Transcription
[Music] The big storm on the horizon, 2025. We're going to go through a time war. You're going to see radical disorder in the next 5 years.
First, I should explain that experience I had of learning that many of the things that surprised me surprised me because they didn't happen in my lifetime before, but they happened many times in history. First time I was clerking on the floor of the New York Stock Exchange in 1971 and the United States Nixon defaulted on the promise to deliver gold for money because they didn't have enough money, real money gold, and it went down. I went on the floor of the New York Stock Exchange expecting a big down. It went up a lot. That's because I never had a devaluation to happen that I found that in March 1933, the exact same thing happened with Roosevelt on the radio. Same thing.
Then I studied the 30s. What happened in 1938 in terms of the depression leading to the wars and so on and the interest rates hitting zero is the exact same thing that happened in 2008. It was because I studied that we were able to make a lot of money in the 2008 financial crisis. So three things started to happen in my lifetime, our lifetimes, that never happened before and I needed therefore to study them in history.
First is the amount of debt and money creation. Huge amounts of debt and money creation. Does that matter? What is the rise and decline of reserve currency? How does that all work? I needed to see the cycles for that.
The second was the amount of internal political conflict, in particular populism of the left and populism of the right. And a populist is a person who will not accept losing. They fight with their contingency and that dysfunction and that lack of willingness to lose. And there's a dynamic that we're going on for that.
And the third, of course, is the great power conflict. In other words, the rise of a comparable economic and military power in the form of China rising and competing with the United States, which is also changing that world order. Those three things never happened in my lifetime but are big things that are affecting things.
When I went back in history, I said I needed to study how these things work. Sometimes we overlook the really big things. So I went back and I studied that and I saw that there were two others that had enormous impact. The two others were acts of nature, in particular drought, floods and pandemics, and they killed more people and they toppled more empires and changed more world orders than anything and certainly big issue.
Now number five is technological changes and how they evolve. So I needed to study those five forces. I saw that there's the cycle that repeats over for good cause effect relationships. I don't believe in a cycle just because it repeats. I started to understand the cause effect relationships. I studied the 10 most powerful empires of the last 500 years and the last three reserve currencies. It took me through the rise and decline of the Dutch Empire and the Guilder, the British Empire and the pound, the rise and early decline in the United States Empire and the dollar, and the decline and rise of the Chinese empire and its currencies along with their significant conflicts as measured in this chart.
Because looking at all these measures at once can be confusing, I'll focus on the four most important ones. The Dutch, British, US, and Chinese. As you can see, they transpired in overlapping cycles that lasted about 250 years with 10 to 20 year transition periods between them. Typically, these transitions have been periods of great conflict because leading powers don't decline without a fight.
In this study, I used eight metrics. Education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, the power of their financial center for capital markets, and the strength of their currency as a reserve currency. Because these powers are measurable, we can see how strong each country is now, was in the past, and whether they're rising or declining. By examining the sequences from many countries, we can see how a typical cycle transpires. Better education typically leads to increased innovation and technology development and with a lag, the establishment of the currency as a reserve currency. You can also see that these forces then declined in a similar order, reinforcing each other's decline.
In a nutshell, the big cycle typically begins after a major conflict, often a war, establishes the new leading power and the new world order. Because no one wants to challenge this power, a period of peace and prosperity typically follows. As people get used to this peace and prosperity, they increasingly bet on it continuing. They borrow money to do that, which eventually leads to a financial bubble. The empire's share of trade grows and when most transactions are conducted in its currency, it becomes a reserve currency which leads to even more money. At the same time, this increased prosperity distributes wealth unevenly. So the wealth gap typically grows between the rich halves and the poor have nots. Eventually, the financial bubble bursts, which leads to the printing of money and increased internal conflict between the rich and the poor, which leads to some form of revolution to redistribute wealth. This can happen peacefully or as a civil war. While the empire struggles with this internal conflict, its power diminishes relative to external rival powers on the rise. When a new rising power gets strong enough to compete with the dominant power that is having domestic breakdowns, external conflicts, most typically wars, take place. Out of these internal and external wars come new winners and losers. Then the winners get together to create the new world order and the cycle begins again.
