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(dramatic music)

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- [Ray Dalio] The changing world order.

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The times ahead will[br]be radically different

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from those that we've[br]experienced in our lifetimes,

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though similar to many times before.

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How do I know that?

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Because they always have been.

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Over my roughly 50 years of[br]global macroeconomic investing,

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I've learned the hard way

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that the most important[br]events that surprised me,

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did so because they never[br]happened in my lifetime.

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These painful surprises led me to study

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the last 500 years of history[br]for similar situations

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where I saw that they had indeed[br]happened many times before

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with the ups and the downs of the Dutch,

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British,

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and US empires.

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And every time they did,

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it was a sign of the changing world order.

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This study taught me valuable lessons

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that I'm going to pass along to you here

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in a distilled form.

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You can find the comprehensive[br]version in my book,

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Principles for Dealing with[br]the Changing World Order.

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Let me begin with a story[br]that brought me to this point,

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about how I learned to[br]anticipate the future

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by studying the past.

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In 1971, when I was a young clerk

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on the floor of the New[br]York Stock Exchange,

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the United States ran out of money

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and defaulted on its debts.

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That's right. The US ran out of money.

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How?

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Well, back then gold was the money

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used in transactions between countries.

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Paper money, like the dollar,[br]was like checks in a checkbook

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in that it had no value

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other than it could be exchanged for gold,

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which was the real money.

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At the time, the United[br]States was spending

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a lot more money than it was earning

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by writing a lot more of[br]these paper money checks

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than it had gold in the[br]bank to exchange for them.

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As people turned these checks[br]into the bank for gold money,

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the amount of gold in the[br]US started to dwindle.

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It soon became obvious

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that the US couldn't keep its promises

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for all the existing paper money,

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so people holding dollars[br]rushed to exchange them

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before the gold ran out.

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Recognizing that the US

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was going to run out of real money,

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on Sunday evening, August 15th,

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President Nixon went on[br]television to tell the world

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that the US was breaking its promise

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to let people exchange[br]their dollars for gold.

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Of course, he didn't say it that way.

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He said it more diplomatically,

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without making it clear

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that the United States was defaulting.

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- [President Nixon] The[br]strength of a nation's currency

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is based on the strength[br]of that nation's economy.

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And the American economy is by far

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the strongest in the world.

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Accordingly, I have directed[br]the secretary of the treasury

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to take the action necessary

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to defend the dollar[br]against the speculators.

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I have directed Secretary[br]Connally to suspend temporarily

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the convertibility of the dollar into gold

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or other reserve assets,

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except in amounts and conditions

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determined to be in the[br]interest of monetary stability

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and in the best interest[br]of the United States.

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- [Ray] I watched in awe

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realizing that money as we[br]understood it was ending.

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What a crisis!

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I expected the stock market[br]to plunge the next day,

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so I got on the exchange[br]floor early to prepare.

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When the opening bell rang,[br]pandemonium broke out,

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but not the kind I expected.

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The market was up - way up -

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and went on to rise nearly 25%.

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That surprised me

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because I never experienced a[br]currency devaluation before.

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When I dug into history,

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I discovered that the exact[br]same thing happened in 1933

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and had the exact same effect.

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Then, paper dollars were[br]also linked to gold,

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which the US was running out of

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because it was spending[br]more paper money checks

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than it had gold to exchange for them.

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And President Roosevelt[br]announced on the radio

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that he would break the country's promise

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to exchange dollars for gold.

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- [President Roosevelt] It[br]was then that I issued the

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proclamation providing for[br]the national bank holiday.

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And this was the first step

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in the government's reconstruction

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of our financial and economic fabrics.

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The second step, last[br]Thursday, was the legislation

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promptly and patriotically[br]passed by the Congress

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confirming my proclamation[br]and broadening my powers

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so that it became possible

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in view of the requirement of time

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to extend the holiday and[br]lift the ban of that holiday

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gradually in the days to come.

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This law also gave authority

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to develop a program...

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- [Ray] In both cases,[br]breaking the link to gold

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allowed the US to continue[br]spending more than it earned

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simply by printing more paper dollars.

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Since there was an increase[br]in the number of dollars

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without an increase in[br]the country's wealth,

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the value of each dollar fell.

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As these new dollars entered the market

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without a corresponding[br]increase in productivity,

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they went to buy lots of[br]stocks, gold and commodities,

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and hence caused their prices to rise.

