“The Changing World Order” book discusses the most important topic of the day. China and Russia are indeed increasingly challenging the existing world order. They are operating under the unmistakable assumption that the time has come to end the West’s World Order. Needless to say, no country thinks about the World Order more than its current leader.

Many books, studies and reports on the subject exist today. What makes this book different is that it comes from a very practical person who is extremely influential in wealth management. The author is one of the leaders of this World Order’s wealth management. He publishes this provocative–if not controversial–book because he feels the need and urgency to communicate.

What follows is the author’s model of how World Orders rise and fall. It is the result of long experience and recent studies. In order to read the rationale and the examples you certainly have to read the book.

A word of caution while reading the excerpts published here under fair-use, focus on the big picture and do not dwell on every detail or time period. Furthermore, the existing world order may be different from what preceded it. It is a world order of sovereign nation-states and international and regional organizations and unions of these states. At its heart, this world order is more democratic and representative of the people than the previous orders. Major decisions with impact are wiser and transparency and information flow are at unprecedented levels. For the first time in history, even the term "world" now extends beyond planet Earth.

Nations are much like humans. They are now healthier, richer, better informed and live longer than they did in past centuries. Compare the pandemic that we are experiencing these days with past comparable pandemics. We are now better equipped to fight a pandemic. Within only one year, we had a highly efficacious vaccine. Patients don't even have to crowd hospitals. With less than half the existing world population, estimates of  the deaths that had resulted from the Spanish Flu range from 20 to 100 million.

The author’s intention is to enlighten minds and induce thought.

World Orders, the quick version:

The Rise

The rise is the prosperous period of building that comes after a new order. It is when the country is fundamentally strong because there are a) relatively low levels of indebtedness, b) relatively small wealth, values, and political gaps between people, c) people working effectively together to produce prosperity, d) good education and infrastructure, e) strong and capable leadership, and f) a peaceful world order that is guided by one or more dominant world powers, which leads to...

The Top

This period is characterized by excesses in the form of a) high levels of indebtedness, b) large wealth, values, and political gaps, c) declining education and infrastructure, d) conflicts between different classes of people within countries, and e) struggles between countries as overextended empires are challenged by emerging rivals, which leads to...

Decline

This is the painful period of fighting and restructuring that leads to great conflicts and great changes and the establishment of new internal and external orders. It sets the stage for the next new order and a new period of prosperous building.

World Orders, the more detailed version:

THE RISE

The rise phase begins when there is…

• ... strong enough and capable enough leadership to gain power and design an excellent system to increase the country's wealth and power. Looking at the historically great empires, this system typically involves...
• ... strong education, which is not just teaching knowledge and skills; it also includes teaching…
• ... strong character, civility, and work ethic development. These are typically taught in families, schools, and/or religious institutions. If done well, this provides a healthy respect for rules and laws and order within society, leads to low corruption rates, and is effective in encouraging people to work together to improve productivity. The better the country does this, the more there will be a shift from producing basic products to…
• ... innovating and inventing new technologies. For example, the Dutch were superbly inventive–at their peak they came up with a quarter of all major inventions in the world. One of these were ships that could travel around the globe to collect great riches. They also invented capitalism as we know it. Innovation is generally enhanced by being…
• ... open to the best thinking in the world to be able to learn the best ways of doing things and by…
• ... the workers, the government, and the military all working well together. As a result of all of these things, the country…
• ... becomes more productive and…
• ... more competitive in world markets, which shows up in its…
• ... share of world trade rising. You can see this happening today as the US and China are now roughly comparable in both their economic outputs and their shares of world trade. As a country trades more globally, it must protect its trade routes and foreign interests and it must be prepared to defend itself from attack so it develops great military strength. If done well, this virtuous cycle leads to…
• ... strong income growth, which can be used to finance …
• ... investments in infrastructure, education, and research and development. The country must develop systems to incentivize and empower those who have the ability to make or get wealth. In all of these past cases, the most successful empires used a capitalist approach to incentivize and develop productive entrepreneurs. Even China, which is run by the Chinese Communist Party, uses a state-capitalism approach to incentivize and enable people. To do that incentivizing and financial enabling well, the country…
• ... has to have developing capital markets–most importantly its lending, bond, and stock markets. That allows people to convert their savings into investments to fund innovation and development and share in the successes of those who are making great things happen. The inventive Dutch created the first publicly listed company (the Dutch East India Company) and the first stock market to fund it. These were integral parts of their machine that produced a lot of wealth and power.
• As a natural consequence, all of the greatest empires developed the world's leading financial center for attracting and distributing the capital of their times. Amsterdam was the world's financial center when the Dutch were preeminent, London was when the British were on top, New York is now, and China is quickly developing its own financial center in Shanghai.
• As the country expands its international dealings to become the largest trading empire, its transactions can be paid in its currency, and people around the world want to save in it, so it becomes the world's leading reserve currency, which enables the country to borrow more, and at lower rates, than other countries because others want to lend in it.

This series of cause/effect relationships leading to mutually supportive financial, political, and military powers has gone together for as long as there has been recorded history. All of the empires that became the most powerful in the world followed this path to the top.

THE TOP

In the top phase, the country sustains the successes that fueled its rise, but embedded in the rewards of the successes are the seeds of decline. Over time, obligations pile up, breaking down the self-reinforcing circumstances that fueled the rise.

