Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

Book Preface

WITH APPRECIATION
To all who helped me learn, you each have my deep gratitude for giving me valuable bits and pieces that I could put together to make this book. If it wasn’t for the conversations we had, the thoughts you shared in your writings, and the histories and statistics that you dug out from archives, this book would have not been possible. In some cases you are still with us and in some cases you are not, but you are all in my thoughts. I am especially grateful to Henry Kissinger, Wang Qishan, Graham Allison, Lee Kuan Yew, Liu He, Paul Volcker, Mario Draghi, Paul Kennedy, Richard N. Haass, Kevin Rudd, Steven Kryger, Bill Long eld, Neil Hannan, H. R. McMaster, Jiaming Zhu, Larry Summers, Niall Ferguson, Tom Friedman, Heng Swee Keat, George Yeo, Ian Bremmer, and Zhiwu Chen.
I also want to thank Peer Vries, Benjamin A. Elman, Pamela Kyle Crossley, Sybil Lai, James Zheng Gao, Yuen Yuen Ang, Macabe Keliher, David Porter, Victor Cunrui Xiong, David Cannadine, Patricia Clavin, Duncan Needham, Catherine Schenk, and Steven Pincus, among others for their valuable perspectives.
I am also very grateful to those who helped convert these concepts and writings into a book, which was nearly as much of an undertaking as coming up with them. I am grateful to Mark Kirby above all others for his unwavering devotion, talent, and patience. I am also grateful to Michael Kubin, Arthur Goldwag, and Phil Revzin, who all provided helpful comments on the manuscript, and to Jim Levine, my literary agent, and Jo e Ferrari-Adler, my editor, who helped create this book and get it out there.
Beyond these people were many others, including Gardner Davis, Udai Baisiwala, Jordan Nick, Michael Savarese, Jonathan Bost, Stephen McDonald, Elena Gonzalez Malloy, Khia Kurtenbach, Alasdair Donovan, Floris Holstege, Anser Kazi, Chris Edmonds, Julie Farnie, and Brian De Los Santos, who contributed signi cantly behind the scenes—as did all the people at Bridgewater, who together created the most amazing learning platform imaginable.

HOW TO READ THIS BOOK

In writing this book I wrestled with whether to make it complete or concise and decided to try to make it both by bolding passages to create a quick-read version. If you want to read the concise version, read what is in bold, and if you want more, it’s all available to you.
I also wanted to convey some principles that are timeless and universal truths for dealing with reality well, which I denoted by putting a red dot in front of them and italicizing.
For some subjects, I had embellishments that I thought would be interesting to some but not all readers, so I chose to present them as an addendum to the respective chapter. Feel free to read or skip as you like.
At the back of this book, you can nd a glossary that explains the abbreviations you see in some of the charts.
Finally, to keep this book from becoming much too long, there is also a lot of supplemental material available at economicprinciples.org, including reference material, citations, more data on the indices, etc.

INTRODUCTION

The times ahead will be radically di erent from those we’ve experienced
in our lifetimes, though similar to many times in history.
How do I know that? Because they always have been.
Over the last 50 or so years, in order to handle my responsibilities well, I have needed to understand the most important factors that go into making countries and their markets succeed and fail. I learned that to anticipate and handle situations that I had never faced before I needed to study as many analogous historical cases as possible to understand the mechanics of how they transpired. That gave me principles for dealing with them well.
A few years ago, I observed the emergence of a number of big developments that hadn’t happened before in my lifetime but had occurred numerous times in history. Most importantly, I was seeing the con?uence of huge debts and zero or near-zero interest rates that led to massive printing of money in the world’s three major reserve currencies; big political and social con?icts within countries, especially the US, due to the largest wealth, political, and values gaps in roughly a century; and the rising of a new world power (China) to challenge the existing world power (the US) and the existing world order. The most recent analogous time was the period from 1930 to 1945. This was very concerning to me.
I knew that I couldn’t really understand what was happening and deal with what would be coming at me unless I studied past analogous periods, which led to this study of the rises and declines of empires, their reserve currencies, and their markets. In other words, to develop an understanding of what is happening now and might happen over the next few years, I needed to study the mechanics behind similar cases in history—e.g., the 1930–45 period, the rise and fall of the Dutch and British empires, the rise and fall of Chinese dynasties, and others.1 I was in the midst of doing those studies when the COVID-19 pandemic struck, which was another one of those big events that never happened in my lifetime but had happened many times before. Past pandemics became a part of this study and showed me that surprising acts of nature—e.g., diseases, famines, and ?oods—need to be considered as possibilities because those surprising big acts of nature that rarely come along were by any measure even more impactful than the biggest depressions and wars.
As I studied history, I saw that it typically transpires via relatively well-de?ned life cycles, like those of organisms, that evolve as each generation transitions to the next. In fact, the history and the future of humanity can be seen as just the aggregate of all the individual life stories evolving through time. I saw these stories ?ow together as one all-encompassing story from the beginning of recorded history up to this moment, with the same things happening over and over again for basically the same reasons, while still evolving. By seeing many interlinking cases evolve together, I could see the patterns and cause/e ect relationships that govern them and could imagine the future based on what I learned. These events happened many times throughout history and were parts of a cycle of rises and declines of empires and most aspects of empires—e.g., of their education levels, their levels of productivity, their levels of trade with other countries, their militaries, their currencies and other markets, etc.
Each of these aspects or powers transpired in cycles, and they were all interrelated. For example, nations’ levels of education a ected their levels of productivity, which a ected their levels of trade with other countries, which a ected the levels of military strength required to protect trade routes, which together a ected their currencies and other markets, which a ected many other things. Their movements together made up the economic and political cycles that occurred over many years—e.g., a very successful empire or dynasty could have its cycle last 200 or 300 years. All the empires and dynasties I studied rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it.

