It is export earnings minus import spending (i.e., the balance of goods and services) that makes the net income of a country that comes from trading with foreigners. That scares everyone. Similarly destiny and the way the global power cycle works have now put the United States in the unfortunate position of having to choose between a) fighting to defend its position and its existing world order and b) retreating. That raises the question about how much of this picture is because we are looking at the value of currencies relative to gold and whether that is an appropriate gauge. The most important evolutionary shift to affect these has been the shrinking of the world to make them more global. These consolidation of power/purge periods range widely in form and severity, depending on the degrees of conflict between the new leaders and their opposition, the amount of conflict between the new leaders themselves, and the levels of development of the various government departments and bureaucracies that they are inheriting. While I have learned an enormous amount that I will put to good use, I recognize that what I know is still only a tiny portion of what I’d like to know in order to be confident about my outlook for the future. Britain and the United States each lost around 400,000. The archetype helps me see the cause-effect relationships that drive how these cases typically progress. As you will read in the cases in Part 2, these factors are measurable timeless and universal truths. They tell an interesting story of how things have changed. In other words, there is nothing wrong with having an increase in money growth instead of an increase in credit/debt growth, provided that the money is put to productive use. I saw how the biggest thing affecting most people in most countries through time is how people struggle to make, take, and distribute wealth and power, though they also struggled over other things, most importantly ideology and religion. [3]In my book Principles: Life and Work, I shared my thinking about these different ways of thinking. Like any of my other principles you can take them or leave them as you like. As shown, they were all about money and power. Quite often, though not always, the government links its money to some hard money (e.g., gold or a hard reserve currency) with promises to allow holders of the new money to make that conversion to the hard money. In order to institutionalize his philosophy and how it would be implemented in this government, Deng shaped a new version of the Chinese constitution, which was adopted in 1982. If they choose to have a lose-lose mutually threatening relationship they will primarily think about how they can hurt the other in the hope of forcing the other into a position of fear in order to get what they want. I also saw how these 10-year leading economic indicators (such as the quality of education and the level of indebtedness) were worsening for the US relative to big emerging countries such as China and India. However, the global depression hit Germany hard, leading to 25% unemployment, massive bankruptcies, and extensive poverty. They are: 1) the big debt, money, and economic cycle, 2) the big internal cycle of order/disorder (caused by gaps in wealth, values, and politics), and 3) the big external cycle of peace and war (caused by rising powers, most importantly China, challenging the leading world power, the United States)1. That is how inflationary depressions come about. Ironically and classically being in this bad position is the consequence of the United States’ successes that led to these excesses. In 2001 the United States had more trade than China with 80% of countries. As we have seen, this “negotiation” was about testing each other’s powers rather than looking to global laws and judges (like the World Trade Organization) to achieve fair resolution. In the chart below you can see where the US and China are currently in their cycles. In Stage 5 those who are fighting typically work with those in the media to manipulate people’s emotions to gain support and to destroy the opposition. Traditionally the Chinese have preferred to enter into relations with empires outside their borders in a manner that is similar to what one might expect from the previously mentioned philosophies—i.e., with the parties knowing their places and acting accordingly and with their places determined by their relative powers. In examining each country’s rise and decline I look at each of the eight measures and convey the highlights of their stories while diving into key moments to understand how they transpired in a more granular way. I’m not saying such a move is likely but I do want to be clear that moves to cut off essential imports from either side would signal a major escalation that could lead to a much worse conflict. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments. Sources include, the Australian Bureau of Statistics, Barclays Capital Inc., Bloomberg Finance L.P., CBRE, Inc., CEIC Data Company Ltd., Consensus Economics Inc., Corelogic, Inc., CoStar Realty Information, Inc., CreditSights, Inc., Credit Market Analysis Ltd., Dealogic LLC, DTCC Data Repository (U.S.), LLC, Ecoanalitica, EPFR Global, Eurasia Group Ltd., European Money Markets Institute – EMMI, Factset Research Systems, Inc., The Financial Times Limited, GaveKal Research Ltd., Global Financial Data, Inc., Haver Analytics, Inc., The Investment Funds Institute of Canada, Intercontinental Exchange (ICE), International Energy Agency, Lombard Street Research, Markit Economics Limited, Mergent, Inc., Metals Focus Ltd, Moody’s Analytics, Inc., MSCI, Inc., National Bureau of Economic Research, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Refinitiv, Renwood Realtytrac, LLC, RP Data