• As people in the country, which is now rich and powerful, earn more, that makes them more expensive and less competitive relative to people in other countries who are willing to work for less.
• At the same time people from other countries naturally copy the methods and technologies of the leading power, which further reduces the leading country's competitiveness. For example, British shipbuilders hired Dutch designers to design better ships that were built by less expensive British workers, making them more competitive, which led the British to rise and the Dutch to decline.
• Also, as people in the leading country become richer, they tend to not work as hard. They enjoy more leisure, pursue the finer and less productive things in life, and at the extreme become decadent. Values change from generation to generation during the rise to the top from those who had to fight to achieve wealth and power to those who inherited it. The new generation is less battle-hardened, steeped in luxuries, and accustomed to the easy life, which makes them more vulnerable to challenges.
• Additionally, as people get used to doing well, they increasingly bet on the good times continuing-and borrow money to do that which leads to financial bubbles.
• Within capitalist systems, financial gains come unevenly so the wealth gap grows. Wealth gaps are self-reinforcing because rich people use their greater resources to expand their powers. They also influence the political system to their advantage and give greater privileges to their children-like better education-causing the gaps in values, politics, and opportunity to develop between the rich "haves" and the poor "have-nots." Those who are less well-off feel the system is unfair so resentments grow.
• As long as the living standards of most people are still rising, these gaps and resentments don't boil over into conflict.
• During the top, the leading country's financial picture begins to change. Having a reserve currency gives it the "exorbitant privilege" of being able to borrow more money, which gets it deeper into debt. This boosts the leading empire's spending power over the short term and weakens it over the longer run.
• Inevitably, the country begins borrowing excessively, which contributes to the country building up large debts with foreign lenders.
• While this boosts spending power over the short term, it weakens the country's financial health and weakens the currency over the longer term. In other words, when borrowing and spending are strong, the empire appears very strong, but its finances are in fact being weakened because the borrowing sustains the country's power beyond its fundamentals by financing both domestic overconsumption and international military conflicts required to maintain the empire.
• Also the costs of maintaining and defending the empire become greater than the revenue it brings in, so having an empire becomes unprofitable. For example, the British Empire became massive, bureaucratic, and lost its competitive advantages as rival powers-particularly Germany-soared, leading to an increasingly expensive arms race and world war.
• If the empire begins to run out of new lenders, those holding their currency begin to look to sell and get out rather than buy, save, lend, and get in-and the strength of the empire begins to fall.

DECLINE

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.

Internally...

• When debts become very large, and there is an economic downturn and the empire can no longer borrow the money necessary to repay its debts, this creates great domestic hardships and forces the country to choose between defaulting on its debts and printing a lot of new money. The country nearly always chooses to print a lot of new money, at first gradually and eventually massively. This devalues the currency and raises inflation.
• Typically at those times when the government has problems funding itself 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 of the right. Those of the left seek to redistrib ute the wealth while those of the right seek to maintain the wealth in the hands of the rich. This is the "anti-capitalist phase," when capitalism, capitalists, and the elites in general are blamed for the problems.
• Typically during such times taxes on the rich rise, and when the rich fear their wealth and well-being will be taken away, they move to places, assets, and currencies they feel safer in. These outflows reduce the country's tax revenue, which leads to a classic self-reinforcing, hollowing-out process.
• When the flight of wealth gets bad enough, the country outlaws it. Those seeking to get out begin to panic.
• These turbulent conditions undermine productivity, which shrinks the economic pie and causes more conflict about how to divide the shrinking resources. Populist leaders emerge from both sides and pledge to take control and bring about order. That's when democracy is most challenged because it fails to control the anarchy and because the move to a strong populist leader who will bring order to the chaos is most likely.
• As conflict within the country escalates, it leads to some form of revolution or civil war to redistribute wealth and force the big changes. This can be peaceful and maintain the existing internal order, but it's more often violent and changes the order. For example, the Roosevelt revolution to redistribute wealth was relatively peaceful, while the revolutions that changed the domestic orders in Germany, Japan, Spain, Russia, and China, which also happened in the 1930s for the same reasons, were much more violent.
• These civil wars and revolutions create what I call new internal orders…. But the important thing to note for now is that internal orders can change without leading to a change in the world order. It's only when the forces that produce internal disorder and instability align with an external challenge that the entire world order can change.

Externally...

• When there is a rising great power that is capable of challenging the existing great power and existing world order, there is a rising risk of great international conflict, especially if there is internal conflict going on within the existing great power. Typically the rising international opponent will seek to exploit this domestic weakness. This is especially risky if the rising international power has built up a comparable military.
• Defending oneself against foreign rivals requires great military spending, which has to occur even as domestic economic conditions are deteriorating and the leading great power country can least afford it.
• Since there is no viable system for peacefully adjudicating international disputes, these conflicts are typically resolved through tests of power.
• As bolder challenges are made, the leading empire is faced with the difficult choice of fighting or retreating. Fighting and losing are the worst, but retreating is bad too because it allows the opposition to progress and it shows that one is weak to those other countries that are considering what side to be on.
• Poor economic conditions cause more fighting for wealth and power, which inevitably leads to some kind of war.
• Wars are terribly costly. At the same time, they produce the necessary tectonic shifts that realign the world order to the new reality of wealth and power.
• When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle.

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.