The era of Empires has been over since WW II. It has been replaced by the age of Business and Technology battles for market and mind share. It’s a war for fickle, borderless entrepreneurial dominance. Check which Countries house and maintain the largest number of Global Brands and Enterprises, and you’ll find who the current winners are.
Let’s break down the end of the Empire Paradigm using Dalio’s terminology:
The Government:
Dalio’s Cycles reasonably describe the rise, decline & fall of dominant Empires until WWII. From then on, they don’t. Further, without diminishing the “overall” validity of Dalio’s views, his reasoning about the critical reasons for “how” and “why” the collapse of these Empires occurred is also partially wrong.
Why?
Dalio describes past Empires’ operational successes as based on partnerships between Government, Bankers, and The Military. But there aren’t any partnerships in Autocracies. The Supreme Leader, King, and even Semi-God (E.g., Japan up to the 1940’s) rules everything. Hence, Bankers, Military, and Entrepreneurs serve at the pleasure, mercy, and sole benefit of the ruler. Although I agree with the general principles of how Dalio describes the decline of these empires, I believe that it’s on those one-way and brutal relations with their subjects where the fundamental reasons lie on how and why all Empires and Autocracies are flawed and eventually fail.
ALL AUTOCRACIES EVENTUALLY FAIL
The Military:
In The Empire’s cycles, the military power of the new ruling Empire is the determining factor in defeating the failing (previous) empire. This is no longer the case in Today’s world. Nuclear Power and Mutually Assured Destruction (M.A.D.) has erased this scenario. Therefore, the wannabe Empire doesn’t have the option to conquer the failing Empire through force. In effect, Nuclear Power has reduced the military’s role to that of Gate Keepers of a Texas Standoff.
Additionally, starting in WW II (some could argue even earlier since Waterloo), conquering territories or nations has become a dual losing proposition: on one side, hostile patriots eventually repel the aggressors (E.g., Vietnam, Afghanistan, etc.). and the occupied territories have become a heavy, even unsustainable, economic burden to the invader (E.g., Germany occupying France in WW II or more recently Russia occupying Crimea and parts of Eastern Ukraine).
WANNABE EMPIRES NO LONGER CAN CONQUER THE INCUMBENT EMPIRES THROUGH MILITARY FORCE
The Entrepreneurs:
The businesspeople of the past were nothing but servants to the ruler. Their mission was to go abroad and extract/exploit by whatever means necessary the maximum amount of riches for the ruler. When this was no longer possible, the Empire weakened and eventually failed.
The Free-Global-Enterprises of Today are not serving any ruler. Their brands identities, cash flows, R&D budgets, and billions of customers worldwide are independent of geographies or ideologies. They’re also spreading, expanding, sourcing, and manufacturing based on where they can operate more efficiently and profitably.
Hence in Today’s world, the term Empire is no longer adequate. The winning and prosperous nations are increasingly those whose legal, social, and political systems foster the emergence and sustainability of the most significant number of global enterprises & global brands.
It’s about economic dominance, no longer military or geographical dominance.
The dominant nations Today have the largest and biggest number of global enterprises and brands. Hence the world risk dynamics no longer contain Empires’ apocalyptical endings but the whole world’s doomsday (we rise or sink together). World power is more and more about business dominance, which is not permanent as it may change hands back and forth based on whose above scorecard is the most successful and profitable.
GLOBAL-FREE-MARKET ENTERPRISES (NOT GOVERNMENTS) ALREADY ACCOUNT FOR THE MAJORITY OF THE DEVELOPED WORLD’S G.D.P.
THEIR VIRTUOUS CIRCLES OF EMERGENCE, GROWTH, AND BORDERLESS DOMINANCE CAN NOT BE CORRELATED TO DALIO’S ANALYSIS OF RISING AND DECLINING EMPIRES.
YET, IN TODAY’S GLOBAL WORLD, ENTERPRISES ORIGINATED ON AUTOCRATIC, TOTALITARIAN SYSTEMS (E.g., China) ARE SUBJECT TO DALIO’S PRINCIPLES OF RISE, SUCCESS, AND DECLINE.
SERVING A MASTER WILL PREVENT THEM SOONER OR LATER FROM COMPETING AND SUSTAINING THE INNOVATION IMPETUS AND COMPETITIVENESS EDGE THAT ONLY TRUE INDEPENDENCE CAN PROVIDE.
