Transcription
Chapter 8, the overall big cycle. If I had to pick the most important chapter in this book, this would be it. That's because it deals with the biggest and most important forces that are dramatically changing the world order. And it shows how and why these forces have repeatedly driven history through its big cycles.
Having seen so many of these big cycles, watching what is happening now is like watching a movie that I've seen many times before, just a contemporary version in which the clothes that the people are wearing and the technologies that they are using are more modern. I hope to show you what I see. Also by showing what happened in the past and why it happened, we can understand how previously unimaginable developments are now happening and could happen in the future.
While this book is mostly focused on understanding what's going on with the debt, credit, money, economic cycles, we can't look at this dynamic in isolation and make sense of it because how these cycles transpire is influenced by other big forces. Similarly to understand what is happening in other areas we need to understand the debt, credit, money and economic force as it has big effects on the developments of most areas. Together five big forces produce the overall big cycle that leads to radical changes in monetary, domestic and/or world orders. I comprehensively explained how this overall big cycle works and how it was manifest over the last 500 years in my book Principles for Dealing with the Changing World Order. But I won't cram that 600-page book in here. Instead, I'm going to give you a very brief summary. That way when we turn to part three about what has happened in our current big cycle and part four in which I will try to look into the future, you will be able to see how what actually happened compares with my templates of both the big debt cycle and the overall big cycle.
How the machine works. Because everything that happens has reasons that make it happen, it appears to me that everything changes like a perpetual motion machine. To understand this machine, one needs to understand its mechanics. Because everything affects everything else directly or indirectly, these mechanics are very complex. Sometimes I try to explain what I know about them with enough of their complexity to show them in useful detail, such as I did previously in this book to explain how countries go broke. And sometimes I try to explain them simply. As the saying goes, any fool can make something complicated. It takes a genius to make it simple. In this chapter, I will try to explain the big cycle simply. I will begin by explaining my approach.
As a global macro investor for most of my life, I've tried to understand and model the cause-effect relationships and use my models to bet on what will happen in the markets. To do that, for about the last 35 years, I've created computerized expert systems that enable the computer to make decisions like I make them. These systems are based on the following principle: Decision-making systems should be based on timeless and universal relationships. Meaning that they should explain all the big important developments in all time frames and in all countries, though not necessarily precisely or in detail. If they fail to explain all the big developments in all time frames and in all countries, that indicates that an important influence is missing and needs to be added to the template or model that we're using. The expert systems I've built are previously developed forms of artificial intelligence. Now, with various breakthroughs in artificial intelligence, I am, and I believe we all are, on the brink of being able to understand all of the cause-effect relationships that drive everything. Though for now, we still have to labor along the old-fashioned way with people studying what happened using computing and AI tools that are available. That is why in my own feeble attempts to understand and describe the most important mechanics that change the world as we know it, I do these in-depth studies and create explanations of them. What I'm about to describe is a result of this process. However, because the forces that drive the big cycle are so big, it is easy to see and understand them without worrying about the details and the complexities.
Zooming out to the highest level, the five most important drivers of change are:
1. The debt, credit, money, economic cycle.
2. The internal order and disorder cycle.
3. The external geopolitical order and disorder cycle. In other words, the changing world order.
4. Acts of nature, in other words, droughts, floods, and pandemics.
5. Human inventiveness, most importantly, of new technologies.
These forces affect each other to shape the biggest things that happen, creating cycles that move markets and economies around an upward sloping trend line. The incline of this upward slope is primarily driven by the inventiveness of practical people. In other words, entrepreneurs who are given adequate resources, in other words, capital, and work well with others: co-workers, government officials, lawyers, etc., to make the inventions and products that create productivity improvements over a shorter period of time (1 to 10 years). The short-term cycles, especially the debt and political cycles, are dominant. Over a long period of time (10 years and beyond), the long-term cycles and the upward sloping trend in productivity have much bigger effects. I will now delve into these five forces. While hearing about them, please think about how these forces have worked and how they are working now. That will help you see how and why history rhymes and better understand what is happening now and what is likely to happen.
How the overall big cycle works. The five big forces. We are now 80 years into the overall big cycle that began at the end of World War II, which is by and large unfolding in the classic ways that will produce dramatic changes that one can only imagine by visualizing these five forces interacting simultaneously in a historical context.