Ltd, Rystad Energy, Inc., S&P Global Market Intelligence Inc., Sentix Gmbh, Spears & Associates, Inc., State Street Bank and Trust Company, Sun Hung Kai Financial (UK), Tokyo Stock Exchange, United Nations, US Department of Commerce, Wind Information (Shanghai) Co Ltd, Wood Mackenzie Limited, World Bureau of Metal Statistics, and World Economic Forum. I wanted to show you a simplified version that conveys the essence of the stages and then descend down into the details. These factors were laid out in the first chapter and measured by 17 indices. As shown from this top-down, big-picture perspective, output per person appears to be steadily improving, though very slowly in the early years and faster after around 1800, when the slope up becomes much steeper, reflecting the faster productivity gains. [2] I approach seeing just about everything this way. As previously explained, the last major period of destroying and restructuring happened in 1930-45, which led to the new period of building and the new world order that began in 1945 with the creation a new global monetary system (built in 1944 in Bretton Woods, New Hampshire) and a new American-dominated system of world governance (located the United Nations in New York and the World Bank and the International Monetary Fund in Washington, DC). If that doesn’t work, those who want to get what they want more than they respect the rules will resort to using their power. This process has gone on from before history was recorded and will go on as long as there are people who have to decide how to collectively do things. This move to a fiat monetary system freed the Federal Reserve and other central banks to create a lot of dollar-denominated money and credit, which led to the inflationary 1970s, which was characterized by a flight from dollars and dollar-denominated debt to goods, services, and inflation-hedge assets such as gold. [2]For example, Americans were by and large not allowed to own gold from 1933 to 1974. I want to do the opposite because understanding the timeless and universal forces that produce changes is most important. In Stage 5 this begins to become much more apparent. That is why we hear accusations from both sides that the other is doing evil things and no disclosures of the similar things that they are doing. As far as Chinese money, credit, and the economy are concerned, the history is very long and complicated and went through the full range of money/credit/economic systems and cycles that were described in Chapter 2 and its appendix, so what happened in China is basically the same as what happened all around the world through the millennia, though exactly when and exactly how is a bit different. The Chinese government pursues a wide range of evolving interventionist policies and practices aimed at limiting market access for imported goods, services, and businesses, thus protecting its domestic industries by creating unfair practices. My objective is to show you those cases and the mechanics that drove them and, with that perspective, attempt to imagine the future. That is because the really big boom periods and really big depression/revolution periods come along about once in a lifetime, and once-in-a-lifetime experiences are naturally surprising…and because the swings between great and terrible times tend to be far apart, the futures we encounter are more likely to be more opposite than similar to those that we had and expect. For a further description, see Hart, Jonker, and van Zanden, A Financial History of the Netherlands, 56-58. Deng Xiaoping reiterated this view that communism and the capitalism he was employing were not at odds in an interview with an American TV journalist when he said, “According to Marxism, communist society is based on material abundance…Only when there is material abundance can the principle of a communist society—that is, ‘from each according to his ability to each according to his needs’—be applied. Restrictions were imposed on the import of “luxury goods” from the US, defense expenditure was slashed, dollar and gold reserves were drawn down, and agreements were made between sterling economies not to diversify their reserve holdings to the dollar.51 Prime Minister Clement Attlee gave a dramatic speech on August 6, 1947, calling for the spirit of wartime sacrifices to be made once again in order to defend the pound: “In 1940 we were delivered from mortal peril by the courage, skill, and self-sacrifice of a few. For example, if you don’t understand how the Roaring ’20s led to a debt bubble and a big wealth gap, and how the bursting of that debt bubble led to the 1930-33 depression, and how the depression and wealth gap led to conflicts over wealth all around the world, you can’t understand the forces that led to Franklin D. Roosevelt being elected president. As a principle: During periods of severe economic distress and large wealth gaps, there are typically revolutionarily large redistributions of wealth. I thought, “Oh my God, the monetary system as we know it is ending,” and it was. However, the holders of the paper claims and the banks soon discover the wonders of credit and debt. Most importantly we should see whether the most extreme elements within their parties win, which would pull the two parties further apart and set the stage for a much greater conflict between the two more polarized sides (the Democrats and the Republicans), or if the moderates in the two parties win, which would bring the two parties closer together. At the same time the US risks losing this privileged position by creating too much money and debt. There is both a real economy and a financial economy. I point this out to convey a) how important Taiwan’s reunification with China is and b) how risky the situation was 25 years ago when China was not nearly as strong militarily as it is now, so this is why I would worry a lot if we were to see a “Fourth Taiwan Strait Crisis.”