I think China is going to be a big power for the foreseeable future. I think the basic picture in China, the United States, the emergence of India and so on. The world order is going to change in a very profound way. We can't say who's going to be the winner and the loser of this game, but I think we do know that this conflict is going to be with us and it's totally changing the world order. When you're asking like who's going to be the winner of this game, in the history of democracy as Plato described in the republic, there's a cycle and one of the great vulnerabilities of democracies is the disorderliness, the anarchy that comes from a conflict. The risk of capitalism is when you have the wealth gap clash and the opportunity gap clash, and that produces risk for democracy. In the 30s, four major democracies, because of that dynamic, their parliaments chose to be autocracies. That happened in Germany, Italy, Spain, and Japan. Both have risks. We've all been blessed with this amazing environment, equal opportunity, the ability to be creative, rule of law, civility. But if we risk those things in both of those, then we have a great risk on this war. I think it depends more on how we are with our circumstances to be strong and capable and relative to them. It certainly is going to be a test of the systems.
Every conclusion that I have is a function of measuring statistics and having them as leading indicators. India has the highest potential growth rate. I think India is where China was when I started to go 1984. So if you look at the complexion, the per capita income, so that you have a massive reform, development, creativity, all those elements there are of course issues, risk issues, but India is very important. Now, of course, there's a religious internal issue having to do with the population has 240 million Muslims, and I don't think that any of these issues is going to stop India. Also in history, the countries that were the neutral countries did the best, better than the winners in wars. So as we have this conflict between the United States and China and its allies, Russia and so on, as we see that lineup, countries that are in the middle like India are going to be net beneficiaries of that.
So there are two big epicenters where things are happening fast and quick and getting better. Well, let's say three. One of them is there's the AON countries. We can say that Singapore in essentially is a hub. But the ACON countries, which is, you know, Indonesia, Philippines, Vietnam and all of that, that's going to be a great area. The Middle East, in terms of particularly the Gulf countries. The amount of money and they're making talent magnets. They're attracting people. You look at how the change in wealth has take place. That's certainly it. And India, they think there are two different systems, two different approaches. They would think that an autocratic, they used to have a committee that would make it, but they would say it would be very much like a company. If you had a company, you have a board, you have the executive committee and so on and so forth, and you make sure you get the leadership. And then they would say that the world should have a competition, and that throughout history there are these competitions in all the various ways we talk about, and there's an emergence of that, and that there's an inevitability. And I think we say that there's an inevitability for a conflict because there's a containment and then there's a desire to expand, and it's like almost keeping a lid on a boiling pot. That's the type of situation.
I can go on at length about the particulars of their thing. They have a very good historical perspective because their history's been literally 5,000 years. Like we think of ours, they remember the particulars and all the leaders study that, and there is a cycle that they're very conscious about. So, for example, the big risk that they believe is instability. She says that the big storm on the horizon. He keeps referring to the big storm on the horizon. And that relates to the conflict in the world that we're talking about. But it also relates to the fact that they've got a debt problem. They have a debt restructuring problem. And their instinct through history, the learning of history is that during such periods of time, internal conflict is a big threat. And therefore, autocracy, strong controls are the things to have. Okay. Now we can explore the relative merits of that internal conflict and so on. But that's basically their perspective.
Let me first deal with the productivity thing. Throughout history, productivity has been the greatest. And so if you take the 20s, we had the productivity, most inventions, most patents and so on. In the 20s, you also had a debt problem and you also had a wealth gap problem. I believe that in terms of the new technology, we're going to really see new technologies now that can be used for weapons or that can be used for productivity, but we're going to have to have a reorganization of how are we going to redistribute the wealth and opportunities and so on.
So, if we come back, I think we just have to look at what are we fighting for now? What's going on? Of course, there's a fight over money. If you have a downturn, if you have a debt problem, and I think there's good reason to believe we will. We can get into that in a minute. But they fight over money and they fight over differences in values. In other words, the differences in values like how do you educate your children? What is gender issues and education issues and those types of things. And so I think you're seeing those things to fight over. You're seeing plenty to fight over. And let's say we don't fight. Let's pray we don't fight. We need us to come together. But if let's say we don't fight, you're still going to have to deal with how do you redistribute not only money, but how do you redistribute opportunities? And that's going to take figuring it out. And there's going to be an argument over how they do that.
No, I think this is really interesting because I think you're saying if you don't fight over the historic area battlefields, right? If we're not fighting over resources, we are going to fight over social issues or social constructs or social beliefs. >> But I'm also saying you're going to fight over resources. Like we have debt and we're operate as though it doesn't matter and we'll continue to have the pile. If you look at history and we can get into why it is, it is not that that goes on a while and you can't continue to increase your living standards by borrowing more than you're spending. You know, you can't keep accumulating your debt because it has to matter. So these types of things as they build up, as the debt builds up, as the wealth gaps builds up, the values gaps build up, then there's difference in reaction to controls. So you see the movement. We will have things to fight over at the same time as we hopefully will have a productivity miracle.
