10 THE CHANGING WORLD ORDER Big Debt/Money/Capital Markets/Economic Cycle THE THREE BIG CYCLES Geology ADDITIONAL DETERMINANTS Education OTHER KEY DETERMINANTS (EIGHT KEY MEASURES OF POWER) Big Cycle of Internal Order and Disorder Big Cycle of External Order and Disorder Innovation & Technology Cost Competitiveness Military Strength Trade Economic Output Markets and Financial Center Reserve Currency Status Resource-Allocation Efficiency Acts of Nature Unhealthy Disorder War Low Low Weak Weak Unfavorable Low Weak Weak Unfavorable Poor Disruptive Healthy Order Peace High High Strong Strong Favorable High Strong Strong Favorable Efficient Beneficial Infrastructure and Investment Character/Civility/Determination Governance/Rule of Law Low Weak Weak High Strong Strong Gaps in Wealth, Opportunity & Values Large Small 11 THE CHANGING WORLD ORDER DYNAMICS TO PAY ATTENTION TO Self-Interest Desire to Gain Wealth and Power Learning from History Multigenerational Psychological Cycle Time Frame of Decision Making Individual Not important Limited Decadent Short-Term Country Important Extensive Strong Long-Term Leadership Weak Competent Openness to Global Thinking Culture Class Relationships Closed Unproductive Divisive Open Productive Cooperative Political Left/Right Prisoner’s Dilemma Relationships Partisan At War Lose-Lose Moderate Cooperative Win-Win Balance of Power Peace/War Cycle Unfavorable War Favorable Peace 12 THE CHANGING WORLD ORDER THE UNIVERSE COUNTRY STATE EMPIRE HUMANKIND ALL LIVING THINGS TRIBE (i.e., community) INDIVIDUAL FAMILY C H A P T E R 2 DETERMINANTS ADDENDUM 13 THE CHANGING WORLD ORDER Type 3: Fiat Money (e.g., USD Today) Maximizes Credit, Minimizes Credibility Type 1: Hard Money (e.g., Metal Coins) Maximizes Credibility, Minimizes Credit Type 2: Claims on Hard Money (e.g., Banknotes) Expands Credit, Compromises Credibility C H A P T E R 3 THE BIG CYCLE OF MONEY, CREDIT, DEBT, AND ECONOMIC ACTIVITY 14 THE CHANGING WORLD ORDER 0% 20% 40% 60% 80% 100% RESERVE CURRENCIES VS GOLD (SPOT FX) NLD GBR USA Dutch Empire ends/ collapse of Bank of Amsterdam US Civil War Great Depression Inflationary ’70s WWI WWII War of 1812 Napoleonic Wars 1600 1700 1800 1900 2000 -100% -80% -60% -40% -20% 0% 20% 40% 1860 1880 1900 1920 1940 1960 1980 2000 2020 SPOT FX VS GOLD USA GBR DEU FRA ITA JPN CHE ESP NLD CHN (1) (2) (3) (5) (6) (4) C H A P T E R 4 THE CHANGING VALUE OF MONEY 15 THE CHANGING WORLD ORDER 2 1 10 100 1,000 10,000 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 FX TOTAL RETURN VS GOLD (LOG) ITA USA GBR DEU FRA JPN CHE ESP NLD -60% -40% -20% 0% 20% 1850 1860 1870 1880 1890 1900 1910 SPOT FX VS GOLD (1850–1913) ITA USA GBR DEU FRA JPN CHE ESP NLD Broad stability US Civil War Falling silver prices produce Japanese devaluation Fiscal crisis in Spain 2 Due to a lack of data, several charts in this chapter do not show China. 16 THE CHANGING WORLD ORDER -100% 0% 100% 200% SPOT FX VS GOLD (1913–1930) USA GBR DEU FRA ITA JPN CHE ESP NLD CHN Post-WWI devaluations and German hyperinflation Broad stability during 1920s 1913 1915 1917 1919 1923 1925 1927 1929 1921 -100% -80% -60% -40% -20% 0% 20% SPOT FX VS GOLD (1930–1950) USA GBR DEU FRA ITA JPN CHE ESP NLD CHN 1930 1935 1940 1945 1950 DEU FX restructured in 1948, effectively confiscating nearly all financial wealth 17 THE CHANGING WORLD ORDER -100% -80% -60% -40% -20% 0% 20% 1968 1966 1970 1972 1974 1976 SPOT FX VS GOLD (1966–1977) USA GBR DEU FRA ITA JPN CHE ESP NLD CHN End of Bretton Woods -100% -50% 0% 50% 98 02 06 10 14 22 18 -4% -2% 0% 2% 4% 6% REAL LONG RATES (1998–PRESENT) SPOT FX VS GOLD (1998–PRESENT) 98 02 06 10 14 18 USA GBR DEU FRA ITA JPN CHE ESP NLD CHN 18 THE CHANGING WORLD ORDER CURRENCY AND GOLD REAL RETURNS OF MAJOR COUNTRIES SINCE 1850 (VS CPI, ANN) Country Real Returns (vs CPI), Ann 1850–Present 1850–1912 1912–Present Continuous Govt Bill Investment Gold Continuous Govt Bill Investment Gold Continuous Govt Bill Investment Gold United Kingdom 1.4% 0.7% 3.1% -0.1% 0.5% 1.1% United States 1.6% 0.3% 3.6% -1.0% 0.4% 1.0% Germany -12.9% 2.0% 3.0% -0.9% -18.2% 3.1% France -0.7% 0.6% 2.6% -0.3% -2.6% 1.1% Italy -0.6% 0.3% 4.7% -0.5% -2.6% 0.5% Japan -0.7% 1.0% 5.0% 0.4% -2.2% 1.2% Switzerland 1.5% 0.0% 3.4% -0.5% 0.5% 0.3% Spain 1.4% 1.1% 4.5% 0.1% 0.3% 1.5% Netherlands 1.4% 0.5% 3.3% 0.0% 0.4% 0.7% China — 3.3% — — — 3.3% Average 1.2% 0.9% 3.6% -0.3% -0.1% 1.6% Data for Switzerland is since 1851; data for Germany, Spain, and Italy is since 1870; data for Japan is since 1882; data for China is since 1926 (excluding 1948–50). Average return is un-rebalanced and doesn’t include China. 10 100 1,000 10,000 REAL RETURN OF GOLD (VS CPI, LOG) USA GBR DEU FRA ITA JPN CHE ESP NLD CHN 1860 1880 1900 1920 1940 1960 1980 2000 2020 19 THE CHANGING WORLD ORDER 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 0 4 8 12 16 20 REAL RETURN OF BILLS (VS CPI) ITA USA GBR DEU FRA JPN CHE ESP NLD 20 THE CHANGING WORLD ORDER THE TOP THE DECLINE THE RISE CHN USA Peace and prosperity Excesses and widening of wealth and other gaps New internal order and new leadership Resource-allocation systems and government bureaucracies are built and refined Bad financial conditions and intense conflicts Civil wars and revolutions 5 6 3 4 1 2 THE TOP THE DECLINE THE RISE 3 4 2 5 6 1 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 56 1 2 3 4 56 1 2 3 4 56 1 4 1 2 3 56 2 3 4 5 6 C H A P T E R 5 THE BIG CYCLE OF INTERNAL ORDER AND DISORDER