ON AN INTERCONNECTED, INTERDEPENDENT, AND GLOBALIZED PLANET, THE RISK IS A WORLDWIDE COLLAPSE INSTEAD OF AN EMPIRE COLLAPSE.
If not on a Nuclear War (where most of us will die), where does the most considerable risk of a Worldwide Collapse lies then?
It lurks in the World’s Financial system, that’s where the most significant risk of a collapse or downfall of the world, as we know it, exists.
Although we see them as one, the world’s monetary order functions through two separate yet interconnected pipelines: The Private and the Government financial systems. Each represents a different risk, and both are entirely obsolete.
Why?
Let’s analyze them separately:
The Bankers (The Private Economy Financial System):
Our financial system remains tied to the Government (serving at its pleasure and mercy).
It’s a devil’s pact as the financial institutions willingly subject themselves to the will of the Government, following its intricate and capricious rules in exchange for exorbitant profits not generated out of legitimate productive activities.
They are artificial TOLL stations collecting fees for transacting, intermediating, holding, and investing other people’s money (financial institutions, hedge funds, etc., do not produce anything).
Free money and undeserved humongous windfalls for a role that no longer has a place in Today’s digitally interconnected world.
The decisions and risks taken by the financial community with the money earned by others constitute the main risk that could bring the entire world economy down. E.g., take the mortgage crisis of 2008, or as pointed out by Warren Buffet, “..financial derivatives are weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal..”
In Today’s increasingly digitalized world, there’s no longer a need for a third party to hold our money (including all the outrageous and obsolete hurdles, costs, and time delays involved in having a bank account). Much less be subject to the risks of our money being unavailable, frozen by the bank, or seized by third parties (mainly by the Government).
E.g., imagine companies like Apple holding direct custody of the daily proceeds from their sales in the form of cryptocurrencies.
“SELF-CUSTODY” OF FINANCIAL ASSETS AND A SIGNIFICANT REDUCTION OF THE ROLE OF FINANCIAL INSTITUTIONS AS MONEY HOLDERS, IS THE WAY OF THE FUTURE TO MITIGATE THE RISK THEY POSE TO THE WORLD’S ECONOMY.
The Fiscal Authority -The Treasury Department- (The Government Financial System Part “A”):
As Dalio correctly points out, Governments freely spend more than they collect in taxes. This happens because they can cover their budgetary deficits (overdrafts) by issuing I.O.U.’s (T-Bills) with virtually no restrain. Contrary to the past though, where Government’s depended entirely on the productivity of their unscrupulous conquerors.
In Today’s free world, the leading global enterprises and brands have become never-ending tax generators for the Government, while not depending on single regions or finite natural resources -including extractable riches- but solely on their ability to create products and services coveted worldwide.
In the developed and free-world, Dalio’s Autocratic Governments of the past have been replaced by Democratically elected Governments that, on the wings of the private economy’s torrent of recurring revenues, have become corrupted, insatiable, bureaucratic, special-interest-driven spending machines. And as he correctly points out as a lesson from the past, ever-increasing debt-funded government spending inevitably leads (in extreme economic downturns) to Government defaults. In Today’s interconnected world, a Government default on their debt by one of the top 5 economies in the world could bring the entire world economy down.
If we equate the Treasury Department to the “Government’s Checkbook,” the only way to balance it is to drastically restrict politicians’ ability to approve budgets riddled with new debt, in effect tying the Department of Treasury’s ability to issue new debt (T-Bills) to cover its “Checkbook’s Overdraft.”
As a result, the Government will spend much less while operating under a balanced budget (Eg., the Austrian model). Simply put, the Government will have to spend the same amount of money it collects. And balancing the budget means cutting spending, not taxing individuals and enterprises further.
The Monetary Authority -The Federal Reserve- (The Government Financial System Part “B”):
The private sector generates 80%+ of the revenue and profits generated by the U.S. economy. The public sector represents only about 20% of the economy. Why is it that a minority stakeholder is able to put the entire economy at risk?
If the private sector chooses to self-custody its financial assets through cryptocurrencies the risk goes away, the cost of money will be market-driven, and there will no longer be a reason for banks to exist.
Consequently, there won’t be a need for a government-owned financial institution to be the “Bank of all Banks” (The Fed) either.