I think that in the next 5 years, year by year, we're going to go through a time war. You're going to see radical disorder in the next 5 years as each one of those things comes to pass. First with the elections as we have, then we have the conflict with the geopolitical conflict. Then we have the climate issue, which by the way is a very expensive issue. We should talk about how costly that issue is. And then we're going to have this issue of technology, which can provide the greatest miracle but also is a weapon.
>> Just frame for us your thoughts on debt for a second. There is a US debt, but then there are also every other 182 countries who have a ton of debt. And so, how do you think about debt to GDP relatively and in absolute terms?
>> For any country, and quite often many countries, because they go through the cycle together as they did in the 30s, what happens is debt rises relative to incomes. And what that means mechanistically is that debt service payments rise relative to incomes. And so it squeezes out consumption. As compounds, what happens is there's a realization that they have to print money. So I think you're going to see in the next downturn another move to print money. There are certain things that are going on now that means that the big risk comes when they don't want to hold those bonds anymore. Okay? Because the supply demand, think about that, supply demand has a deficit. It has to borrow and so it sells its bonds. Who are the buyers of the bonds? Why do they buy? The buyers of the bonds buy because there's an attractive return. Not only do you have to sell those amounts of bonds, but when they start to realize that I'm not getting good returns on those bonds, they can sell those bonds. There are 31 trillion dollars of bonds.
>> They own instead.
>> They always own tangible things. And those things can also be, it could be equities. It could be many other things. It could be gold. Gold has always been accepted as a money because it's there's a saying, gold is the only asset you can have that's not somebody else's liability. In other words, dependent on getting paid. You can have that intrinsic value and for a long period of time it's been valued and you can move it between countries. But also different countries prosper. So you'll see the countries, some of the countries that we mentioned, they will prosper through that. The United States made most of its money because it didn't enter the war. It was before on World War II and World War I. The United States became the richest country because of the money it made before it entered the war. So those countries will prosper and in those countries then certain real estate, hard assets, but where you have that is very, very important. There's a huge wealth gap and the nature of our economy is producing this. So I can rattle a bunch of statistics. What happened as happens in these cycles is that when you have the type of situation we have, the government will take on the debt and it'll send out the money. So the mechanics of that were that there was more checks and more money sent than there was loss of income by a lot. So a lot of money went out and as a result of that the financial conditions of the household sector improved generally speaking, while the financial conditions of the government sector, the government got into a lot more debt. That's very classic at the end of the cycle because there's an imbalance between demand and purchases of bonds. There is the central bank buying those bonds, that monetization. So now that's what the wealth gap looks like. That also creates more of the inflation. The late 20s in the United States is such a classic example. We had more innovations, more techn, you know, all of these cycles. If I was to go back to industrial revolution, late 1800s, and then you turn, then when there's a lot of debt and a big wealth gap, you have the panic of 1907, boom, you have this internal conflict and you had the first world war. In the 20s, you had the same kind of late 20s. It was an era of great inventiveness. The other things matter.
>> So just because we're really great at innovation isn't going to save us if all these other things are broken.
>> It's a wonderful thing, but ultimately we as a society in aggregate are spending a lot more money than we're earning. So if we're doing such a good job on that technology, why is that happening? Okay, we're still so now when you look at the debt, do you want to own the debt? Do you want to own that? When those who don't want to own it, then you have a financial problem and populism, that's a dangerous combination at the same time as you have an external. So it's a very risky. You know, and then also at the same time that that's happening, they'll win at all cost. They won't compromise. They will win. They will fight for that side and win. And that everything needs to be reformed. I'm not against capitalism, but it needs to be reformed. And part of the big problem, just analytically mechanically, is that the profit system alone does not direct resources adequately. Let's say if we take climate for example, there are costs, terrible costs that come from climate. It's not built into the system. Education, look at the gaps in education. State government controls education. Then you get to the town, at the town level, it's the town that controls the education, how much they pay. And so then you create wealth gaps with rich people being able to take care of their kids in a way that other people can't take care of their kids. And that creates an opportunity gap. That's a structural problem. There are pre-existing conditions that represent challenges. So, for example, the amount of debt that we're in, it represents a challenge. There are a lot of these challenges, but it is not inevitable. We're going to have an interesting 2 years. We're going to have an interesting China US relations. We're going to have an interesting financial conflict and we're going to have radical technology changes. Plus, climate's going to be an issue.
In 2008, he sounded the alarm about the impending financial crisis. And now he's warning about something even more important. Well, there's a supply demand. You know, when there's a lot of debt, it has to be sold. And there is not enough buyers for that debt. And when that happens, things bad things happen, like interest rates go up and the economy goes down. So, it's a you got to get that down to about 3% of GDP. Now it's 6 and about.