There are too many dimensions to what is now happening and too many analogous cases of these things having happened in history to cover in any single post, so I will share them bit by bit in a series of posts relating what’s happening today to the patterns of history I describe in my book Principles for Dealing with the Changing World Order. In this post, I want to pass along what I'm seeing about the sides coalescing in a fight for control of the world order.
History teaches, and what is now happening shows, that in struggles and wars for the control of the world order, countries typically align into opposing sides (e.g., the "allied" and the "axis" countries in WWII) or remain neutral. That happened on a worldwide basis in the first half of the 20th century and was especially true in WWII as the West and the East became more interconnected. We are now beginning to see emerge a similar squaring off into alliances. As explained in the WWII example from my book, economic stresses and conflicts (i.e., economic sanctions) between nations can become progressively more intense to the point of being intolerable, which prompts military wars. For example, America’s sanctions on Japan (e.g. embargoing Japan’s oil imports so they would run out and freezing Japanese financial assets) pushed Japan into the position of either submitting or fighting, which led to the attack on Pearl Harbor that brought the US into the military war.
In today’s brief post, I want to show some early indications of how countries are coalescing into one of two sides or remaining neutral. The table below is derived from watching their actions. It speaks for itself. Those closer to the top are more aligned on one side, those on the bottom are more aligned on the other, and those in the middle are more neutral in this increasingly bipolar world. While these ratings are preliminary, they are already more precise than labels like “NATO countries.” For example, look at the rating of Turkey which is a NATO country but not fully aligned with other NATO countries in its actions. Of course, this is heavily influenced by the Russian-Ukrainian situation, though if one looks at most positions taken on most issues, the picture is similar. I will update this table as more data comes in, though I doubt the positioning will change much because I think that the table already does a good job conveying where these countries stand.
This table is not just interesting because it shows which ones are on which sides, but it is valuable in helping us to begin to imagine what goods, services, and financial assets those countries lower on the list might bring into Russia while we are seeing those items from countries higher on the list being pulled out of Russia. In this way we can begin to imagine whether or not Russia will be ruined by sanctions or can get though them, and we can begin to imagine how powerful the United States’ sanctions weapon will be, which is critically important in gauging how powerful the US will be. Because the sanctions weapon is the United States’ most unique and most powerful weapon (because the military weapons of the leading powers appear to be roughly comparable in their abilities to cause mutually assured destruction so nobody wants to use them—by the way, Russia and China have superior hypersonic missiles [1]), seeing how effective American-led sanctions are—and whether opposing countries will impose their own sanctions on the US and other countries on the top part of the list—will tell us a lot about how the next phase of this war for control of the world order will likely play out.
Importantly, there is a significant risk that if this sanctions war escalates, other countries and investors will worry about being sanctioned, which could have a big effect on the willingness to hold dollar assets because this situation, like the Suez Crisis for the British Empire and the British pound, will reflect the power of the United States and affect the desirability of holding the leading reserve currency and the debt denominated in it.
As previously explained, the external war cycle and the indicators of where we are in it suggest that we could be on the brink of military war between the great powers, though that also seems inconceivable because it’s so obviously a step toward a catastrophe that nobody wants. To be clear, I am not saying that we are going into a military war between the great powers. I believe that all parties want to avoid a catastrophic (e.g., nuclear) war and I have seen many cases in which conflicts brought us to the brink of war (starting with the Cuban Missile Crisis) and there was a pull back from it. At the same time, I believe that there are irreconcilable existential differences that the leading powers could fight to the death for, and I believe that they could play a game of chicken to see which side blinks first. So I believe that we are in a very risky position and that we will learn a lot over the next couple of weeks.
Most importantly, in the relatively near future we will probably learn:
- …whether or not there will be a settlement and, if there is a settlement, whether Putin or the NATO powers win. In my opinion that settlement will either be a) a win for Putin (by which I mean it will give Putin a regime change in Ukraine and tolerable conditions in Russia) or b) it will be a loss for Putin (by which I mean no regime change and sanctions that cripple Russia). Of course, the negotiations underway are attempting to make the deal look less clearly a win or a loss for either side. While what happens will be important, it won’t be the end of the war between Putin and the powers on the top of the list, or the end of the war of those on the top of the list against those on the bottom of the list. More likely, these wars are just beginning. In other words, it seems implausible to me that both sides will return to a stable coexistence, so it seems more likely that some sort of a war in Europe as part of some sort of a greater world war will continue.
- …if there is no settlement whether there will be a big escalation (e.g., Russia threatening nuclear war and the Western powers threatening a more severe sanctions war). I think that if there is no settlement there will be a big escalation. I think it won’t be long before we find out what happens because the existing path is unsustainable.