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As I studied more history,

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I saw that the exact same thing happened

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many, many times before.

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I saw that since the beginning of time,

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when governments spent much[br]more than they took in taxes

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and conditions got bad,

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they ran out of money[br]and they needed more.

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So, they printed more, a lot more,

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which made its value fall

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and made the prices of most everything,

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including stocks, gold[br]and commodities rise.

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That's when I first[br]learned the principle that

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when central banks print a lot[br]of money to relieve a crisis,

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buy stocks, gold and commodities

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because their value will rise

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and the value of paper money will fall.

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This printing of money is[br]also what happened in 2008

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to relieve the[br]mortgage-driven debt crisis,

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and in 2020 to relieve the[br]pandemic-driven economic crisis.

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And it almost certainly[br]will happen in the future.

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So, I suggest that you keep[br]this principle in mind.

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These experiences gave me[br]another principle, which is,

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to understand what is coming at you,

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you need to understand[br]what happened before you.

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That principle led me to study

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how the roaring twenties bubble

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turned into the 1930s depression,

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which gave me the lessons

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that allowed me to anticipate

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and profit from the 2007 bubble

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turning into the 2008 bust.

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All these experiences led me to develop

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an almost instinctual urge

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to look to the past for similar situations

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to learn how to handle the future well.

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Changing orders.

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(man whistles)

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(machine beeping)

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Over the last few years,

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three big things that hadn't[br]happened in my lifetime

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prompted me to do this study.

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First, countries didn't have enough money

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to pay their debts,

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even after lowering[br]interest rates to zero.

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So their central banks[br]began printing lots of money

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to do so.

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Second, big internal conflicts emerged

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due to growing gaps in wealth and values.

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This showed up in political populism

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and polarization between the left,

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who want to redistribute wealth,

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and the right, who want to[br]defend those holding the wealth.

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And third, increasing external conflict

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between a rising great power[br]and the leading great power,

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as is now happening with[br]China and the United States.

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So, I looked back.

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I saw that all these had happened[br]together before many times

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and nearly always led to changing[br]domestic and world orders.

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The last time this sequence[br]happened was from 1930 to 1945.

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What exactly is an order? You might ask.

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It's a governing system for[br]people dealing with each other.

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There are internal orders for[br]governing within countries,

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typically laid out in constitutions.

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And there is a world order for[br]governing between countries,

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typically laid out in treaties.

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Internal orders change at[br]different times than world orders,

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though whether within[br]or between countries,

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these orders typically change after wars.

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Civil wars within countries,

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international wars between countries.

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They happen when revolutionary new forces

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defeat weak old orders.

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For example, the US internal order

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was laid out in the constitution in 1789

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after the American Revolution,

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and it is still operating today,

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even after the American Civil War.

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Russia got rid of its old[br]order and established a new one

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with the Russian revolution in 1917,

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which ended in 1991 with a[br]relatively bloodless revolution.

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China began its current[br]internal order in 1949

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when the Chinese Communist[br]Party won the civil war.

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You get the idea.

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The current world order

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commonly called the American world order,

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formed after the allied[br]victory in World War II

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when the US emerged as[br]the dominant world power.

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It was set out in agreements and treaties

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for how global governance[br]and monetary systems work.

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In 1944, the new world monetary system

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was laid out in the[br]Bretton Woods Agreement

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and established the dollar

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as the world's leading reserve currency.

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A reserve currency is a currency

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that is commonly accepted[br]around the world,

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and having one is a key factor

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in a country becoming the[br]richest and most powerful empire.

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With a new dominant power and[br]monetary system established,

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a new world order begins.

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These changes take place in a[br]timeless and universal cycle

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that I call the big cycle.

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I'll start with a quick overview,

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then give you a more complete version

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and then direct you to[br]my book if you want more.

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As I studied the 10 most powerful empires

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over the last 500 years

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and the last three reserve currencies,

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it took me through the rise and decline

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of the Dutch empire and the guilder,

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the British empire and the pound,

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the rise and early decline

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in the United States[br]empire and the dollar,

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and the decline and rise[br]of the Chinese empire

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and its currencies,

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as well as the rise and[br]decline of the Spanish, German,

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French, Indian, Japanese,[br]Russian, and Ottoman empires,

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along with their significant conflicts

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as measured in this chart.