More specifically:
1. The debt, credit, money, economic cycle. Throughout this book, I have described the most important things that influence the big debt cycle, like debt service payments relative to income, the amount of new debt sold relative to the demand for it, the desirability and willingness of debt asset holders to hold their existing debt assets, and other factors explained earlier. Because I have already covered this big debt cycle so completely that you're probably sick of hearing about it, I won't say much more. I will just reiterate the main points I want to get across, which are: There has always been, and I expect that there always will be, short-term cycles that over time add up to big debt cycles. The average short-term debt cycle has typically taken about six years, give or take about three, with the duration of that cycle dependent on a number of influences that we can monitor and use to come up with rough estimates of how long each one will last. The average long-term debt cycle has typically taken around 80 years, give or take about 25 years, with the duration of that cycle also driven by a number of influences that we can monitor and use to come up with rough estimates of how long each one will last. These debt cycles are influenced by and influence other things, most importantly what I have identified as the four other big forces.
To summarize the dynamic in a few sentences, what has timelessly and universally throughout the millennia and across countries driven the big debt cycle changes and has created the big debt and economic problems is the creation of unsustainably large amounts of debt assets and debt liabilities relative to the amounts of money, goods, services, and investment assets in existence. This has always led to big debt crises and runs on banks. By a run, I mean a turning in of debt assets to banks in order to get real money, which the bank doesn't have enough of to meet the demand. Classically, when the holders of those financial assets actually try to convert them back into money and buy things and see that they can't get the buying power they believe they have stored in their debt assets, the run accelerates and feeds on itself, which causes great shifts in market values and wealth until debts are defaulted on, restructured, and/or monetized, reducing the debt burdens relative to incomes and a new equilibrium is reached. The debts are almost always monetized, by which I mean that it is almost always the case that the central bank creates a lot of money and credit to make it easier to pay back the debt, which devalues the money and the debt.
It's worth noting that at times when the debt-money force, the internal order force, and the external order force are late in their cycles, in other words, when there is a lot of debt and a lot of internal and external conflict, it is typically just before big conflicts and revolutionary changes in monetary orders, internal orders, and world orders. Like a life cycle, the big cycle goes through stages. This late-cycle stage, which I call stage 5, comes just before the depression and war stage that brings about the end of the big cycle. For reasons I will explain later, I believe that we are now in this late-cycle stage. It is a time of radical, typically unexpected changes that haven't happened in one's own lifetime, but have happened many times throughout history. At such times, it is extremely valuable to understand the past cases of big changes and consider whether they could happen again. In my book, Principles for Dealing with the Changing World Order, I examined a number of such cases. Since history can be an effective guide for understanding cause-effect relationships and bringing perspective on what is now happening and what might happen, we can use these historical cases to think about what's logically likely to happen under the existing circumstances.
So what are these existing circumstances at this time? There is great overindebtedness in the United States and in all major countries at the same time as there are increasingly nationalistic and fragmented internal orders in these countries, increasingly contentious relationships between countries, adverse and expensive acts of nature, and amazing new technologies. Looking at past cases with similar configurations of conditions can help us imagine otherwise unimaginable possible developments. For example, I repeatedly saw and will show you in the next part of the book that when faced with similar conditions of excessive debt, countries, including the United States, took the following extraordinary actions: exerting great pressure on countries to buy the country's debt, as the British did in the past; selectively freezing debt and/or taking the assets of enemy countries, the way the US did to Japan and Russia more recently; defaulting on and restructuring debts by extending maturities or monetizing them to cut debt burdens, the way Germany did after Hitler came to power; imposing confiscatory taxes and capital or foreign exchange controls to prevent assets from leaving the country; revaluing government assets; and creating new types of money.
To be clear, I'm not saying these sorts of things will happen, and I am hesitant to raise them as possibilities because my doing so could engender exaggerated fears which could prompt inappropriate and exaggerated actions. However, like a good doctor speaking to a patient suffering from a serious disease, I feel that it would be an irresponsible omission of mine not to convey what past cases tell us about the possibilities that sometimes accompany these conditions.
Number two, the second big force, the internal order and disorder cycle. Within countries, there are both short-term political swings lasting about 6 years on average, give or take 3 years, that over time add up to big shifts in domestic orders that last about 80 years, give or take about 25 years. To reiterate, I don't mean that these time frames are fixed because they are highly variable in duration, but I do mean that they have always happened and I believe they always will happen, with the durations driven by influences that we can monitor and use to come up with rough estimates of how long each one will last. These are the cycles that exist within countries and lead to conflicts and changes in the system of governance or what I am calling orders. These fights for power work basically the same way in all systems of government, all types of organizations, and even within families because the approaches to fighting them are embedded in human nature.