- …what those in the lower part of the list (more aligned with Russia), most importantly the Chinese, will do, and what the Americans will do in response to what they do. That will matter a lot for a few reasons. Most importantly we will see how much those on the lower part of the list will ignore the sanctions and provide support to Russia despite them (my guess is a lot) and what the American retaliations will be if they don’t do what the Americans want them to do. That is what the contentious discussion between the American and Chinese sides in Rome was about. Also, the situation with Russia and Ukraine and that with China and Taiwan can’t be totally ignored so it must be monitored, as history shows having wars on two fronts simultaneously is an often used strategy. To be clear I am not saying that I expect China to become more aggressive regarding the Taiwan issue anytime soon. I believe that all parties would like a peaceful resolution of the Ukraine and Taiwan issues. But what I am saying is we have to watch out for these sorts of tit-for-tat escalations. I think there is a much higher than normal probability of them occurring.
- …how effective the American-led sanctions will be and what that will mean for American and American-allied powers. Right now United States sanctions powers look awesome, but this will be tested. Right now U.S. led sanctions look awesome, but they will be tested by Russia’s ability to adapt and by what those in the lower part of the list do, e.g., if India and China replace the items and parts being withdrawn from Russia. They are especially powerful against Russia because it needs to import practically everything. But there is a lot to be seen. I have many questions that will soon be answered by observing what is happening. For example, I wonder if Russian payments for its imports from China and Chinese loans to Russia will be made in CNY through the Chinese clearing system instead of being made in dollars through the US/Western-controlled payments system. Notably Saudi Arabia will begin to accept payments for its oil in China’s currency. Will that increasingly be the case for the countries on the bottom of the list because China’s currency increasingly becomes the favored currency by those countries on the lower part of the list and because these countries will increasingly worry about being sanctioned? Would that lead them to change what they hold in assets (e.g., hold less US debt assets like bonds) and where they hold it? Logically it should. We will see what happens.
- …what will happen to the countries on each side in the war relative to the neutral countries? As mentioned in this war and always, there are three types of countries—those on one side of the war, those on the other side, and those that are neutral. History shows us, and logic makes clear why, the neutral countries and their markets do best during wars until the “winner” is known. The following charts average the experience of different countries in WWI and WWII based on their alignment in the war. As conveyed in these charts a) wars can be devastating, so it pays for countries to be neutral and people and investments to be in neutral countries until the winners become clear, b) at the end of the wars, being in winning and neutral countries is best and being in losing countries is disastrous, and c) debt assets (cash and bonds) are generally bad to own and gold has been good to own.
Each series represents an equally weighted average of the countries classified into each category across both World War I and World War II (indexing all returns to the start of each war and assuming monthly rebalancing). Loser is tagged as any country that either a) explicitly lost the war and/or b) experienced meaningful revolution during/after the war. Countries that were meaningfully occupied during the war are excluded (e.g., FRA, NLD, BEL in WWII). Classifications for World War I: Winners (USA, GBR, FRA), Losers (DEU, RUS, AUT), Neutral/Safe Havens (JPN, SWE, CHE, NOR, CHN, ESP, NLD). World War II: Winners (USA, GBR), Losers (DEU, JPN, ITA), Neutral/Safe Havens (SWE, CHE, ESP). Note: USA is excluded from FX vs USD averages.
In my 72 years, I have closely watched a number of conflicts that threatened to produce mutually-assured destruction, starting the with Cuban Missile Crisis (which I was riveted to the TV watching unfold and couldn't imagine being resolved without war or a humiliating loss for one of the sides). Because I have always seen the warring parties step back from the brink rather than go over it, my bias is to believe that there will be some sort of a deal and the world will drift into a new normal with some players scared more than others—and that they will all take a break before the next round. By the way, one of the results of the Cuban Missile Crisis was that it contributed to Khrushchev being replaced by members of his party.
While watching the fight, it is important to remember that we are only partially through the first round of this new struggle for control of the world order and that nothing is assured. Still, we will learn a lot by watching how things transpire, which will set the stage for the next round. At the end of this round, we will see which side won the round and how. We will have seen the terrible suffering of war and its human and economic costs. We will also see which weapons were most effective and which were not used and/or not effective. At this moment, close to the end of this first round, Putin's conventional military power has shown itself to be much weaker than most people expected, the American-led sanctions have proven to be much stronger than most people expected, and non-conventional weapons (e.g. cyber, chemical, biological, space, and nuclear) haven't played as much of a role as expected. While we have gotten some pretty strong signs of how the countries are lining up into the two sides and in the middle (i.e., non-aligned), we haven't yet seen much about how they will play their hands and how effective they will be. We will see that pretty soon. When this first round comes to an end, most people will probably misconstrue it to as the end of the fight, but it will only be the beginning.
So, in summary, I believe a) history is a great guide for understanding the big cycle changes in the world order that are now unfolding, b) we have to watch what is happening closely because nobody can foretell how wars will play out, but we can learn a lot from watching how they do play out, and c) I expect that we will soon learn a lot.
PS
If you are interested in learning more about how the Big Cycle works and is working now and haven’t seen my animation explaining the archetypical Big Cycle, I suggest that you watch it here, and if you haven’t seen my discussion with Henry Kissinger about the Big Cycle and where we are in it, I suggest that you watch it here.
Footnotes
[1] See “China and Russia’s hypersonic weaponry threatens US early warning system” and “Hypersonic-Missile Failures Risk US Chase of China, Russia.”
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