How Countries Go Broke: The Big Cycle

Key Concepts

• Overall Big Cycle: A recurring historical pattern driven by the interaction of five major forces, leading to significant changes in monetary, domestic, and world orders.
• Debt Credit Money Economic Cycle: The cyclical expansion and contraction of debt, credit, and money supply, leading to economic booms and busts.
• Internal Order and Disorder Cycle: The cyclical shifts in domestic political and social structures, ranging from periods of stability and harmony to periods of conflict and upheaval.
• External Geopolitical Order and Disorder Cycle: The cyclical changes in the global balance of power and international relations, alternating between periods of cooperation and periods of conflict.
• Acts of Nature: Natural disasters such as droughts, floods, and pandemics that can significantly impact societies and economies.
• Human Inventiveness: Technological advancements and innovations that drive productivity growth and shape the course of history.
• Multilateralism vs. Unilateralism: The contrast between international cooperation and self-interested actions by individual nations.
• Demagogue: A leader who manipulates public opinion, stirs up emotions, and uses extraordinary means to gain power, often undermining democratic institutions.

1. The Overall Big Cycle: An Overview

The most important chapter focuses on the "overall big cycle," driven by five major forces that have repeatedly shaped history. Understanding these forces helps interpret current events and anticipate future developments. The current era is viewed as a contemporary version of past cycles, with modern technologies and societal norms overlaying familiar patterns. The book aims to provide a framework for understanding how seemingly unimaginable events can occur by examining historical precedents.

2. The Five Big Forces

The overall big cycle is shaped by the interplay of five key forces:

1. The Debt Credit Money Economic Cycle: This cycle involves the expansion and contraction of debt, credit, and money supply, leading to economic booms and busts.
2. The Internal Order and Disorder Cycle: This cycle refers to the shifts in domestic political and social structures, ranging from periods of stability and harmony to periods of conflict and upheaval.
3. The External Geopolitical Order and Disorder Cycle: This cycle describes the changes in the global balance of power and international relations, alternating between periods of cooperation and periods of conflict.
4. Acts of Nature: Natural disasters such as droughts, floods, and pandemics can significantly impact societies and economies.
5. Human Inventiveness: Technological advancements and innovations drive productivity growth and shape the course of history.

These forces interact to create cycles that influence markets and economies around an upward-sloping trend line, primarily driven by entrepreneurial inventiveness. Short-term cycles (1-10 years) are dominated by debt and political cycles, while long-term cycles (10+ years) are more influenced by productivity and long-term trends.

3. Approach as a Global Macro Investor

The author's approach involves understanding and modeling cause-effect relationships to make informed investment decisions. For 35 years, computerized expert systems have been used to make decisions based on timeless and universal relationships. These systems are based on the principle that decision-making 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. The author believes that advancements in AI will eventually enable a comprehensive understanding of all cause-effect relationships.

4. The Debt Credit Money Economic Cycle in Detail

The big debt cycle is driven by the creation of unsustainable amounts of debt assets and liabilities relative to the available money, goods, services, and investment assets. This leads to debt crises and bank runs, where holders of financial assets attempt to convert them into money, revealing the lack of sufficient funds. This accelerates the crisis, causing shifts in market values and wealth until debts are defaulted on, restructured, or monetized. Monetization involves central banks creating money and credit to ease debt repayment, devaluing the currency and debt.

• Short-term debt cycles: Average duration of about six years (give or take three).
• Long-term debt cycles: Average duration of about 80 years (give or take 25).

5. The Internal Order and Disorder Cycle in Detail

Internal order and disorder cycles involve short-term political swings (around 6 years) that accumulate into significant shifts in domestic orders (around 80 years). These cycles lead to conflicts and changes in governance systems. Changes in orders are driven by those who have the greatest power getting to determine what is done. Fights occur when a powerful group wants to change the order, and it is unclear which side has more power. Democracies can fail and transition to autocracies, often due to large gaps in wealth and values, worsening conditions, and weak leadership.

• Examples of leaders shifting to become autocratic leaders: Julius Caesar, Napoleon Bonaparte, Benito Mussolini, Adolf Hitler, Recept Erdogan.

6. The International Order and Disorder Cycle in Detail

International order and disorder cycles involve periods of harmony, productivity, and prosperity alternating with periods of conflict, destruction, and depression between countries. Disorder arises when there are fights to determine which country or countries will have the power to set what type of order exists. Historically, multilateralism (global harmony, peaceful coexistence) has been rare and unsustainable, often emerging after wars with a dominant power enforcing the order. The current trend is a shift from multilateralism to unilateralism, with major powers gaining influence and the strong preying on the weak.

• Examples of multilateral organizations: The United Nations, the IMF, the World Bank, the World Health Organization, the World Trade Organization.

7. Acts of Nature in Detail

Acts of nature, such as droughts, floods, and pandemics, have historically caused significant loss of life and societal disruption. Objective data indicates that these events are increasing in frequency and cost. Factors contributing to this include pollution, disruption of nature, higher population density, increased international travel, and closer contact with other species.

8. Human Inventiveness in Detail

Technological advances, particularly in artificial intelligence, have the potential to dramatically impact all areas of life. These advances can raise living standards and generate economic and military power, but they can also contribute to financial bubbles and busts when supported by unsustainable credit growth.

• Examples of trade advances and improving technologies leading to debt bubbles and busts: The South Sea bubble in 1720, the railway mania in the 1830s and 1840s, the electricity and utilities bubbles in the 1870s and 1890s, and the dotcom bubble and telecom's crash from 1990 to 2001.

9. Synthesis/Conclusion

The overall big cycle is a complex interplay of debt, internal order, international order, acts of nature, and human inventiveness. Understanding these forces and their historical patterns is crucial for interpreting current events and anticipating future developments. The current era is characterized by high indebtedness, internal and external conflicts, adverse acts of nature, and rapid technological advancements. The biggest impact of how the challenges that arise during the big cycle are handled is how people deal with each other.