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The Rise and Fall of Empires

This week, I’m back with another post from your friendly neighborhood billionaire Ray Dalio. Ray Dalio recently put out an article called “The Big Cycles Over the Last 500 Years”.

He talks about the rise and falls of empires and countries over the past five centuries. This is super important, because we are nearing a tipping point where the U.S. has been the dominant nation for the past 75 years.

No one really knows what life would be like if the U.S. weren’t the dominant superpower. However throughout history, there were other dominant superpowers.

The dominant superpower has not just been the U.S.. Amongst many others, the Romans, Egyptians, Dutch, British and Chinese were also superpowers. The U.S. is at a tipping point, and China is challenging the U.S.

Before we dive into a 1600s history lesson, there are some things you need to know.

Cycles of Empires

It’s important to note is that these cycles of rising and falling empires happen over and over again. You will even see this on a granular level, in your life stages. For example going through school, college, marriage, kids and retirement.

 

Empires usually last between 50 years and a couple hundred of years. Then another superpower rises up to challenge them. Then there is a new superpower.

The U.S. has been the superpower for the past 75 years. Although I think the U.S. will stay the superpower for longer, China is growing stronger. Ray specifically talks about how there is eight measures of a country’s superpower.

#1 Education

How educated are the people collectively of that country to innovate new technology?

#2 Technology

How is that superpower country innovating and leading the push into new tech?

#3 Military

How competitive are we compared to other countries in terms of the military?

#4 & #5  Exports & Imports

We also are very strong with global imports, exports, trade with other countries

#6 GDP

What’s our GDP as a country overall compared to the total GDP of the world?

#7 Financial Sensors

Right now New York is the main financial center. However China is growing stronger in the finance.

#8 Reserve Status

The U.S. is currently the reserve status . However, as I’ve stated before, China is growing stronger in all eight areas. Now China is essentially very strong in all of these areas as well.

 

 

This is one of the first times in the past few decades where a country is rising up and competing with the U.S.. China has some of the top schools. These schools are producing very smart engineers! In China, they are innovating AI and machine learning software.

Shenzen, China is basically the next Silicon Valley, military center and trade center. It affected our stock market when we got into a trade war with China.

Now we rely on China for many goods and services. If we got into a serious trading war, we wouldn’t necessarily need to make up for the lack of manufacturing.  Let’s dive into specific examples.

Dutch Empire 1580 – 1780

Around 1580, the Dutch overtook the Spanish empire who had been in control for 200 years prior. In the years leading up to 1580, the Spanish empire was the strongest empire in the Western world, and the Chinese empire was the strongest in the Eastern world.

Meanwhile the Dutch were becoming more and more educated. In fact, they came up with 25% of the inventions worldwide with just a population of around, 1 to 2 million people. They created strong ships that allowed them to control trade – and trade is a measure of superpower.

Not only that, they created a lot of the capitalist functions that we have today. Specifically, they created the first public company – the Dutch East India company.

 

 

They also created the first stock exchange in 1602. They created this new system to take on more debt and give more capital to companies. This allowed them to grow.

Additionally they created the world’s first reserve currency. Many people around the world were involved with Dutch trading so the currency became widely used.

The Dutch were very good at building ships, which allowed them to control trade and establish naval dominance.  Furthermore, Amsterdam became a leading financial center!

All good things come to an end. Empires rise and fall! The British rose up to challenge the Dutch. As the British got stronger, both economically and militarily, they started to challenge and fight with the Dutch. After many decades of fighting, the British won around 1815.

The Rise and Decline of the British Empire and Pound

As is typical after wars, the winning powers (most notably Britain, Russia, Austria, and Prussia) met to agree on the new world order.

That set the stage for Great Britain’s 100-year-long “imperial century” during which Great Britain became the unrivaled world power. The British pound became the world’s dominant currency, and the world flourished.

As is typical following the period of war, there was an extended period—in this case 100 years—of peace and prosperity, because no country wanted to challenge the dominant world power and overturn the world order that was working so well.

Like the Dutch before them, the British followed a capitalist system to incentivize and finance people to work collectively, and they combined these commercial operations with military strength to exploit global opportunities in order to become extremely wealthy and powerful.

Around 1760, the British created a whole new way of making things and became rich while raising people’s living standards.  It was called the Industrial Revolution.  It was through machine production, particularly propelled by the steam engine.  So, this relatively small country of well-educated people became the world’s most powerful country by combining inventiveness, capitalism, great ships and other technologies that allowed them to go global. This also included a great military that created the British empire which was dominant for the next 100 years.

Naturally London replaced Amsterdam as the world’s capital markets center and continued to innovate financial products.

Later in that 100-year peaceful and prosperous period from 1870 to the early 1900s, the inventive and prosperous boom continued as the Second Industrial Revolution

This period was for Great Britain what “the Dutch Golden Age” was for the Dutch about 200 years earlier, because it raised the power in all the eight key ways.

At this time several other countries used this period of relative peace and prosperity to get richer and stronger by colonizing enormous swaths of the world.  As is typical during this phase, other countries copied Britain’s technologies and techniques and flourished themselves, producing prosperity and, with it, great wealth gaps.