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To understand China's patterns better,

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I also studied the rise and fall

0:12:39.540,0:12:43.513
of Chinese dynasties and their[br]monies back to the year 600.

0:12:44.600,0:12:47.210
Because looking at all[br]these measures at once

0:12:47.210,0:12:48.890
can be confusing,

0:12:48.890,0:12:51.830
I'll focus on the four[br]most important ones,

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the Dutch, British, US and Chinese.

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You'll quickly notice the pattern.

0:12:59.590,0:13:02.790
Now let's simplify the form a bit.

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As you can see, they transpired[br]in overlapping cycles

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that lasted about 250 years

0:13:09.430,0:13:13.170
with 10 to 20 year transition[br]periods between them.

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Typically, these two transitions

0:13:14.640,0:13:16.920
have been periods of great conflict

0:13:16.920,0:13:21.230
because leading powers don't[br]decline without a fight.

0:13:21.230,0:13:24.533
So, how am I measuring an empire's power?

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In this study, I used eight metrics.

0:13:28.390,0:13:30.800
Each country's measure of total power

0:13:30.800,0:13:33.810
is derived by averaging them together.

0:13:33.810,0:13:36.380
They are education,

0:13:36.380,0:13:39.580
inventiveness and technology development,

0:13:39.580,0:13:43.820
competitiveness in global[br]markets, economic output,

0:13:43.820,0:13:47.700
share of world trade, military strength,

0:13:47.700,0:13:51.530
the power of their financial[br]center for capital markets

0:13:51.530,0:13:55.610
and the strength of their[br]currency as a reserve currency.

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Because these powers are measurable,

0:13:57.990,0:14:02.820
we can see how strong each[br]country is now, was in the past,

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and whether they're rising or declining.

0:14:06.560,0:14:10.330
By examining the sequences[br]from many countries,

0:14:10.330,0:14:13.403
we can see how a typical cycle transpires.

0:14:15.200,0:14:17.700
And because the wiggles can be confusing,

0:14:17.700,0:14:19.470
we can simplify it a bit

0:14:19.470,0:14:23.280
to focus on the pattern of[br]cause-effect relationships

0:14:23.280,0:14:26.743
that drive the rise and[br]decline of a typical empire.

0:14:27.800,0:14:31.640
As you can see, better[br]education typically leads

0:14:31.640,0:14:35.350
to increased innovation[br]and technology development,

0:14:35.350,0:14:39.060
and with a lag, the[br]establishment of the currency

0:14:39.060,0:14:41.410
as a reserve currency.

0:14:41.410,0:14:43.840
You can also see that these forces

0:14:43.840,0:14:46.170
then declined in a similar order,

0:14:46.170,0:14:48.253
reinforcing each other's decline.

0:14:49.150,0:14:51.930
Let's now look at the[br]typical sequence of events

0:14:51.930,0:14:53.640
going on inside a country

0:14:53.640,0:14:56.990
that produces these rises and declines.

0:14:56.990,0:15:00.850
In a nutshell, the big[br]cycle typically begins

0:15:00.850,0:15:03.710
after a major conflict, often a war,

0:15:03.710,0:15:08.690
establishes the new leading[br]power and the new world order.

0:15:08.690,0:15:11.520
Because no one wants to[br]challenge this power,

0:15:11.520,0:15:15.400
a period of peace and[br]prosperity typically follows.

0:15:15.400,0:15:18.290
As people get used to[br]this peace and prosperity,

0:15:18.290,0:15:21.490
they increasingly bet on it continuing.

0:15:21.490,0:15:23.570
They borrow money to do that,

0:15:23.570,0:15:26.710
which eventually leads[br]to a financial bubble.

0:15:26.710,0:15:28.930
The empire's share of trade grows.

0:15:28.930,0:15:32.760
And when most transactions[br]are conducted in its currency,

0:15:32.760,0:15:35.350
it becomes a reserve currency,

0:15:35.350,0:15:37.163
which leads to even more borrowing.

0:15:38.170,0:15:41.200
At the same time, this[br]increased prosperity

0:15:41.200,0:15:43.760
distributes wealth unevenly.

0:15:43.760,0:15:45.930
So the wealth gap typically grows

0:15:45.930,0:15:49.343
between the rich "haves"[br]and the poor "have-nots".

