Transcription
I want to start by asking you a question that I had to ask myself about 10 years ago. A question that fundamentally changed how I see the world. How do you prepare for something that has never happened in your lifetime, but has happened many times in history?
For most of my career as a global macro investor, I operated under a certain set of rules. I looked at the last 30, 40 or 50 years of data to build my mental models. And for a long time that worked, but then things started happening that my models couldn't explain.
I saw interest rates hit zero and then go negative. I saw central banks printing money on a scale that had no precedent in the modern era. I saw a level of political polarization in the United States, populism rising on both the left and the right that we hadn't seen since the 1930s. And I saw the rise of a great power, China, challenging the existing dominant power, the United States, in a way that hadn't happened since the rise of Germany or the Soviet Union.
I realized that if I only looked at my own lifetime, these events looked like anomalies. They looked like black swans. But when I widen my aperture, when I look back 500 years, I realized they weren't anomalies at all. They were part of a machine. History is a machine. It is a perpetual motion machine driven by logical cause and effect relationships that repeat over and over again. I call this the big cycle.
If you want to understand what is happening to the United States today and if you want to understand the British warning that is flashing red right now, you have to understand the mechanics of this cycle. The cycle typically lasts about 250 years with a transition period of 10 to 20 years. It tracks the rise and fall of the world's leading empire and its reserve currency. We saw it with the Dutch Empire in the 1600s. We saw it with the British Empire in the 1800s and we are seeing it with the American Empire today.
The cycle works like a biological life. It has a birth, a growth phase, a peak and a decline. The rise is the healthy phase. It happens when a country is poor but hungry. The people are hardworking, the debt is low and the internal order is unified. They invest in education which leads to innovation and technology. The Dutch invented ships that could sail around the world. The British invented the steam engine. The Americans invented the internet. This technology makes them competitive. They produce more than they consume. They become the world's leading trading power. Eventually, because they dominate trade, people around the world want to save in their currency. the Dutch Gilder, the British pound, the United States dollar, they become the reserve currency.
This brings us to the top. This is where the United States has been for the last 75 years. But the top is a dangerous place. It is dangerous because of human nature. When you are rich and powerful, you lose the edge that got you there. You become expensive. Your labor costs go up. So you lose competitiveness to rising rivals who are willing to work harder for less. But the most dangerous shift is psychological. You move from being a nation of producers to a nation of consumers and financeers. You start betting on your own dominance. You borrow money to consume more than you earn. You believe that the good times are the norm rather than the result of hard work. This is the decadence phase. And this is exactly where the British Empire found itself in the early 20th century.
The warning I am delivering today is not my opinion. It is simply the observation that the United States is tracking the British trajectory with a correlation that is almost terrifyingly precise. We are following their script line by line toward a transition that most of us are completely unprepared for. Let's tell the story of the British decline because it is effectively the story of our own future if we don't change course.
In 1850, Great Britain was the unparalleled master of the universe. It accounted for 20% of the world's economic output. The British Navy ruled the waves, ensuring that free trade flowed through the empire. London was the financial capital of the world. The British pound was as good as gold. Literally, it was pegged to gold and the whole world held it. But if you look closely at the data from that period, you see the rot starting to set in. The first thing that turns down in an empire is not its military or its wealth. It is its competitiveness and its education relative to others.
By the late 1800s, the British elite had become complacent. They sent their children to Eaton and Oxford to learn Latin and Greek and how to be gentlemen while the rising Germans and Americans were studying engineering, chemistry and physics. There is a concept I talk about in my book uh principles for dealing with the changing world order called the lag. This is crucial. There is a lag between when a country loses its real competitive advantage and when it loses its brand name and reserve currency status. For 50 years, Britain was losing the economic war, but it still looked like the superpower. This is the moment of maximum risk. It's when you feel rich, but you are actually becoming poor.
By 1914, the United States had already economically overtaken Britain. We were producing things cheaper and better. But Britain still acted like the global policemen. They overextended themselves. Then came the internal conflict. We often forget this, but before World War I, Britain was tearing itself apart. The wealth gap had exploded. The guilded age created a class of super rich financiers in London. While the working class in Manchester and Liverpool struggled, this led to the rise of populism, strikes, and political polarization. The internal order, the ability of a country to work together, began to crack.
This is exactly what we are seeing in the United States today. We have the highest wealth gap since the 1930s. We have populism rejecting the establishment. We have a political system that is more focused on fighting the other side than on solving national problems. When an empire is internally divided, it becomes vulnerable externally. The British tried to maintain their global empire, their external order. While their internal order was crumbling and their finances were deteriorating, they relied on debt. This is the trap. The British utilized the exorbitant privilege of the pound to borrow money from the very rivals that were rising against them. In the early 20th century, the United States was lending money to the United Kingdom. Today, China is lending money to the United States. The British example teaches us that you cannot borrow your way to power forever. Eventually, the math catches up with you. The British warning is that a decline doesn't happen in a straight line. It happens slowly and then it happens all at once. It happens when the debt bill finally comes due.