Central banks present a significant risk to the world economy because of their newly found ability to print inorganic money (not generated by the economy).
Through Quantitative Easing (Q.E.) Central banks worldwide have bought (mainly) T-Bills in the open markets. Q.E. is another example of Governments introducing enormous risks into the financial system (E.g., let’s assume that the Dollar tomorrow was no longer accepted globally as a reserve currency, suddenly, Q.E. and the Fed’s Balance Sheet could become a house of cards).
Additionally, Q.E. is another clear example of the Government’s unlimited ability to create debt without limits (when the Fed issues inorganic money to buy T-Bills, it creates a liability for an equal amount in its balance sheet).
The only way to do away with the financial risks Central Banks represent to the world’s economy is to legally forbid therm outright to incur debt and/or issue inorganic money.
IN THE INTERCONNECTED DIGITAL FREE WORLD, THERE’S NO LONGER A MARKET REASON FOR BANKING INSTITUTIONS TO EXIST. SELF-CUSTODY OF FINANCIAL ASSETS IS THE WAVE OF THE FUTURE.
IN THE FREE WORLD, GOVERNMENTS ARE A SMALL FRACTION OF THE ECONOMY; HENCE THEY MUST NOT HAVE THE POWER TO PUT THE ENTIRE ECONOMY AT RISK.
THE FISCAL AUTHORITY (TREASURY) MUST RUN A BALANCED CHECKBOOK AND NO LONGER HAVE THE ABILITY TO BORROW ON BEHALF OF THE PEOPLE OR ENTERPRISES THAT ARE ITS LIVELIHOOD.
WITHOUT THE NEED FOR BANKS IN THE PRIVATE ECONOMY, THE MONETARY AUTHORITY (CENTRAL BANKS/FED) SHOULD EXIST ONLY AS THE BANK OF THE DEPARTMENT OF TREASURY.
Currency:
Dalio’s principles provide a masterful historical and present description of the world monetary systems. It’s on the way forward where we disagree with him. Money is a “means of payment” that enables the purchase and/or sale of goods and services. Money per se does not have any intrinsic value (e.g., it is not backed by Gold). Since the Gold Standard was abandoned, any currency’s value is derived mainly from the strength and size of the economy behind it. Hence, since the U.S. economy is 25% of the world economy, this enables the U.S. Dollar to be and remain the world’s reserve currency.
The strength of a nation’s economy causes:
1) widespread “acceptability,”
and
2) a collective/implicit/tacit “consensus,”
which engenders
3) ongoing trust
in the usage of its Government printed currency.
The problem, though, is that (e.g., The U.S.) with the Government being only about 20% of the economy, it no longer has the size, not even the voting power (in corporate terms) to command the exclusive right to print money.
In addition, if we add the instances of reckless behavior previously described by both its fiscal and monetary authorities, one could argue that Government has not only lost the “exclusivity” privilege of printing money; it has also become a clear and present danger to the economy, a dangling threat to the tireless work and the never-ending wealth creation prowess of the general population and free enterprises.
Ten years of 2% inflation (pre-pandemic) in the developed free-world demonstrate the increased efficiencies and productivity of the private sector. This points to a private sector currency that will also operate efficiently and be free-market driven.
Further, no single data point indicates that once the current and mainly supply-driven inflation subsides, the free-world private sector and the economy will not return to the same efficiencies and productivity of pre-pandemic levels.
It’s not difficult to envision that the future may also include: 1) Government-issued currencies used primarily by and between government entities, workers, vendors, etc., and 2) Privately generated currencies held and exchanged directly by and between individuals and corporations. When cross payments occur between the Government and the Private economy Currencies, they’ll take place through the proven currency exchange mechanism.
IN THE NEAR FUTURE, THERE WILL BE: SELF-CUSTODY, PRIVATE-ECONOMY ISSUED, PROOF OF WORK, DECENTRALIZED CURRENCIES BACKED ONLY BY THEIR WIDESPREAD ACCEPTABILITY, CONSENSUS, AND TRUST. THEY’LL BE USED AS THE PREVAILING MEANS OF PAYMENT IN THE PRIVATE ECONOMY.
GOVERNMENT-ISSUED CURRENCIES WILL BE USED PRIMARILY WITHIN THE GOVERNMENT-DRIVEN ECONOMY.
Cryptocurrencies:
It is all but certain that “a” or “a series” of cryptocurrencies will become the “means of payment” of the private economies.
