chinese Cycle was under Mao. The second phase was under Deng Xiaoping, when he built China’ economy.

China’s Lessons and its Ways of Operating

Chinese culture is a mix of their experience and lessons.

  • Confucianism: a philosophy that seeks to bring harmony within the system. It starts with the family, up to the country. Super hierarchical, everyone respects those above them.
  • Legalism: favors the rapid conquest and unification of all things under one leader. View of the world is “kill or be killed”. Western equivalent of fascism.
  • Taoism: highlight the importance of living within the laws of nature. Nature is made out of opposites that must be balanced.

China put the group over all else while the US put the individual above all else. The Chinese sought more to control and defend their land than to annex others, which is why they didn’t have colonies and were prone to isolation.

They don’t like to fight. They believed the best way to fight is to become extremely powerful so the enemy doesn’t attempt to do war.

China’s Monetary and Economic History

China has been through the same cycles as everyone else.

The currency they used was silver.

While most nations had global reserve currencies, China never did.

The first reason is that leaders weren’t as interested in commerce as much as the Europeans. The second is that investments didn’t play a massive role throughout the dynasties either.

In the 1920s, debt grew, so paper money was debased and controlled.

  • When you see capital controls being put on a currency, especially when there is a big domestic debt problem, run away from that currency.

Let’s now have a look at Chinese history from 1800 until now

The Decline from 1800 until 1949

China’s decline began when the dynasty became weak and decadent while EU countries became strong (particularly GB).

Great Britain sought tea, silk, and porcelain from China, but the Chinese weren’t interested to buy anything from the British.

When the British ran out of silver to buy in China, they smuggled opium into the country sold for silver, which helped them keep on buying tea, silk, and porcelain.

This led to the First Opium War. Britain won, obtained Hong Kong, and forced the Chinese to open their ports for trade. Japan obtained Taiwan.

China subsequently borrowed from Western countries to deal with protests at home, which made its situation even worse.

Looking at it in this way, we can understand why Mao thought that capitalism was evil.

Britain had forced its way into China and exploited Chinese workers “for trade”.

Communism seemed the obvious solution to avoid such a fate in the future.

At the end of WWII, most foreigners left China where the communists and capitalists were fighting to determine how wealth would be redistributed.

Mao won in 1949.

The Rise from 1949 until Now

The evolution of China from 1949 to now happened in three phases.

1. Mao (1949-1976): Building the foundation.

Mao ruled over China like a communist emperor. He built the institutions and kept a classic communist system. The land was redistributed and most businesses were nationalized.

The Chinese economy grew but the country remained extremely poor.

While China had had the backing of the USSR so far, the Soviet Union became an enemy in 1960 with the coming to power of Nikita Khrushchev.

In 1958, Mao attempted to establish the Great Leap Forward, which was a catastrophe and led to the death of roughly 40 million people.

The economy contracted by 25%.

The economy recovered until the Cultural Revolution. The Cultural Revolution was Mao attempting to secure more control over the country in order to prevent a coup. It also killed a lot of people, roughly 20 million.

By 1971, Mao’s health declined. Meanwhile, the Soviet Union had grown increasingly more threatening to China, so China allied with the US.

Nixon went to China in 1972, and China’s communist regime was recognized by the international community.

Mao died in 1976. Two groups, reformists and hardliners, opposed each other for 2 years. The reformists won and Deng Xiaoping came to power.

2. Deng Xiaoping and his heirs (1978-2012): Building China peacefully

Deng Xiaoping reformed China and introduced capitalism. China became much stronger and gained considerable power.

Xiaoping was obsessed with economic reforms and opening China up to foreign investors.

He created a 70-year plan with ambitious socio-economic goals.

He also reformed the political system to make it less dependent on one person, and introduced the Politburo who voted when a consensus couldn’t be reached.

He forbid leaders from doing more than two five-year terms, and encouraged consensus instead of dictatorial decisions. He also reformed the constitution to facilitate foreign investments.

A democratic movement arose in 1989, and was matted by Xiaoping. However, he did not go back to Mao’s days, and kept on reforming.

Jang Zemin then Hu Jintao succeed Xiaoping with the same politics. They also negotiated to take Hong Kong back from the British and Macau from Portugal.

Meanwhile, the US and China’s relationship grew. US manufacturers produced in China, sold to Americans, and Americans borrowed dollars from the Chinese to maintain their overconsumption.

The bubble eventually exploded in 2008. The middle class got hurt, especially as their jobs moved to China. The rich got even richer, so a populist wave took over politics.

The G20 met in Washington and agreed to print money to stimulate the economy.

In China, debt grew much faster than the economy.

