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In this post, at the beginning I will show you how what is now happening is tracking the archetypical Big Cycle, and near the end I will show you how wars typically change how the systems work and how the markets and economies behave. In these 4,500 words, I will be packing in a lot to explain the mechanics of what is happening. While I tried to make it simple, if you find it too dense, just scan to the next section. I promise you that it will be worth it.
History shows that the movements to civil and/or international wars that change the domestic and world orders take place via a progression of stages that transpire in big cycles that have occurred for logical reasons throughout history. I believe that reviewing how the typical Big Cycle works, what stage we are in, and what typically comes next is now especially important. That is because the evidence points to us being on the brink of civil and/or international war (in my book Principles for Dealing with the Changing World Order, I describe this as late Stage 5, on the brink of Stage 6) and because without understanding how these cycles transpire, we will simply observe events in the news without being adequately prepared for them or able to prevent them.
To be clear, when I say that I believe we are on the brink of civil and/or international war, I am not saying that we will necessarily go into them or that, if we do, it will happen very soon. What I am saying is that the different sides in domestic and international conflicts are preparing for war and if events are allowed to progress as they typically do, there is a dangerously high probability of us being in at least one of these wars if not both in about five years, give or take about three (with the highest risk point being in 2025-26).
While the part of the cycle we are now in has not occurred before in our lifetimes, it has occurred many times before, most recently in 1930-45. For that reason, I believe that now is the time to reflect on how the cyclical cause/effect relationships lead to the progression of events that makes up the Big Cycle, and what we should do individually and collectively to deal with these progressing realities.
The good thing is that the scary realities are now much more broadly recognized than they were a couple of years ago. The bad things are that a) conditions are deteriorating even faster than I expected, b) the cause/effect relationships and how they progress are not well understood, and c) nothing much is being done to halt their progressions.
The contraction/restructuring phase occurs when the levels and growth rates of debt are unsustainable in ways and amounts that are analogous to the 1930-45 period (and many periods before then, which are shown in my book). More specifically they occur when debt assets and debt liabilities have both risen to such high levels that the interest rates that are high enough to incentivize creditors to hold them are intolerably high for debtors to meet their debt payment obligations. When this is the case, these assets will be dumped either because the assets are not providing high enough returns to hold them or because there is a greater risk of default. That puts the central bank in the difficult position of having either to allow interest rates to rise (due to the selling of debt), which is depressing to asset prices and the economy, or to print a lot of money and buy the debt assets, which depreciates the value of the money. If you are interested in seeing a more complete explanation and many historical cases, you can get that in Principles for Dealing with Big Debt Crises, which is available for free here. This is also covered in Chapters 3 and 4 of Principles for Dealing with the Changing World Order.
The sides are now more clearly lining up in these conflicts. As is usual in these cycles, when conflicts intensify there is a lot of pressure on all parties to pick a side and fight for it. This dynamic is becoming increasingly risky because there are many ways these countries can badly hurt each other. For example, several countries now have nuclear weapons and other weapons of mass destruction so it is not inconceivable, though it is still improbable, that a chain-reaction war, like that which occurred in the world wars, could occur.
At the same time, we are seeing all the classic signs of being on the brink of military war, such as using economic warfare that is existentially threatening. For example, the recently passed US bill that could cut off needed semiconductor chips to China and Russia cutting off natural gas to Europe are analogous to the US cutting off oil to Japan in 1941, which led to the Japanese bombing of Pearl Harbor. There are also the classic big increases in military spending that typically come just before wars. If you are interested in seeing how analogous what is happening now with what happened immediately prior to World War II, I suggest that you read Chapter 6 in Principles for Dealing with the Changing World Order.
This Big Cycle is made up of several shorter-term versions of the same cycles that add up to the Big Cycle. They, like the Big Cycle, tend to have influences on each other. For example, 1) there is a short-term debt-money-economic cycle (that typically lasts about seven years give or take about three) that is manifest in what is commonly called the business cycle that consists of recessions that lead central banks to create easy money and credit that eventually leads to booms that overheat that lead to inflations and bubbles that lead to central banks tightening money and credit that leads to recessions and busts, 2) there is a short-term political cycle that shifts power between the left and the right in elections that are influenced by the short-term debt-money-economic cycle, and 3) there are short-term external order-disorder geopolitical cycles that are manifest in more minor shifts between peace and war that grow in intensity when two or more opposing great powers exist. None of these cycles transpires in any exact way because they are influenced by many other things.
Also, as shown here, severe capital controls were commonplace (until relatively recently). It was common for rising geopolitical tensions to usher in these sorts of controls, making it harder for investors to access their savings. These actions put sand in the gears of international trade, as we are seeing now via supply chain disruptions.
While I of course hope that we will not slip into Stage 6 and all-out war, I think it is my responsibility to make you aware of where I believe we are in these cycles (i.e., in late Stage 5, close to Stage 6) and what Stage 6 has typically looked like. If we should start to enter Stage 6, I will review it more comprehensively in another post.
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