Most people are shocked by what’s going on in the world right now. I’m not. I’ve seen this movie before.
As a global macro investor for over 50 years, I have had to examine the cause-and-effect relationships that drive history in order to place my bets. What I found is that all monetary orders, political orders, and geopolitical orders rise, develop, and collapse in a repeating pattern that I call the “Great Cycle,” usually lasting about 30 years, lasting about 75 years.
I believe that the times ahead will be radically different from what most people are used to, more like the turbulent period before 1945 than the period we have experienced since the end of World War II.
in my book Principles of Coping with the Changing World OrderI described the six stages of the Great Cycle. Stage 6 is collapse, a period of great disorder. Stage 5 is the stage immediately before that. That’s where we are now.
Because of our different perspectives, I now see that my perspective on things is very different from most other people’s. My perspective is shaped as a global macro investor who has to bet on what the future will be like. To do this well, I think it is very valuable to examine the cause/effect relationships that have consistently driven global macro events over the last 500 years.
From this perspective, watching what’s happening now is like watching a movie I’ve seen many times before, because the events are happening in the same way I’ve seen them many times before. This perspective has been invaluable to me in betting, so at this stage of my life, I want to pass it on in the hope that it can help others prepare for what lies ahead.
Contrary to my perspective, it seems to me that most people are surprised by what is happening because nothing like this has happened in their lives, and they are paying more attention to the events of the day than to how monetary orders, domestic political orders, and international geopolitical orders have evolved over time.
As I researched history, I found that all monetary orders, domestic political orders, and international political orders began, developed, and broke down in the progression of the Great Cycle. For example, I saw how the monetary, political and geopolitical order was disrupted during the great turmoil of 1929-1945, how new orders were formed in 1945, and how these new orders evolved and brought them and the conditions to a point similar to those in 1929-39. I also saw how major natural events (droughts, floods, and epidemics) and the invention of powerful new technologies greatly affected monetary orders, political orders, and geopolitical orders (and vice versa) in ways that affected the Great Cycle.
Nearly all of the evolution of these orders throughout their Great Cycles was driven by essentially the same cause/effect dynamics. For example, I have seen time and time again over this 500-year period and across countries how massive debt/money cycles are driven by debt and debt service payments rising relative to incomes. This squeezed spending until it caused debt service problems and spending restrictions.
I have also seen that when this happens, there are large amounts of debt assets (bonds) and debt liabilities (debts) outstanding, as well as large budget deficits that require larger sales of debt assets (i.e. bond sales) than demand, with the resulting supply/demand imbalance causing the debt and/or the currency to fall in value.
I have also found that periods of major civil and international conflict, especially pre-war periods, lead creditors to fear that the debtor reserve currency country will be devalued or unable to pay its debts. I saw how this led to these creditors and central banks shifting some of their bond holdings into gold to protect themselves against these debts being paid with devalued currency or not paid at all due to capital wars. What is currently happening in markets and the monetary system is consistent with this pattern.
Inside Principles of Coping with the Changing World OrderI explained how these cycles occur and are broken.. Major breakouts occur in what I call Phase 6 of the cycle, which is a period of great disorder. The last major Phase 6 period began in 1929 and ended in 1945 with World War II, with clear winners, most importantly the United States, determining how the new orders would work. It ended after World War II. This led to the establishment of monetary, political, and geopolitical orders led by the United States. We are now in a new Phase 5; This phase is the phase just before failures. As we move towards Stage 6, the key signs of Stage 5 are:
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Large and rapidly growing government debts and geopolitical conflicts, which have led to concerns about the value and security of money, especially reserve money, are triggering a move away from fiat currencies and towards gold.
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Large income, wealth and value gaps within countries that have led to the rise of populism on the right and populism on the left, irreconcilable differences that cannot be resolved by compromises and the rule of law.
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A transition from a world order with a dominant power and relative peace to a world order reflecting the conflict of great powers.
Throughout history, these conditions have often led to financial problems and conflicts rather than compliance with the rules. These were particularly challenging for democracies because they are based on the right to disagree and follow rules; So when disagreements are large and there is no broad-based belief in a system of rule-following, democracies experience disorder and autocratic leaders gain power. For example, in the 1930s, four major democracies (Germany, Japan, Italy, and Spain) became autocracies.
These conditions, combined with large wealth and value gaps and poor economic conditions, often led to disorder, conflict, and sometimes civil wars. There is nothing new in this dynamic. Plato wrote about this: Republic In 375 BC.
Today we see this:
* Large debts, deficits and devaluation of fiat currencies due to the increase in dollar and gold prices,
* Growing political and ideological polarization and populism within countries (now called MAGA and WOKE in the US), resulting from large and growing differences in wealth and values manifested in pre-Civil War type developments such as the President sending troops to cities and related conflicts (such as in Minneapolis) and the questioning of whether elections should be allowed to proceed normally.
* The collapse of the post-1945 multilateral, rules-based, international order and alliances such as NATO, and the rise of a new kind of world order that more closely resembles pre-1945 world orders, with great power conflicts and battleship diplomacy-type geopolitical moves, as we see with Greenland, Venezuela, Iran and its allies, and China and Russia and its allies.
When I look at these historical and current dynamics, I think it is unquestionably clear that what is happening now is more like the pre-1945 period than the post-1945 period to which we are accustomed, which misleads most people’s expectations and causes them to be shocked by what is happening. At the same time, nothing is predetermined. There’s a chance that our leaders, individually and collectively, won’t fight and will bring people together to do the hard, smart things needed to deal with these challenges well enough to overcome them. I’m not optimistic because that’s human nature.
Since we all have to bet on the future in some way, I hope this Great Cycle perspective will help you as it has helped me.
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This story first appeared on: Fortune.com