This brings us to the mechanics of the collapse. How does a superpower actually go broke? I wrote in my book, How Countries Go Broke to answer this specific question because it is the mechanism that triggers the end of the big cycle. It all comes down to the difference between hard money and soft money. When a country is rising, it usually has hard money. It links its currency to gold or a fixed asset. This builds trust. People save in your currency because they know it won't be debased. The British pound was the gold standard. The United States dollar became the gold standard after Breton Woods in 1944.
But when you reach the top phase, when you have high debt, expensive military commitments and internal social conflict, the government runs out of money. It faces a big squeeze. It has more liabilities, pensions, health care, defense, debt, interest, than it has income taxes. At this point, policymakers have only two choices. And in my study of the last 500 years, they almost always make the same choice. Choice one is austerity and default. You stop spending. You tell the people they can't have their pensions. You tell the bond holders they won't get paid. This causes a deflationary depression and usually a revolution. It is too painful to accept. So they choose choice two, print money. They decouple from hard money. They turn on the printing press. They try to inflate their way out of debt.
The British did this in 1914 to pay for the war. They broke the link to gold. In 1931 during the depression they devalued the pound against gold. In 1949 they devalued again against the dollar. In 1967 they devalued again. Every time they printed money they bought a little bit of time but they destroyed the value of the empire. They robbed the savers to pay the debtors. The United States is currently in many of the same late cycle characteristics. We call it quantitative easing or monetizing the debt. But let's call it what it is. We are printing money to pay bills we cannot afford.
When you print money, it feels good at first. The stock market goes up. The government can send out checks, but it sets off a run on the bank. The bank is the United States. The depositors are the central banks of the world, China, Japan, Saudi Arabia, who hold trillions in United States debt. Right now, we are testing their patience. We are giving them a negative real return. We are paying them 4% or 5% interest, but inflation is eating that up. And on top of that, we are weaponizing the dollar through sanctions. We are telling the world if you don't agree with us we can freeze your assets. This is what happened to the British. Other countries realized it was risky to hold pounds. They started selling. When the world stops buying your debt, you have to print even more to cover the gap, which causes the currency to fall even faster. It becomes a self-reinforcing feedback loop.
This is the specific financial mechanism that ends the dominance of an empire. It isn't usually an invasion that finishes you off. It is the loss of the reserve currency status. Once you lose that, you can no longer consume more than you produce. You become a normal country. The standard of living drops and the empire dissolves.
So where does this leave us? We are at the point in the cycle where the tectonic plates are shifting. We have a declining power, the United States, that is financially overextended, internally divided, and printing money. We have a rising power, China, that is growing its military, asserting its influence, and challenging the global order. This brings us to the Thusidities trap. In the last 500 years, there were 16 times when a rising power challenged a dominant power. In 12 of those 16 cases, it ended in war.
The British faced this with Germany. They fought two world wars that technically they won, but in the process they lost their empire and their financial independence. They emerged from World War II bankrupt, handing the keys of the world order to the United States. Now the United States is facing China. The conflict is playing out across all five major types of warfare. Trade, technology, capital, geopolitical, and potentially military. But the biggest risk to the United States is not China. The biggest risk is us. The British didn't lose their empire just because Germany was strong. They lost it because they failed to maintain their internal order and their financial health. If the United States continues to have a civil war at home, if we continue to have dysfunction that prevents us from educating our children, fixing our infrastructure, and balancing our books, we will lose. A country that is at war with itself cannot be strong abroad.
However, the big cycle is not destiny. It is a probability, not a certainty. We can change the outcome, but only if we face reality. We need what I call a beautiful deleveraging. We need to balance the pain of spending cuts with the printing of money in a way that is balanced, not reckless. We need to invest in the source of our power, the productivity of our people. And we need to understand that the American century was an anomaly, not a permanent state of nature.
For you as individuals, this is the British warning. Do not assume that the dollars in your pocket will buy the same amount of goods in 10 years. Do not assume that the geopolitical map will look the same. In the markets, the most dangerous phrase is it's different this time. It is rarely different. The names change from gilders to pounds to dollars, but the mechanics remain the same. If you understand the machine, you don't have to be fearful. You can be prepared. You can diversify. You can see the signal through the noise. The sun set on the British Empire not because they were unlucky, but because they ignored the fundamentals. The sun is now dipping low on the American era. Whether it sets completely or whether we can rise for a new day depends entirely on whether we are willing to read the writing on the wall.