Greetings fellow travelers.
Our Moral Letters this week address the question of how we can safely navigate our way in the world. In Moral Letter 105 On Treading Safely, we discuss the dangers inherent in our interactions with other people.
Specifically, we look at how easily envy, hatred, and fear arise, and what we can do to avoid becoming targets. There is another harm greater than all these, and that is the harm we cause ourselves. As we'll see in the main article below, that can happen when we blithely ignore the consequences of our actions.
In Moral Letter 106 On Thoughts And Actions, we consider once again the vital question of how much is within our control. Because our thoughts are most fully in our control, we should focus first on controlling our thoughts. Our judgment and values behind our actions is critical.
Although we do not have complete control over the outcomes of our actions, we must still take responsibility for the results. That goes to the heart of today's topic, which is what will happen to America in the coming years?
To introduce the topic, let me ask if you remember in The Empire Strikes Back when Luke meets Yoda about his potential training as a Jedi? Luke says, "I'm not afraid." Yoda then replies in a menacing voice, "Oh, you will be. You will be."
That's how I think we should feel as Americans today. That's definitely so if hedge fund titan Ray Dalio is right about the reasons that nations rise and fall.
I recently read his book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail. It was a chilling read. I will quote some highlights below. If you find this topic interesting, I recommend you read it. You can find additional material freely available on Mr. Dalio's related website economicprinciples.org.
He looks back over hundreds of years of world history to find broad trends that we might extrapolate and apply today. He starts by reminding us that "no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fall."
He charts the relative power of great empires over the centuries to show the rise and decline of, among others, China, the Netherlands, the United Kingdom, and the United States. He suggests the world is at the cusp of another change in the world order, with China potentially overtaking the United States in global power.
To explain how countries evolve internally, eventually leading to systemic change, Mr. Dalio talks about the six stages of internal order. He describes the progression from order to disorder as follows:
Here is how he describes the decline phase, where he believes the United States finds itself today:
The decline phase typically comes from internal economic weakness together with internal fighting, or from costly external fighting, or both. Typically, the country's decline comes gradually and then suddenly. When debts become very large, and there is an economic downturn ... the country nearly always chooses to print a lot of new money [which] devalues the currency and raises inflation.
At the same time as there are bad financial and economic conditions, and large wealth, values, and political gaps – there are great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or right.
As conflict within the country escalates, it leads to some form of revolution or civil war to redistribute wealth and force the big changes.
Already last year when the book was published, Mr. Dalio thought the United States was 70% through the cycle, well into Stage 5 (the decline). At that time, he said the markers he was watching to indicate escalation to Stage 6 (civil wars and revolutions) were "1) the rules being disregarded, 2) both sides emotionally attacking each other, and 3) blood being spilled." I hate to say it, but aren't we already seeing more of this?
These changes to a country's internal order can lead the entire world order to change if there is a sufficiently serious external challenge at the same time. This typically comes in the form of another great power whose influence is rising. A rising great power typically seeks to exploit domestic weakness of the other through tests of power.
Mr. Dalio notes, "As bolder challenges are made, the leading empire is faced with the difficult choice of fighting or retreating.... When all of these forces line up – indebtedness, civil war/revolution at home, war abroad, and a loss of faith in the currency – a change in the world order is typically at hand."
This chart shows in more detail the relative standing of the world's great empires across time. Note the arcs of the two current superpowers, the United States and China.
America still enjoys reserve currency status, which provides us tremendous advantages. As long as we can print money that people want to use inside and outside the United States, we can get away with spending more than we take in. But we must be wary of the federal government spending past all sensible limits, which will cause inflation and a loss in the dollar's value.
Mr. Dalio says that while a great nation's fall is not inevitable, "reversing a decline is very difficult.... The question is whether we Americans can face our challenges honestly and adapt and change to meet them.... Can [we] remain strong and united, or will [we] continue to allow division and internal struggles to lead to decline?"
It would require hard work and sacrifice for us to slow the decline. Are we up for it as a nation? Do we feel lucky? What do you think? Do you think we can face our challenges honestly? Will we allow division and internal struggles to lead to decline?
As you consider your answer, have a look at this chart from the Congressional Budget Office in its publication The Budget and Economic Outlook: 2022 to 2032. It shows our federal debt as a percentage of GDP since 1900. Look particularly at the projection for the next thirty years.
As for me, I am inclined to think Yoda is right.
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