3. Xi Jinping (2012-now): Becoming a World Power

When Xi Jinping took control, China was becoming indebted, corrupt, and grew more threatening to the US.

Xi decreased debt, reformed the economy, led an anti-corruption purge, reduced inequality, expanded China’s power outside (Eg: the Belt and Road Initiative), and controlled power at home.

While China sought to grow without any powerful ambitions, this changed with Xi. China wants to become world leader in a lot of economic categories where the US is currently world leader, which creates friction.

China wants to emancipate itself from the US. The US wants to contain it.

China is now a major and expanding power.

Let’s have a look at its relations with the US.

Chapter 13: US-China Relations and Wars

The Positions the Americans and Chinese Are in

The positions the two countries are in are due to the Big Cycles.

The US is at the end of its empire time, while China is at the beginning.

The first thing we need to highlight is that the US is an overly indebted country mainly held by China.

  • Countries succeed when they can sustain the strengthening forces without being decadent. The most successful countries did this for 200–300 years. No country has been able to do it forever.

There are five major types of wars. We will add two more:

  1. Trade wars
  2. Technology wars
  3. Geopolitical wars
  4. Capital wars
  5. Military wars
  6. Culture wars
  7. War with ourselves.

These wars are increasing. They should not be considered random information data points, but small conflicts that eventually lead to an all-out war.

The Trade/Economic War

The trade war so far included tariffs and import restrictions. This war has been more of a test of power than anything else.

The US accuses China of the following:

  1. Interventions led to protecting its domestic market.
  2. The Chinese government works hand-in-hand with its companies, including when it comes to espionage and security.
  3. The Chinese are stealing intellectual property.
  • When things are not going well, leaders don’t hesitate to do stuff previously considered immoral.

The war will likely escalate.

It could escalate when one country cuts off essential imports for the other: eg: oil, rare earth materials, etc.

It’s a clear sign that an all-out war is about to happen.

The result is that countries want to rely less and less on others and more on themselves -> shift to domestic production.

The Technology War

The tech war is important as whoever wins it would likely win an all-out war too.

China has become much better in tech, but is still dependent on the US. The US is leading in tech, though not everywhere. Overall, its lead is declining.

Since China leads in computing power, AI, and data, they are likely to develop technology faster than the US due to better decision-making.

To retaliate, the US has been limiting access to some tech companies like Huawei.

The Geopolitical War

Sovereignty (Hong Kong, Taiwan, the South East China Sea, etc) is the biggest issue for China.

The Century of Humiliation is a big reason for that. China doesn’t dictate how the US treats its citizens and can’t stand when the US or the EU does so.

The most dangerous issue is Taiwan.

The Chinese don’t believe the US will allow reunification with Taiwan. As a result, they want to be sufficiently powerful to deter the US from engaging militarily.

Would the US fight? Doing so would be at great cost. Not doing so would also be at great cost.

The Capital War

One of the biggest risks that can ignite a conflict is that the capital is cut off. Since money = power, no money = no power.

Countries use sanctions to cut off capital.

By printing the world currency, the US decides who gets to use it – and who doesn’t.

However, the US is at risk of losing this privilege because:

  • The amount of dollar-denominated assets in foreigners’ portfolios is too large for what it should be.
  • The Fed and the US government are printing a lot of money, which makes it unattractive to hold.
  • Holding debt is less desirable during wartime than peacetime.
  • Since the US can prevent someone from using their money, holding debt in dollars may be dangerous.
  • The US dollar is a reserve currency mainly because it can be used freely between countries. If the US starts to impose sanctions, the US dollars attractivity would decline.
  • Countries targeted by sanctions have sought to go around them by developing alternative payment systems.

At the moment, there are no good alternatives. The USD makes up 51% of all money in existence.

The euro makes up 20%.

To quote the author:

The euro 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. Because the European Union is financially, economically, and militarily at best a secondary power, buying its currency and debt denominated in its currency, which its central bank is free to print, is not an enticing thing to do.

Gold is a dead asset since there are no significant international trade and capital transactions in it and it isn’t used to back currencies anymore.

The Yen has the same problem as the dollars, the pound has the same problem as the euro, and the renminbi makes up for only…2% of all money.

-> at this moment, there are no other attractive world currencies.

  • When currencies aren’t attractive and when there are no other currencies to replace them, the money flows into other types of investment (e.g., gold, commodities, stocks, property, etc). No need for another currency to have all currencies devaluate.

The Military War

  • While impossible to imagine, the next military war will likely be much worse than imagined.

World War III would likely be extremely deadly due to the fact that many technologies of war have never been tested, and that the tech of today is much more destructive than the tech of the past.

  • When countries have big internal disorders, 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 is high.

Since the US will likely descend into civil war in the upcoming years, it’s in the interest of China to wait before waging a war.