That period was called “the Gilded Age” in the US, “la Belle Époque” in France, and “the Victorian Era” in England.  As is typical at such times the leading power, Great Britain, became more indulgent while its relative power declined, and it started to borrow excessively.

As other countries became more competitive, the British empire became more costly and less profitable to maintain.

From 1900 until 1914, as a consequence of the large wealth gaps, there became 1) greater arguments about how wealth should be divided within countries and 2) greater conflicts and incompatibilities in economic and military powers that existed between European countries.  As is typical at such times, the international conflicts led to alliances being formed and eventually led to war.

That war had become global (WWI). It lasted from 1914 until 1918 and cost the lives of an estimated 8.5 million soldiers and 13 million civilians.  As it ended, the Spanish flu arrived, killing an estimated 20-50 million people over two years.  So 1914-20 was a terrible time.

Despite winning both World War I and World War II, the British were left with large debts, a huge empire that was more costly than profitable, numerous rivals that were more competitive, and a population that had big wealth gaps which led to big political gaps.

Although the US had overtaken the UK militarily, economically, politically, and financially long before the end of World War II, it took more than 20 years after the war for the British pound to fully lose its status as an international reserve currency.

The Rise of the American Empire and the US Dollar After World War I

As is typical after wars, the winning powers—in this case the US, Britain, France, Japan, and Italy—met to set out the new world order.

The large foreign debt burdens placed on Germany set the stage for 1) Germany’s post-war inflationary depression from 1920 to 1923 that wiped out the debts and was followed by Germany’s strong economic and military recovery, and 2) a decade of peace and prosperity elsewhere, which became the “Roaring ’20s.”

During that time the United States also followed a classic capitalist approach to resource allocation, and New York became a rival financial center to London, channeling debt and investments into various businesses.

Other countries became more competitive and prosperous and increasingly challenged the leading powers.  Most importantly Germany, Japan, and the US got stronger economically and militarily.

However, the US was isolationist and didn’t have a big colonial empire past its borders, so it was essentially out of the emerging conflict.  As shown in the chart of the standing of empires above, Germany and Japan both gained in power relative to the UK during this interwar period

As is typical, the debts and the wealth gaps that were built up in the 1920s led to the debt bubbles that burst in 1929, which led to depressions, which led to the printing of money, which led to devaluations of currencies and greater internal and external conflicts over wealth and power in the 1930s.

The Japanese and Germans started to make territorial expansions in the early to mid-1930s, which led to wars in Europe and Asia in the late 1930s that ended in 1945.

That brought about the second world war which, as usual, was won by the winning countries coming up with new technologies (the nuclear bomb, while the most important, was just one of the newly invented weapons).  Over 20 million died directly in the military conflicts, and the total death count was still higher.  So 1930-45, which was a period of depression and war, was a terrible time.

The Rise of the American Empire and the US Dollar After World War II

As is typical after wars, the winning powers—most importantly the US, Britain, and Russia—met to set out the new world order.

The US followed a capitalist system.  The new monetary system of the US-led countries had the dollar linked to gold and had most other countries’ currencies tied to the dollar.  This system was followed by over 40 countries.

At the same time, the currencies and debts of the losing countries were wiped out, with those holding them losing all of their wealth in them.  Great Britain was left heavily indebted from its war borrowings and faced the gradual end of the colonial era which would lead to the unraveling of its empire that was becoming uneconomic to have.

New York flourished as the world’s pre-eminent financial center, and a new big debt and capital markets cycle began.  That produced what has thus far been a relatively peaceful and prosperous 75-year period which has brought us to today.

Leading up to Today

 

 

As is typical of this peaceful and prosperous part of the cycle, in the 1950-70 period, there was productive debt growth and equity market development that were essential for financing innovation and development early on.  That eventually led to too much debt being required to finance both war and domestic needs—what was called “guns and butter.”

Then in 1971, when it was apparent that the US didn’t have enough gold in the bank to meet the claims on gold that it had put out, the US defaulted on its promise to deliver gold for paper dollars which ended the Type 2 gold-backed monetary system, and the world moved to a fiat monetary system.

Each of these cycles raised debt and non-debt obligations (e.g., for pensions and healthcare) to progressively higher levels, and this led the reserve currency central banks of the post-war allies to push interest rates to unprecedented low levels. This led to printing unprecedented amounts of money.  Also classically, the wealth, values, and political gaps widened within countries, which increases internal conflicts during economic downturns.  That is where we now are.

During this prosperous post-war period many countries became more competitive with the leading powers economically and militarily.

In China, Mao Zedong’s death in 1976 led Deng Xiaoping to a shift in economic policies to include capitalist elements including private ownership of large businesses, the development of debt and equities markets, great technological and commercial innovations, and even the flourishing of billionaire capitalists—all, however, under the strict control of the Communist Party. As a result of this shift and the simultaneous shift in the world to greater amounts of globalism China grew much stronger in most ways.

And it is growing in power at a significantly faster pace than the United States and other “developed countries.” At the same time, we are in a period of great inventiveness due to advanced information/data management and artificial intelligence supplementing human intelligence with the Americans and Chinese leading the way.

Thanks for reading guys! Please comment below your thoughts!

 

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