0:15:50.360,0:15:52.980
Eventually, the financial bubble bursts,

0:15:52.980,0:15:55.223
which leads to the printing of money,

0:15:56.680,0:15:59.040
an increased internal conflict

0:15:59.040,0:16:00.640
between the rich and the poor,

0:16:00.640,0:16:03.270
which leads to some form of revolution

0:16:03.270,0:16:05.230
to redistribute wealth.

0:16:05.230,0:16:09.080
This can happen peacefully[br]or as a civil war.

0:16:09.080,0:16:13.080
While the empire struggles[br]with this internal conflict,

0:16:13.080,0:16:15.720
its power diminishes relative to

0:16:15.720,0:16:18.870
external rival powers on the rise.

0:16:18.870,0:16:20.670
When a new rising power

0:16:20.670,0:16:23.760
gets strong enough to compete[br]with the dominant power

0:16:23.760,0:16:26.280
that is having domestic breakdowns,

0:16:26.280,0:16:31.280
external conflicts, most[br]typically wars, take place.

0:16:31.580,0:16:34.400
Out of these internal and external wars

0:16:34.400,0:16:37.870
come new winners and losers.

0:16:37.870,0:16:42.570
Then the winners get together[br]to create the new world order.

0:16:42.570,0:16:44.563
And the cycle begins again.

0:16:45.540,0:16:46.760
As I looked back,

0:16:46.760,0:16:49.700
I saw that these cause[br]and effect relationships

0:16:49.700,0:16:52.600
drove the cycles of rises and declines

0:16:52.600,0:16:55.050
all the way back to the Roman empire.

0:16:55.050,0:16:58.650
I saw how the stories of[br]each one of these cycles

0:16:58.650,0:17:03.240
blended together with others[br]before, during, and after

0:17:03.240,0:17:08.060
in the same way as each individual[br]story blends with others

0:17:08.060,0:17:11.540
to make the epic 500 year story

0:17:11.540,0:17:14.260
that is our collective history.

0:17:14.260,0:17:16.273
And like human life cycles,

0:17:17.210,0:17:20.960
no two are exactly the[br]same, but most are similar.

0:17:20.960,0:17:24.800
They're driven by logical[br]cause and effect relationships

0:17:24.800,0:17:27.839
that progress through stages from birth

0:17:27.839,0:17:29.849
to strength and maturity

0:17:29.850,0:17:33.690
to weakness and inevitably decline.

0:17:33.690,0:17:36.520
However, that's like saying[br]a person's life cycle

0:17:36.520,0:17:38.740
takes 80 years on average

0:17:38.740,0:17:42.050
without recognizing that[br]many are much shorter

0:17:42.050,0:17:44.080
and many are longer.

0:17:44.080,0:17:47.840
While age can be a good[br]indicator of future longevity,

0:17:47.840,0:17:51.640
a better way is to look[br]at health indicators.

0:17:51.640,0:17:56.150
One can do that with empires[br]and their vital signs too.

0:17:56.150,0:17:59.950
I found that by watching the[br]indicators of power change,

0:17:59.950,0:18:03.070
I was able to see what[br]stage a country was in,

0:18:03.070,0:18:07.430
which helped me to anticipate[br]what was likely to come next.

0:18:07.430,0:18:11.420
Now, I'll take you through[br]the big cycle in more detail.

0:18:11.420,0:18:12.800
Give me 20 minutes

0:18:12.800,0:18:16.340
and I'll give you the[br]last 500 years of history

0:18:16.340,0:18:18.840
and show you the similar patterns across

0:18:18.840,0:18:23.773
the Dutch, British, US[br]and Chinese empires.

0:18:25.310,0:18:27.883
500 years of big cycles.

0:18:30.884,0:18:33.634
(wind whooshing)

0:18:35.370,0:18:37.770
I'm going to describe the typical cycle

0:18:37.770,0:18:40.213
by dividing it into three phases.

0:18:41.060,0:18:44.373
The rise, the top, and the decline.

0:18:45.610,0:18:46.673
The rise.

0:18:47.850,0:18:52.850
Successful new orders that rise,[br]both internal and external,

0:18:52.850,0:18:57.040
are typically started by[br]powerful revolutionary leaders

0:18:57.040,0:18:58.910
doing four things.

0:18:58.910,0:19:00.690
First, they win power

0:19:00.690,0:19:03.820
by gaining more support[br]than the opposition.

0:19:03.820,0:19:06.140
Second, they consolidate power

0:19:06.140,0:19:10.120
by converting, weakening, or[br]eliminating the opposition

0:19:10.120,0:19:12.170
so they don't stand in their way.