The Culture War

  • How people behave with each other determines how they react to challenges. This behavior is determined by culture.

Chinese culture is top-down, hierarchical, and collective at the expanse of the individual. Since it’s a communist country, wealth is redistributed.

US culture is bottom-up, individualistic, capitalist, and admires revolutionary thinking.

Chinese and Americans both fail to empathize with each other.

Both of them have their cultures deeply embedded, and will never give it up.

Americans would fight for their freedom of speech, while Chinese would fight for more for “harmony”.

Eg: when a general manager for an NBA tweeted support for Hong Kong, the Chinese were furious. When he took the tweet down, the Americans were furious.

Americans don’t think the group should be held accountable for the behavior of the individual. Chinese do.

The War With Ourselves

This is the greatest war, as we have the most control over how we are.

The items that make empires great (judged by the 18 determinants) are:

  1. Strong leadership
  2. Strong education
  3. Strong character, civility, work ethic
  4. Low corruption, high respect for the rule of law
  5. People that can work well together
  6. A good resources allocating system
  7. Open-mindedness to adopt the best practices
  8. Great competitiveness in global markets
  9. Strong income growth
  10. Important investments in assets that will make money later (infrastructure, education, research)
  11. Increasing productivity
  12. New tech
  13. Important share of world trade
  14. Strong military
  15. Strong currency
  16. Leading financial center

Because the internal order is the primary cause for the rise and fall of empires, it is important that citizens and politicians ask themselves how well they do with these 16 items.

Part III: The Future

Chapter 14: The Future

When looking at the future, you should:

  1. Determine what’s likely to happen
  2. Protect yourself in case you’re wrong

Dealing with the future is about:

  1. Seeing and adapting to what is happening, even if it wasn’t predicted
  2. Thinking about what may happen (in probabilities)
  3. Knowing enough to protect against the downsides and unpredictable events

The author’s approach to predicting the future is based on:

  1. Evolution, which causes change, generally toward improvement
  2. Cycles, which cause ups and downs
  3. The indicators we have discussed


Evolution helps you predict the future as long as a big unpredicted event does not come to disturb that vision of the future.

  • While predicting the future based on the past, be prepared to be surprised because the future will be much different than you expect it to be.

Based on past data, we can estimate that in the next 10 years, there will be 10-15% more people on earth, the output per person will be 20% higher, wealth will be 30% higher and life expectancy, 7.5% longer.

Cycles and Bumps Along the Way

  • When betting in the market, evolution will naturally tend to get it up, but bumps along the way (crises) will also happen.

Quality Indicators

Let’s have a look at the five most important indicators.

1. Innovation

Innovation goes faster and faster and most people will likely benefit from it.

Quantum computing with AI will create an enormous volume of knowledge that will create great wealth.

2. The Debt Money Capital Cycle

Debts are too large at the moment, so money will be printed to service them. There will be a transfer of wealth from lenders to borrowers because of that.

The value of all currencies will decline.

Wealth will also have to be redistributed.

3. The Internal Order And Disorder Cycle

“The empire long divided must unite and long united must divide. Thus it has ever been.”

Internal conflict is high in the US.

  • Power rules and tests of power are the ways one learns who rules.

So, can a decadent cycle reverse?

Likely no.

It requires undoing things that have already been done, such as consuming less and producing more.

At the moment, the US is deeply indebted, its military is weakening, and its internal order tends towards civil war.

4. The External Order and Disorder Cycle

  • All empires eventually disappear and new ones rise to replace them.

The US and China are clearly engaged in four types of war which are intensifying.

These mini-wars precede military wars usually by 10 years.

However, because of the mutually assured destruction principle (nuclear war), the chances for a US-Chinese war are lower than the chances for peace.

As time goes by though, chances for a war increase because China rises and the US declines.

5. Acts of Nature

Natural disasters are more and more violent and cost more and more.


Out of these five determinants, innovation is the only one we can expect to positively evolve in the future as the four others are deteriorating.

Dealing With What You Know and What You Don’t Know

Success is more a matter of knowing what you don’t know than the other way around.

  • Know all the possibilities, think about the worst-case scenarios, and then find ways to protect yourself against them.

Protecting yourself against worst-case scenarios is liberating since it means that whatever you do…you’re covered.

  • Diversify

You can’t think of all the worst-case scenarios. Therefore, by diversifying, you make sure that you’ve covered as many as possible.

  • Put deferred gratification ahead of immediate gratification so you will be better off in the future.

The more you work for your future, the better the future will be. The more you eat your fruits in the present, the worse the future will be.

  • Triangulate among the smartest people possible.

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  • Post category:Summaries
  • Post last modified:May 26, 2022