As with Government currencies, Cryptocurrencies aren’t the heart or the drivers of the economy. The drivers of the economy are only the economic factors that produce or provide goods and services -hence generate real wealth- and those that consume it. Cryptocurrencies will be the vehicle, not the engine or the fuel.
The success of any given Crypto as means of payment will derive from its widespread acceptability, consensus, and trust.
Among the factors that will cause those three elements to exist will be:
1) That the Cryptocurrency from its inception does not belong to any one-party printing money somewhere in the world, so it is genuinely decentralized,
2) that its expansion and growth occurs only through proof of work, or wealth generation through products and services,
3) its easiness of use and lightning-fast speed of transactions,
and
4) exchange ratio stability against government-issued currencies which will allow its utilization not as a speculative asset but as a means of payment that in turn is the basis for pricing everything throughout the private economy.
Widespread utilization will create a Cryptocurrency economy. The strength of such an economy will determine the strength of the broadly accepted Cryptocurrency (ies). Same as Government currencies not having anything backing them up, the widely used Cryptocurrencies will have no reserves backing them up either.
It is likely that there will be two types of Cryptocurrencies: 1) One a commodity type – a means of exchange- acting as a store of value, and 2) Another one serving as a currency – a means of payment acting as the predominant pricing mechanism for the private economy.
Democracies:
Contrary to Dalio’s assertion, there’s not a single example in the developed and free world of redistribution of assets due to a revolution.
Whether is the US, Canada, The U.K., Germany, France, Italy, Spain, The Netherlands, Belgium, Norway, Finland, Sweden, Denmark, Iceland, Greece, Australia, New Zealand, etc., while under legitimate Democratic and Capitalist systems there hasn’t been a single case of revolutions and/or redistribution of wealth in any of these countries. Yet, it is easy to visualize the potential for both in countries like Russia and China.
Polarization & Populism were last seen in the developed world decades ago (mainly in the form of fascist governments in WW II). They constitute a grave danger to Democracy and the Rule of law. Hopefully, we’ve learned that when Autocrats are in power, democracy, freedom, and human rights evaporate, and great tragedies happen to those otherwise “highly developed” societies.
Capitalism vs. Inequality:
Mr. Dalio correctly points out that in the old world, increasing inequality inevitably ended up being one of the reasons for revolutions and the end of Empires. This is not difficult to envision, as wealth in the past was reserved for the rulers and their emissaries.
In modern times though, the advent of Capitalism combined with Democracy has raised living standards exponentially for all, creating unique virtuous circles of prosperity. But, while inequality, as it existed before, is gone for good, it has not gone away; it has simply morphed into a different kind of monster.
Unfortunately, one of Capitalism’s inherent flaws is that it does not contain a formula for how to prevent rapidly increasing new forms of inequality. Today’s inequality is far more complex and dangerous than in the pre-democratic/capitalist era, and it won’t be cured by revolutions or the fall of empires.
Today’s inequality is about an ever-growing, massive, and pernicious gap in living standards between the developed world and the rest of the world. It is about the obscene difference between the haves and have nots (who are much better informed and aware of it than their predecessors). The challenge remains on how to close these gaps without countries becoming welfare states.
The answer to inequality lies in education and work, not on entitlements or free rides.
We see a three-prone action plan that could help ease inequality:
1) Close the gap between skilled job openings and available workers (there are 11.5 million unfulfilled jobs at present in the U.S.). This can be achieved through nationwide targeted education plans as well as skills training,
2) Accelerate and incentivize the growing national trend toward self-employment,
and
3) Following the Wikipedia model, create a nationwide peer-to-peer database containing the going market rates for salaries in the private and public sectors for every job there’s in existence. Job information should include both national, regional, and local enterprises. It should consist of job description and requirements. Job data to be posted mainly by the workers themselves. Transparency and visibility will further empower workers to search for the best remuneration available in real-time for their type of job, profession, etc.
Today’s wannabe empires, all under autocratic rule, stand no chance of dominating entrepreneurially or militarily and are doomed to fail.
Government finances, Government issued currencies, and the private banking and financial system devil’s pact with Government constitute the biggest risk to the global free economy.
Inequality between Countries and inequality between Individuals include the biggest risk to our world’s social order.
By Erasmus Cromwell-Smith.
July 17th. 20222.