0:19:12.170,0:19:15.760
Third, they establish[br]systems and institutions

0:19:15.760,0:19:17.500
that make the country work well.

0:19:17.500,0:19:20.700
And fourth, they pick[br]their successors well,

0:19:20.700,0:19:23.210
or create systems that do that,

0:19:23.210,0:19:27.310
because a great empire[br]requires many great leaders

0:19:27.310,0:19:29.610
over several generations.

0:19:29.610,0:19:32.720
At this stage soon[br]after winning the fight,

0:19:32.720,0:19:36.490
there was typically a period[br]of peace and growing prosperity

0:19:36.490,0:19:39.250
because the leadership is clearly dominant

0:19:39.250,0:19:42.880
and has broad support so[br]no one wants to fight it.

0:19:42.880,0:19:45.740
During this phase,[br]leaders within the country

0:19:45.740,0:19:47.950
have to design an excellent system

0:19:47.950,0:19:50.570
to raise the country's wealth and power.

0:19:50.570,0:19:52.440
First and foremost, to be great

0:19:52.440,0:19:55.550
they must have strong education,

0:19:55.550,0:19:58.400
which is not just teaching[br]knowledge and skills,

0:19:58.400,0:20:03.400
but also strong character,[br]civility and work ethic.

0:20:03.850,0:20:05.980
These are typically taught in the family,

0:20:05.980,0:20:08.310
schools and religious institutions.

0:20:08.310,0:20:11.530
That provides a healthy[br]respect for rules and laws,

0:20:11.530,0:20:14.380
order within society, low corruption,

0:20:14.380,0:20:18.130
and enables them to unite[br]behind a common purpose

0:20:18.130,0:20:19.313
and work well together.

0:20:20.490,0:20:21.710
As they do this,

0:20:21.710,0:20:25.270
they increasingly shift from[br]producing basic products

0:20:25.270,0:20:29.473
to innovating and[br]inventing new technologies.

0:20:31.700,0:20:36.220
For example, the Dutch rose[br]to defeat the Habsburg empire

0:20:36.220,0:20:38.590
and become superbly educated.

0:20:38.590,0:20:42.340
They became so inventive that[br]they came up with a quarter

0:20:42.340,0:20:44.680
of all major inventions in the world.

0:20:44.680,0:20:48.280
The most important of which[br]was the invention of ships

0:20:48.280,0:20:51.850
that could travel around the[br]world to collect great riches

0:20:51.850,0:20:55.480
and the invention of[br]capitalism as we know it today

0:20:55.480,0:20:57.580
to finance those voyages.

0:20:57.580,0:21:01.010
They, like all leading empires,[br]enhanced their thinking

0:21:01.010,0:21:04.460
by being open to the best[br]thinking in the world.

0:21:04.460,0:21:05.480
As a result,

0:21:05.480,0:21:08.480
the people in the country[br]become more productive

0:21:08.480,0:21:11.610
and more competitive in world markets,

0:21:11.610,0:21:15.830
which shows up in their[br]growing economic output

0:21:15.830,0:21:19.370
and rising share of world trade.

0:21:19.370,0:21:21.100
You can see this happening now

0:21:21.100,0:21:24.200
as the US and China are roughly comparable

0:21:24.200,0:21:26.790
in both their economic outputs

0:21:26.790,0:21:28.623
and their shares of world trade.

0:21:30.470,0:21:32.400
As countries trade more globally,

0:21:32.400,0:21:34.450
they must protect their trade routes

0:21:34.450,0:21:36.640
and their foreign interests from attack.

0:21:36.640,0:21:40.410
So they develop great military strength.

0:21:40.410,0:21:42.940
If done well, this virtuous cycle

0:21:42.940,0:21:45.990
leads to strong income growth,

0:21:45.990,0:21:48.710
which can be used to finance investments

0:21:48.710,0:21:53.440
in education, infrastructure,[br]and research and development.

0:21:53.440,0:21:57.900
They must also develop systems[br]to incentivize and empower

0:21:57.900,0:22:02.410
those that have the ability[br]to make or take wealth.

0:22:02.410,0:22:06.310
In all of these cases, the[br]most successful empires

0:22:06.310,0:22:08.030
used a capitalist approach

0:22:10.670,0:22:13.830
to develop productive entrepreneurs.

