We’ve jumped into bed with the US. Did we make the right choice?
You guys know I’m a big fan of Ray Dalio.
Not only is the guy a legend in the money and investment world, he’s also a great big picture thinker.
And big picture thinking is funny. It’s totally worthless until suddenly its incredibly valuable.
And most people get caught up in the short term cycles – chasing this or that – and then the big picture changes and the whole investing paradigm gets flipped on its head.
We’re in the middle of it right now – with the move to money printing and fake markets.
If you’re still investing like it’s 2016, you’re going to get left behind.
Anyway, Dalio is doing some great thinking about the tensions between the US and China.
Remember, the previous US-China relationship had defined the last twenty years. It enabled China’s economic boom, which created a whole bunch of peripheral booms – like ours for example!
But now the relationship is changing and it’s not clear where we’ll end up.
Dalio is looking at it through the lens of historical empires. All empires, he reckons, move through a relatively predictable life-cycle.
… The major phases are shown on this chart. It’s the ultra-simplified archetypical Big Cycle…
In brief, after the creation of a new set of rules establishes the new world order, there is typically a peaceful and prosperous period. As people get used to this they increasingly bet on the prosperity continuing, and they increasingly borrow money to do that, which eventually leads to a bubble.
As the prosperity increases the wealth gap grows. Eventually the debt bubble bursts, which leads to the printing of money and credit and increased internal conflict, which leads to some sort of wealth redistribution revolution that can be peaceful or violent.
Typically at that time late in the cycle the leading empire that won the last economic and geopolitical war is less powerful relative to rival powers that prospered during the prosperous period, and with the bad economic conditions and the disagreements between powers there is typically some kind of war.
Out of these debt, economic, domestic, and world-order breakdowns that take the forms of revolutions and wars come new winners and losers. Then the winners get together to create the new domestic and world orders.
This is why, right now, Dalio is very awake to the risks that might come from international conflict, but also internal divisions driven by inequality.
It does appear to be one thing the US isn’t great at: looking after the poor and disadvantaged, or at keeping checks on the uber-wealthy.
Wealth inequality can’t keep growing forever, and it definitely can’t keep growing at its recent pace without creating a large and extremely angry under-class.
That’s not a stable outcome.
But we can also look at the relationship between China and the US through this lens, and in terms of the conflicts that necessarily occur between ascending and waning powers.
The lines in the chart signify the relative powers of the 11 most powerful empires over the last 500 years. In the chart below you can see where the US and China are currently in their cycles. As you can see the United States is now the most powerful empire by not much, it is in relative decline, Chinese power is rapidly rising, and no other powers come close.
Dalio has come up with these metrics himself, so it’s very interesting, but also highly contestable.
I’m not sure that I’d personally see China and the US running neck and neck right now. China is ascending, for sure, but the US still has the run of things.
Anyway, I said last week that you can see a real change in the diplomatic narrative in Australia. There has been a growing awareness that we had to pick sides in this turf war, and Canberra was letting China know that it was siding with the US.
Now you might wonder if that’s smart, since China is ascending and the US is waning.
But China faces it’s own internal challenges. Its demographics are woeful, and way worse than the US. As a quasi centrally-planned economy it faces all the capital misallocation problems that centrally-planned economies face (think of cities filled with empty apartment buildings). And it faces a cavernous middle-income trap – where the advantage it had in cheap-labour becomes a victim of it’s own success, and the economy needs to somehow transition away from cheap-labour manufacturing.
All of these are big challenges.
In all of that, I still feel like the US is the right horse to back, and that’s even before we get to our shared (if sometime superficial) commitment to liberal democratic values.
So yeah, I might argue the toss here.
But the central point is right. The tectonic plates of empire are shifting. If you’re not awake to it, you’re going to get squashed.