This Big Cycle produces swings between 1) peaceful and prosperous periods of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of ?ghting over wealth and power and a lot of destruction of wealth, life, and other things we cherish. I saw that the peaceful/creative periods lasted much longer than the depression/revolution/war periods, typically by a ratio of about 5:1, so one could say that the depression/revolution/war periods were transition periods between the normally peaceful/creative periods.
While the peaceful/creative periods are certainly more enjoyable for most people, all these realities have their purposes for advancing evolution, so in the broader sense they are neither good nor bad. The depression/revolution/war periods produce a lot of destruction, but like cleansing storms, they also get rid of weaknesses and excesses (such as too much debt) and produce a new beginning in the form of a return to fundamentals on a sounder footing (albeit painfully). After the con?ict is resolved, it is clear who has what power, and because most people desperately want peace, there is a resolution that produces new monetary, economic, and political systems—together, a new world order—and fosters the next peaceful/creative period. Within this Big Cycle are other cycles. For example, there are long-term debt cycles that last about 100 years and short-term debt cycles that last about eight years. This short-term cycle also has within it longer, prosperous expansion periods that are interrupted by shorter recession periods, and within these cycles are shorter cycles, and so on.
Before I get your head spinning with all this cycle stu , the main thing I want to convey is that when the cycles align, the tectonic plates of history shift, and the lives of all people change in big ways. These shifts will sometimes be terrible and sometimes terri?c. They certainly will happen in the future, and most people will fail to anticipate them. In other words, the
swinging of conditions from one extreme to another in a cycle is the norm, not the
exception. It was a very rare country in a very rare century that didn’t have at least one boom/harmonious/prosperous period and one depression/civil war/revolution period, so we should expect both. Yet, most people throughout history have thought (and still think today) that the future will look like a slightly modi?ed version of the recent past. That is because the really big boom periods and the really big bust periods, like many things, come along about once in a lifetime and so they are surprising unless one has studied the patterns of history over many
generations. Because the swings between great and terrible times tend to be far apart the future we encounter is likely to be very different from what most people expect.
For example, my dad and most of his peers who went through the Great Depression and World War II never imagined the post-war economic boom because it was more di erent from than similar to what they had experienced. I understand why, given those experiences, they wouldn’t think of borrowing and putting their hard-earned savings into the stock market, so it’s understandable that they missed out on pro?ting from the boom. Similarly, I understand why, decades later, those who only experienced debt-?nanced booms and never experienced depression and war would borrow a lot in order to speculate and would consider depression and war implausible. The same is true with money: money used to be “hard” (i.e., linked to gold) after World War II until governments made money “soft” (i.e., ?at) to accommodate borrowing and prevent entities from going broke in the 1970s. As a result, most people at the moment of my writing this book believe that they should borrow more, even though borrowing and debt-?nanced booms have historically led to depressions and internal and external con?icts.
Understanding history in this way also raises questions whose answers provide us with valuable clues on what the future will be like. For example, throughout my life, the dollar has been the world’s reserve currency, monetary policy has been an e ective tool for stimulating economies, and democracy and capitalism have been widely regarded as the superior political and economic systems. Anyone who studies history can see that no system of government, no
economic system, no currency, and no empire lasts forever, yet almost everyone is surprised
and ruined when they fail. Naturally I asked myself how would I and the people I care about know when we are entering one of these depression/revolution/war periods and how would we know how to navigate them well. Because my professional responsibility is to preserve wealth regardless of the environment, I needed to develop an understanding and strategy that would have worked throughout history, including through these sorts of devastating times.