0:22:13.830,0:22:17.490
Even China, which is run by[br]the Chinese Communist Party,

0:22:17.490,0:22:21.104
used a form of this capitalist approach.

0:22:21.104,0:22:24.521
(cash registers ringing)

0:22:27.170,0:22:30.037
Deng Xiaoping, when[br]asked about this, said,

0:22:30.037,0:22:33.087
"It doesn't matter if it's[br]a white cat or a black cat,

0:22:33.087,0:22:35.600
"as long as it catches mice."

0:22:35.600,0:22:38.387
And "it's glorious to be rich."

0:22:39.470,0:22:43.560
To do this well, they must[br]develop their capital markets.

0:22:43.560,0:22:48.400
Most importantly, their[br]lending, bond and stock markets.

0:22:48.400,0:22:49.530
That allows people

0:22:49.530,0:22:53.050
to convert their savings into investments,

0:22:53.050,0:22:55.960
to fund invention and development

0:22:57.800,0:22:59.860
and share in the successes

0:22:59.860,0:23:02.163
of those who make great things happen.

0:23:03.230,0:23:06.690
The Dutch created the first[br]publicly listed company,

0:23:06.690,0:23:08.860
the Dutch East India Company,

0:23:08.860,0:23:11.120
and the first stock market to fund it,

0:23:11.120,0:23:13.840
which were integral parts of the system

0:23:13.840,0:23:17.340
that produced massive wealth and power.

0:23:17.340,0:23:20.960
As a natural consequence, the[br]greatest empires developed

0:23:20.960,0:23:23.230
the world's leading financial centers

0:23:23.230,0:23:26.383
for attracting and distributing[br]the world's capital.

0:23:27.470,0:23:30.170
Amsterdam was the world's financial center

0:23:30.170,0:23:31.863
when the Dutch were preeminent,

0:23:33.210,0:23:35.860
London when the British were on top,

0:23:35.860,0:23:37.610
New York is now,

0:23:37.610,0:23:41.690
and China is quickly developing[br]its financial centers.

0:23:41.690,0:23:45.690
Most importantly, the[br]capitalists, the governments

0:23:45.690,0:23:48.660
and the military must work together.

0:23:48.660,0:23:51.280
Not only did the Dutch work well together,

0:23:51.280,0:23:53.320
they were one in the same.

0:23:53.320,0:23:55.050
The Dutch East India Company

0:23:55.050,0:23:58.180
was granted a trade[br]monopoly from the government

0:23:58.180,0:24:01.560
and had its own officially[br]sanctioned military

0:24:01.560,0:24:06.313
to go out into the global[br]markets to make and take wealth.

0:24:07.210,0:24:10.890
The British followed with the[br]British East India Company

0:24:10.890,0:24:12.920
and had a similar coordination

0:24:12.920,0:24:17.230
of their government, business[br]and military operations.

0:24:17.230,0:24:21.600
The US Military Industrial[br]Complex followed suit,

0:24:21.600,0:24:23.913
as does the Chinese system today.

0:24:26.960,0:24:28.070
As the country becomes

0:24:28.070,0:24:30.830
the largest international trading empire,

0:24:30.830,0:24:34.630
its transactions can be[br]paid with its currency,

0:24:34.630,0:24:38.220
making it the preferred[br]global medium of exchange,

0:24:38.220,0:24:40.210
and because their currency

0:24:40.210,0:24:43.660
is so widely accepted and frequently used,

0:24:43.660,0:24:46.263
people around the world[br]want to save in it,

0:24:47.240,0:24:50.820
making it the preferred[br]store hold of wealth.

0:24:50.820,0:24:55.230
And thus the world's[br]leading reserve currency.

0:24:55.230,0:24:58.180
The guilder was the world's[br]main reserve currency

0:24:58.180,0:25:00.270
when the Dutch led world trade.

0:25:00.270,0:25:02.393
The pound was when the British led.

0:25:03.310,0:25:05.873
And the dollar has been since the US led.

0:25:07.080,0:25:10.490
Naturally, China's currency[br]is increasingly being used

0:25:10.490,0:25:12.760
as a reserve currency.

0:25:12.760,0:25:15.480
Having a reserve currency[br]enables the empire

0:25:15.480,0:25:17.977
to borrow more than other countries.

0:25:19.630,0:25:21.663
That advantage is huge.