So how do they work? It's simple. Nothing lasts forever. That includes the orders built around established leaders and governance systems. Changes in orders are driven by those who have the greatest power getting to determine what is done. Orders change when those who don't run the existing order acquire more power than those who do and want to change it. Fights occur when both A) a powerful group wants to change the order and B) it is not clear which side has more power, so only a fight can determine it. Fights don't occur if A) there isn't a powerful group that wants to change the order and/or B) there is a powerful group that wants to change it and it is so much stronger than the existing group that the changes will take place with little or no fighting.
In democracies, there is an election cycle that roughly coincides with the economic cycle because bad economic conditions typically lead to political changes. At the beginning of a new popularly chosen leader coming to power, for example, in the first 100 days of a new presidency, there is a honeymoon period and great optimism. That is when dreams of great changes and great improvements exist, and before realities and criticisms of how the new leader has shaped and handled them set in. As time passes, typically the big promises the leader made to get elected become difficult to deliver and bad things happen. So disappointment sets in, critics and enemies become bolder, and support wanes. All this makes fighting to stay in power harder, which often leads to more extreme actions to make that happen. These dynamics are at play in the United States at my writing of this book in March 2025. How things go typically depends mostly on the economy, which depends mostly on where the market and economy-shaping short-term and long-term debt, credit, money, economic cycles are. Though exogenous events like droughts, floods, pandemics, and big international or domestic conflicts can also matter.
All governance orders within countries change from one type to another, from democracies to autocracies and from autocracies to democracies, and each type of order comes in varying flavors, with some managed well and some managed poorly. I will now focus on what happens when democracies fail. When democracies fail, autocracies come in. In my studies of how orders have changed throughout history, I have seen how changes from republic-style representative democracies to autocracies typically happen. These changes are exemplified in how Julius Caesar in ancient Rome, Napoleon Bonaparte in France, Benito Mussolini in Italy, Adolf Hitler in Germany, a consortium of leaders in Japan, Francisco Franco in Spain, Recep Tayyip Erdoğan in Turkey, and many other countries' leaders have shifted to become autocratic leaders. I also read about it in Plato's Republic, written about 375 B.C.E., which is still a valuable description of how democracies become autocracies.
In almost all cases, there are large gaps in wealth and values, bad and worsening conditions, and weak, fragmented leadership in the republic-style representative democracies. These democracies can't fix problems because democracies intrinsically rely on compromise between opposing factions, and compromise breaks down during such times. So instead of following the laws and the system of compromise, the opposing sides become willing to fight to win at all costs. Typically, this leads to intensifying populist conflicts between those of the hard right and those of the weak middle and those of the hard left. Conflicts increase, especially during times of economic stress, which leads to fights for the power to control. How these fights for power take place are largely similar for logical reasons that I will explain. Plato pointed out, and my study of history showed me, that leaders in democracies typically appeal to their constituents' desire for immediate benefits and temporary relief rather than doing the hard things that address deeper systemic issues and make their nation strong over the long term. I have seen and read historical accounts of how leadership also typically becomes weak, decadent, and corrupt, especially after periods of great prosperity and few challenges. Plato argued that when democracies become weak and decadent, they lose sight of justice and virtue. They pass their peaks and begin their declines. These periods are typically marked by growing corruption, inequality, and a failure of institutions to function effectively. When the system no longer satisfies the needs of a large percentage of the people, it loses legitimacy independently. And long before Plato observed this, this dynamic was recognized in China, where it is called losing the mandate of heaven. It is when and why orders fail.
In times of disorder, financial, political, and military power matters more than laws, and authoritarianism works better than weak, disorganized collectivism. Plato called the person who typically leads the revolutionary changes from democracy to autocracy a demagogue. Demagogues manipulate public opinion, stir up emotions, and use extraordinary means to gain power. They typically rile up populist sentiment, promise easy solutions to complex problems, and use propaganda and bullying to gain an increase in power. They are generally of the well-educated class and gather around them others who are powerful. When they are of the political hard right, they and those who support them are typically rich and powerful nobles in the old days, or capitalists since the industrial revolution, who are allied in the belief and their self-interest that great leadership requires strong leadership and strong partnerships at the top, like strong companies that have to work well together to do great things. When demagogues are of the left, they typically get their support from the unprivileged masses.
