Principles for Dealing With the Changing World Order : Why Nations Succeed and Fail

I learned that the biggest thing affecting most people in most countries through time is the struggle to make, take, and distribute wealth and power, though they also have struggled over other things too, most importantly ideology and religion. (View Highlight)

I saw how this happened similarly across countries and across time. While the exact form of it has evolved and will continue to evolve, the most important dynamics have remained pretty much the same. The classes of those who were wealthy and powerful evolved over time (e.g., from monarchs and nobles who were landowners when agricultural land was the most important source of wealth, to capitalists and elected or autocratic political officials now that capitalism produces capital assets and that wealth and political power are generally not passed along in families) but they still cooperated and competed in basically the same ways.

The most important three cycles are the ones I mentioned in the introduction: the long-term debt and capital markets cycle, the internal order and disorder cycle, and the external order and disorder cycle. (View Highlight)

8. The Ability to Learn from History. Most people don’t have this, which is an impediment, though it varies by society. For example, the Chinese are excellent at this. Learning from one’s own experiences is not adequate because, as explained earlier, many of the most important lessons don’t come in one’s lifetime. In fact, many encounters in the future will be more opposite than similar to what one encountered before in life. (View Highlight)

Wealth = Buying Power. (View Highlight)

The typical perspective of the leftist/socialist is that helping each other, having the government support people, and sharing wealth and opportunity are morally good and good for society. They believe that the private sector is by and large run by capitalists who are greedy, while common workers, such as teachers, firefighters, and laborers, contribute more to society. Socialists and communists tend to focus on dividing the pie well and typically aren’t very good at increasing its size. They favor more government intervention, believing those in government will be fairer than capitalists, who are simply trying to exploit people to make more money. (View Highlight)

Money is a medium of exchange that can also be used as a storehold of wealth.

To create more wealth, you have to be more productive. The relationship between the creation of money and credit and the creation of wealth is often confused, yet it is the biggest driver of economic cycles. Let’s look at it more closely. (View Highlight)

Think of it this way: there is both a financial economy and a real economy. Though they are related, they are different. Each has its own supply-and-demand factors that drive it. (View Highlight)

For example, big education and infrastructure programs have paid off nearly all the time (e.g., in the Tang Dynasty and many other Chinese dynasties, in the Roman Empire, in the Umayyad Caliphate, in the Mughal Empire in India, in Japan’s Meiji Restoration, and in China’s educational development programs over the last couple of decades), though they have long lead times. In fact, improvements in education and infrastructure, even those financed by debt, were essential ingredients behind the rises of virtually all empires, and declines in the quality of these investments were almost always ingredients behind empires’ declines. If done well, these interventions can more than counterbalance the classic toxic mix. (View Highlight)

When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. (View Highlight)

In war one’s ability to withstand pain is even more important than one’s ability to inflict pain. (View Highlight)

The stats in my model suggest that the US is roughly 70 percent through its Big Cycle, plus or minus 10 percent. The United States has not yet crossed the line into the sixth phase of a civil war/revolution, when the active fighting begins, but internal conflict is high and rising. (View Highlight)

China’s culture, by which I mean its people’s innate expectations about how families and communities should behave with each other and how leaders should lead and followers should follow, evolved over thousands of years through the rises and falls of its many ruling dynasties and the development of Confucian and Neo-Confucian philosophy as well as other beliefs. I have seen these typical Chinese values and ways of operating manifested over and over again; (View Highlight)

That was right after Deng Xiaoping’s open-door and reform policies began. That is no coincidence. From my first visit to China in 1984 until about 2008, debt growth was in line with economic growth, which was very strong. (View Highlight)

. China is now roughly tied with the US in being the leading power in trade, economic output, and innovation and technology, and it is a strong and quickly rising military and educational power. It is an emerging power in the financial sector but is lagging as a reserve currency and financial center. We will explore all of this in more detail later in the chapter, but in order to understand China’s present we first need to wade into its tremendous history. (View Highlight)

strong education and self-discipline. Getting the most capable people into the most important roles requires the meritocratic selection of people. In Chinese dynasties, the imperial exams often played that role, and it was common for new dynasties to implement educational reforms. It also requires an effective resource-allocation system (View Highlight)

The fall itself comes with escalating rebellions and then a bloody civil war (Stage 5 and Stage 6). Eventually a strong new leader emerges, wins the conflict, and begins the cycle again with a new dynasty (Stage 1 again). (View Highlight)

Growing inequality and fiscal problems over the course of the dynasty are critical drivers of the decline. Dynasties (View Highlight)

believe, and it sounds like Marx believed, that learning and evolving from conflicts and mistakes is the best approach. (View Highlight)

When there is a capital market/economic breakdown at the same time that there are big wealth and values disparities, that is likely to lead to some form of revolution. Such revolutions can end harmoniously and productively, but most are preceded by great conflict and destruction. (View Highlight)

Deng Xiaoping reiterated this view in an interview with “60 Minutes” in 1986, in which he said that the capitalism he was adopting and communism were not incompatible. “According to Marxism,” he said, “communist society is based on material abundance… Only when there is material abundance can the principle of a communist society—‘from each according to his ability, to each according to his needs’—be applied. Socialism is the first stage of communism…” Maybe that’s true and maybe it’s not. (View Highlight)

China will probably advance its technologies, and the quality of decision making that is enabled by them, faster than the US will because big data + big AI + big computing = superior decision making. (View Highlight)

The Chinese are collecting vastly more data per person than is collected in the US (and they have more than four times as many people), and they are investing heavily in AI and big computing to make the most of it. (View Highlight)

The United States has a technology lead (though it’s shrinking fast). As a result, the Chinese currently have great dependencies on imported technologies from both US and non-US sources that the US can influence. This creates a great vulnerability for China, which in turn creates a great weapon for the United States. (View Highlight)

If the United States shuts off Chinese access to essential technologies, that would signal a major step up in the risk of a shooting war. (View Highlight)

On the other hand, if events continue to transpire as they have been transpiring, China is poised to be much more independent and in a much stronger position than the United States technologically in five to 10 years, at which time we will likely see these technologies much more decoupled. This picture changes by the day, and it is important to stay on top of it. (View Highlight)

The goal in a capital war is to cut the enemy off from capital because no money = no power. (View Highlight)

• The United States’ greatest power comes from having the world’s leading reserve currency, which gives the US enormous buying power because it gives it the ability a) to print the world’s money and have it widely accepted abroad and b) to control who gets it.

The United States is at risk of losing its dominant position as a reserve currency because:

Things will change. To the extent that the United States and China are in a capital war, the development of Chinese currency and capital markets would be detrimental for the United States and beneficial for China. Without the US attacking China’s currency and capital markets in an attempt to weaken them, and/or the Chinese hurting their own currency and capital markets (by making policy shifts that make these markets less attractive), China’s currency and capital markets will probably develop quickly to increasingly compete with US markets. It is up to American policy makers to decide whether or not they will try to disrupt this evolutionary path by becoming more aggressive or accept that evolution, which will likely lead to China becoming relatively stronger, more self-sufficient, and less vulnerable to being squeezed by the US. (View Highlight)

Know all the possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones (View Highlight)

This principle has saved many people’s lives when things got bad, and it’s one of my most important principles.