0:25:22.810,0:25:23.850
Think about it.

0:25:23.850,0:25:27.040
People all over the[br]world are eager to save

0:25:27.040,0:25:31.000
and hence lend back their[br]currency to the empire.

0:25:31.000,0:25:34.570
Countries without a reserve[br]currency don't have that.

0:25:34.570,0:25:37.680
And when the empire runs[br]out of its own money,

0:25:37.680,0:25:40.313
remember the United States in 1971,

0:25:41.410,0:25:43.680
they can always print more.

0:25:43.680,0:25:45.620
The exorbitant privilege

0:25:45.620,0:25:48.950
afforded by the empire's reserve currency

0:25:48.950,0:25:51.400
leads borrowing to increase

0:25:51.400,0:25:54.670
and the beginning of a financial bubble.

0:25:54.670,0:25:57.850
This series of cause and[br]effect relationships,

0:25:57.850,0:26:00.200
leading to mutually supportive

0:26:00.200,0:26:03.250
financial, political and military powers,

0:26:03.250,0:26:06.800
bolstered by the borrowing[br]power of a reserve currency,

0:26:06.800,0:26:10.790
have gone together since[br]history began to be recorded.

0:26:10.790,0:26:14.480
All the empires that became[br]the most powerful in the world

0:26:14.480,0:26:17.173
followed this path to the top.

0:26:27.630,0:26:29.290
While in the top phase,

0:26:29.290,0:26:31.740
most of these strengths are sustained,

0:26:31.740,0:26:34.620
embedded within the[br]fruits of their success

0:26:34.620,0:26:37.050
are the seeds of their decline.

0:26:37.050,0:26:38.140
As a rule,

0:26:38.140,0:26:41.423
as people in these rich and[br]powerful countries earn more,

0:26:42.490,0:26:45.600
that makes them more[br]expensive and less competitive

0:26:45.600,0:26:47.547
relative to people in other countries

0:26:47.547,0:26:49.653
who are willing to work for less.

0:26:50.580,0:26:54.280
At the same time, people in[br]other countries naturally copy

0:26:54.280,0:26:57.360
the methods and technologies[br]of the leading power,

0:26:57.360,0:27:00.993
which further reduces the[br]leading power's competitiveness.

0:27:01.880,0:27:04.480
For example, British ship builders

0:27:04.480,0:27:08.320
had less expensive workers[br]than Dutch ship builders.

0:27:08.320,0:27:12.860
So, they hired Dutch designers[br]to design better ships

0:27:12.860,0:27:16.260
that were built by less[br]expensive British workers,

0:27:16.260,0:27:18.210
making them more competitive,

0:27:18.210,0:27:22.490
which led the British to rise[br]and the Dutch to decline.

0:27:22.490,0:27:24.700
Also, as people become richer,

0:27:24.700,0:27:27.220
they tend not to work as hard.

0:27:27.220,0:27:28.910
They enjoy more leisure,

0:27:28.910,0:27:32.020
pursue the finer and less[br]productive things in life,

0:27:32.020,0:27:34.423
and at the extreme, become decadent.

0:27:35.550,0:27:38.600
Values change from[br]generation to generation

0:27:38.600,0:27:40.280
during the rise to the top

0:27:40.280,0:27:43.360
from those who had to fight[br]to achieve wealth and power

0:27:43.360,0:27:45.387
to those who inherited it.

0:27:45.387,0:27:46.660
(boy groans)[br](boy blows raspberry)

0:27:46.660,0:27:49.660
They're less battle[br]heartened, steeped in luxuries

0:27:49.660,0:27:51.900
and accustomed to the easy life,

0:27:51.900,0:27:54.970
which makes them more[br]vulnerable to challenges.

0:27:54.970,0:27:57.580
The golden era of the Dutch empire

0:28:00.621,0:28:02.710
(glasses clink)

0:28:02.710,0:28:05.550
and the Victorian era[br]of the British empire

0:28:08.083,0:28:11.230
(glasses clink)

0:28:11.230,0:28:14.453
were such high prosperity[br]periods like this.

0:28:15.390,0:28:17.640
As people get used to doing well,

0:28:17.640,0:28:21.460
they increasingly bet on[br]the good times continuing

0:28:21.460,0:28:23.320
and borrow money to do that,

0:28:23.320,0:28:25.933
which grows into the financial bubbles.