As these populist leaders, whether they are from the right or the left, gain power, they typically employ tactics such as propaganda, coercion, and the consolidation of power to undermine their enemies and the democratic institutions that support their enemies and/or that support the inefficient bureaucracies that are enabling the problems rather than fixing them. This typically leads to the eventual replacement of democracy with a more centralized dictatorial form of government. The approach a strong CEO uses in running a company can be difficult to distinguish from a demagogue's approach. In fact, it can be said that some strong CEOs govern as demagogues. So, it should be expected that if they were running governments, they would run them the same way. In both cases, there are people who take control and make radical changes to make radical improvements. And the big questions are: What will the controls on them be? And how far will they take the autocracy? If looking at a company, one should see if there is strong oversight and a controlling force like a board and controls from effective regulators. For governments, such controls come from oversight functions and separation of powers. The more uncontrolled they are, the more dictatorial the leaders are likely to become. A relevant good principle is "power corrupts and absolute power corrupts absolutely," which is a phrase attributed to historian and politician Lord Acton in 1887.
In the new order that emerges, financial and political power matters more than laws, and authoritarianism works better than weak, disorganized collectivism. In most of these cases, the transfers from the democracies to the autocracies take place within the rules of democracy and become increasingly extreme over a few years, usually over about 3 to 5 years. These leaders typically make radical changes to the monetary, political, and geopolitical orders, and they typically become very nationalistic, militaristic, expansionist, and autocratic. As mentioned, examples include Caesar in Rome, Napoleon in France, Hitler in Germany, and Mussolini in Italy, in ways that were more thoroughly explained in Principles for Dealing with the Changing World Order. And that should be apparent to observers who are watching what is happening today. This is now taking place with big political shifts mostly toward the hard right for the same reasons that they happened in the past.
Number three, the third big force, the international order and disorder cycle. In other words, the changing world order. How countries deal with each other is of paramount importance, and it too is cyclical for the same reason that there are periods of order, in other words, periods of harmony, productivity, and prosperity, and there are periods of disorder, in other words, periods of great conflict, destruction, and depression. And there are big cyclical swings between these periods within countries. There are periods of order, in other words, harmony, productivity, and prosperity, and there are periods of disorder, periods of great conflict, destruction, and depression, between countries. The periods of disorder take place when there are fights to determine which country or which countries will have the power to set what type of order exists. However, because there has never been an effective global governance system, the world order is more prone to disorder and conflict.
As part of the big cycle, there have also been big swings between unilateralism, in which there is fighting for one's self-interest, the strong winning over the weak, and the law of the jungle and survival of the fittest, and multilateralism, which is there is a striving for global harmony, peaceful coexistence, and egalitarianism. Historically, the only times that multilateralism worked were after wars when people were sick of fighting and there was a dominant power to enforce how things should go. In fact, throughout most of history, brutal, destructive unilateralism was the norm. And periods in which there was multilateralism in pursuit of harmony, peaceful coexistence, and the common good were extremely rare and never sustained.
Consider that it wasn't until 1648, after the Thirty Years' War, that there was an agreement in Europe called the Peace of Westphalia that established that countries have borders and that all countries would pledge to enforce those borders rather than to simply fight one another to get what the other had, which up until that point was the norm. Also consider that it wasn't until after World War I, when Woodrow Wilson, the idealistic academic president of Princeton University, who became president of the newly powerful United States in 1913, naively aspired to have a world governance system that imitated the United States government system, the League of Nations. It didn't last and it failed to prevent World War II, which was followed by the new American world order, which created multilateral organizations like the United Nations, the IMF, the World Bank, the World Health Organization, the World Trade Organization, the International Court of Justice, the World Intellectual Property Organization, and so on. These organizations aimed to foster global cooperation, economic stability, and collective problem-solving. The United States, leveraging its unparalleled economic and military power, became the lynchpin of this liberal international order, promoting democracy, free markets, and human rights. While not without its flaws, this system maintained a relative stability that has so far prevented another world war.