. He became premier in 1998 and in that capacity continued to aggressively pursue reforms to modernize and make the Chinese economy more efficient. I had conversations with the top Chinese holders of this debt as did David McCormick (who is now CEO of Bridgewater and was then the US Treasury Undersecretary for International Affairs) and Hank Paulson (who was then US Treasury Secretary). Whether in his words or mine, in the 1930-45 period these forces were in the decline/conflict phases of their cycles, which led to revolutions and wars around the world that brought the two big ideological approaches—capitalism and communism—into conflict which shaped the landscape of the 20th century. They typically happened when the existing orders slipped into dysfunctional anarchies and a large percentage of the population yearned for strong leadership, discipline, and productivity. During this stage the leaders who do best are “consolidators of power.” They typically have qualities similar to those who did best in the revolution in the prior stage, as they are strong, smart fighters who are willing and able to win at all costs, though they have to be much more politically astute because in the earlier stages the enemies were much more apparent. In the Roaring ’20s a lot of debt (promises to deliver paper money that was convertible to gold) was created to buy speculative assets (particularly stocks). This was natural because the two world wars made the US the richest and most powerful country by far. The expressed goal at the time that I heard a lot of was to “break the iron rice bowl,” which was to not provide demotivating guaranteed employment and assured basic benefits and to replace them with more incentive-based compensation. Because I had never seen a devaluation before I didn’t understand how they worked. Let’s start with the big-picture basics. I’m told that his favorite book was Zuo Tradition, which focuses on political, diplomatic, and military affairs in a “relentlessly realistic style” 2 in the period from 722 BC to 468 BC, because the lessons it offered were so relevant to what he was encountering. During times of great wealth gaps and populist thinking, stories that bring down elites are popular and lucrative, especially those that bring down left-leaning elites in right-leaning media outlets and those that bring down right-leaning elites in left-leaning media outlets. In 1984 I had my first direct contact with China. Deng also reformed government’s decision-making structure. That is the cultural inclination/style of Chinese leadership. In other words I shared with them what I saw in much the same way that I am sharing it with you in this writing, and we discussed it, looking at the circumstances in much the same way doctors would look at and discuss medical cases.27 As you probably know by now, I believe that everything works like a machine with timeless and universal cause/effect relationships. In 2014, I wanted to forecast economic growth rates in a number of countries because they were relevant to our investment decisions. At the end of the war, in 1944-45, the new monetary system that linked the dollar to gold and other currencies to the dollar was created, and the currencies and debts of Germany, Japan, Italy, and China (and a number of other countries) were quickly and totally destroyed while those of most winners of the war were slowly but still substantially depreciated. These debt cycles are both undesirable and understandable because there is a tendency to favor immediate gratification over long-term financial safety, particularly by politicians. [1]For example, though I always had and retained the ownership power to make decisions at Bridgewater autocratically, I chose not to use that power. During difficult times of conflict protecting the wealth of those who have wealth is not a priority relative to redistributing wealth to get it to where it is needed most. The peace treaty that formalized this deal into law is called the Magna Carta. When it is widely perceived that the money and the debt assets that are promises to receive money are not good storeholds of wealth, the long-term debt cycle is at its end, and a restructuring of the monetary system has to occur. The US dollar accounts for over 50% of reserves held and has unwaveringly remained the primary reserve currency since 1945, especially after it replaced gold as the most-held reserve asset after there was a move to a fiat monetary system. We aren’t seeing this. So, whenever I provide you with what I think, as I’m doing in this study, please realize that I’m just doing the best I can to openly convey to you my thinking. Firstly, and most disappointingly, the month-long episode of the virus lacked consistency and the circulation of sensible knowledge. The Chinese government built industrial facilities and imported lots of equipment from the Soviets. As their incomes weakened their demand fell and more credit problems occurred in a self-reinforcing downward economic spiral. In 1934, there was severe famine in parts of Japan, causing even more political turbulence and reinforcing the right-wing, militaristic, nationalistic, and expansionistic movement. This compares with about 5% for both parties in 1960.9 One recent survey showed that 15% of Republicans and 20% of Democrats thought the country would be better if large numbers of the other side “just died.”10 Based on these and other surveys, it appears that large numbers of members of both parties are more inclined to fight for deeply held preferences rather than compromise.

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