While we have all lived through a time when multilateralism's striving for harmony, peaceful coexistence, and egalitarianism was of course what we all wanted, multilateralism is now fading into irrelevance and unilateralism is rising for reasons that are understandable in the context of history. As a result, the powers of multilateral organizations are declining rapidly and transitioning into the hands of the major powers. I believe that the realists must accept the fact that both the aspiration for and the existence of global cooperation are eroding as the pendulum is swinging toward self-interested unilateralism and survival of the fittest. It increasingly becomes the case that the strong prey on the weak. These developments are all typical of the stage of the big cycle that we're now in.
While this transition from multilateralism to unilateralism is at first shocking, it quickly becomes normalized. For example, it was only months before this writing that Donald Trump's statements concerning Greenland, Canada, and the Panama Canal would have been considered unimaginable. At such times, alliances often change fast as circumstances change quickly, and winning is more important than loyalties. To help us imagine the future, we should pay close attention to the lessons from history. Through most of history, without the existence of countries with viable borders, collections of people with common interests fought to seize wealth from others with common interests or to defend their own interests. Those who won got richer and more civilized. They typically got more decadent and weaker and eventually were taken down by stronger barbarians who were in turn brought down by subsequent generations learning to be stronger. For example, that is the story of the rise of the amazing Roman Empire and then its defeat by the Gauls, as well as the rises and falls of most dynasties and with them the rises and declines of leadership approaches. These alternating ages of barbarism and civility contributed to periods of war that took down the more advanced civilizations when barbarians were stronger and civilizations were weak. History has repeatedly shown us that civility, when taken too far, creates weak decadence that eventually loses to strong barbarism. The peaceful and productive modern-day version of this is the fighting that happens in business with the invention of new and effective business ideas and weapons that fuel creative destruction. We love to watch these fights, which are like watching fights in the Roman Colosseum. Or better yet, we love being in them. Frankly, I love being in them and I detest impractical idealism, while I love practical idealism above all else. But when taken too far, the destructive version of the same impulse leads to a lack of cooperation and to fighting in politics, geopolitics, dealing with acts of nature, and new technologies that can be very destructive. So I worry about that.
Number four, the fourth big force, acts of nature: droughts, floods, and pandemics. Throughout history, acts of nature have killed more people than wars and toppled more orders than the previously mentioned forces. And an objective view of the data shows that droughts, floods, and pandemics are increasing and increasingly costly. While why this is happening is debated, that it is happening is not debatable. Nor is it debatable that humanity's polluting and disrupting of nature, higher human population density, closer contact across the world brought about by more international travel, and closer contact with other species due to land development leading to animal-human disease transmissions are all causes. We regularly see these happening in the news, most recently with the Los Angeles wildfires. It is almost certain that these problems will get worse. As with other forces, this force is intertwined with the other big forces to shape what's happening. For example, the migration issues in developed countries with migration pressures resulting from changes in climate and the living condition issues in underdeveloped countries where people are struggling to adapt to droughts, floods, and other changes are obviously worsening due to damaging acts of nature increasing. And given that nearly all nations are facing debt and money issues, there isn't enough money to be spent on climate mitigation or adaptation.
Number five, the fifth force, human inventiveness, most importantly, of new technologies. There are great advances in technology, particularly in artificial intelligence, that will dramatically affect all thinking in all areas for good or bad. Throughout history, technological advances have raised living standards and life expectancies and have been used to generate economic and military power and have been used in wars to create great destructions. They are closely tied to the other four forces. When technological advances are supported by good financial, economic, and social conditions, they advance more quickly than when those conditions are bad. But when their developments are supported by unsustainable credit growth, they tend to cause financial bubbles and busts. For example, the South Sea bubble in 1720, when the Dutch Empire was beginning to decline, the railway mania in the 1830s and 1840s, the electricity and utilities bubbles in the 1870s and 1890s, and the dot-com bubble and telecom's crash from 1990 to 2001 are all relevant examples of cases where trade advances and improving technologies led to debt bubbles and busts, as well as the beneficial changes they produced.
That's enough of the overall big cycle for now. Enough to help you better understand the dynamics you'll hear about in part three as you look at the events that have unfolded since our current big cycle began in 1945 with the end of World War II. It will also help you understand the perspective I take when I attempt to look into the future in part four. But before we move on, it is worth sharing one final principle, which is about the biggest impact of how the challenges that arise during the big cycle are handled. Namely, the biggest and most important force is how people deal with each other. If people deal with their problems and their opportunities together rather than fight each other, they can get the best possible results. Unfortunately, while technology has evolved a lot, human nature hasn't changed much. So this is still probably beyond the capabilities of humankind. We will see.