0:28:27.180,0:28:30.410
Naturally, the financial[br]gains come unevenly.

0:28:30.410,0:28:32.123
So, the wealth gap grows.

0:28:33.000,0:28:35.270
Wealth gaps are self-reinforcing

0:28:35.270,0:28:38.400
because rich people use[br]their greater resources

0:28:38.400,0:28:40.680
to reinforce their powers.

0:28:40.680,0:28:44.460
For example, they give greater[br]privileges to their children,

0:28:44.460,0:28:46.010
like better education,

0:28:46.010,0:28:49.233
and they influence the political[br]system to their advantage.

0:28:50.220,0:28:53.780
This causes the gaps in values, politics,

0:28:53.780,0:28:56.240
and opportunities to grow between

0:28:56.240,0:28:59.223
the rich "haves" and the poor "have-nots".

0:29:00.910,0:29:04.620
Those who are less well-off[br]feel the system is unfair,

0:29:04.620,0:29:06.800
so resentments grow.

0:29:06.800,0:29:08.700
But as long as the living standards

0:29:08.700,0:29:10.980
of most people are still rising,

0:29:10.980,0:29:14.960
these gaps in resentments[br]don't boil over into conflict.

0:29:14.960,0:29:17.020
Having the world's reserve currency

0:29:17.020,0:29:20.290
inevitably leads to borrowing excessively

0:29:20.290,0:29:23.110
and contributes to the country building up

0:29:23.110,0:29:26.030
large debts with foreign lenders.

0:29:26.030,0:29:29.870
While this boosts spending[br]power over the short term,

0:29:29.870,0:29:32.750
it weakens the country's financial health

0:29:32.750,0:29:36.340
and weakens the currency[br]over the long-term.

0:29:36.340,0:29:39.860
In other words, when borrowing[br]and spending are strong,

0:29:39.860,0:29:42.670
the empire appears very strong,

0:29:42.670,0:29:45.453
but its finances are[br]in fact being weakened.

0:29:46.870,0:29:49.160
The borrowing sustains the country's power

0:29:49.160,0:29:50.800
beyond its fundamentals

0:29:50.800,0:29:53.940
by financing both[br]domestic over consumption

0:29:54.930,0:29:57.420
and international military conflicts

0:29:57.420,0:30:00.420
required to maintain the empire.

0:30:00.420,0:30:04.340
Inevitably, the cost of maintaining[br]and defending the empire

0:30:04.340,0:30:06.780
becomes greater than the[br]revenue it brings in.

0:30:06.780,0:30:10.270
So having an empire becomes unprofitable.

0:30:10.270,0:30:14.200
For example, the Dutch empire[br]overextended around the world

0:30:14.200,0:30:17.780
and fought war after[br]increasingly expensive war

0:30:17.780,0:30:20.370
with the British and other European powers

0:30:20.370,0:30:23.100
to protect its territory and trade routes.

0:30:23.100,0:30:26.890
The British empire similarly[br]became massive, bureaucratic,

0:30:26.890,0:30:31.020
and lost its competitive[br]advantages as rival powers,

0:30:31.020,0:30:33.580
particularly Germany, soared,

0:30:33.580,0:30:37.000
leading to an increasingly[br]expensive arms race

0:30:37.000,0:30:38.533
and world war.

0:30:39.680,0:30:42.630
The US has spent about[br]eight trillion dollars

0:30:42.630,0:30:46.513
on foreign wars and their[br]consequences since September 11th,

0:30:47.570,0:30:51.100
and trillions more for[br]other military operations

0:30:51.100,0:30:55.540
and for supporting military[br]bases in 70 countries,

0:30:55.540,0:30:57.590
and it still isn't spending enough

0:30:57.590,0:31:00.500
to support its military[br]competition with China

0:31:00.500,0:31:02.063
in the area around China.

0:31:03.400,0:31:05.570
In this cycle, the richer countries

0:31:05.570,0:31:07.330
eventually get deeper into debt

0:31:07.330,0:31:10.300
by borrowing from poor[br]countries that save more.

0:31:10.300,0:31:13.880
It's one of the early signs[br]of a wealth and power shift.

0:31:13.880,0:31:16.870
This started in the[br]United States in the 1980s

0:31:16.870,0:31:21.190
when it had a per capita income[br]40 times that of China's,

0:31:21.190,0:31:23.420
and started borrowing from Chinese

0:31:23.420,0:31:25.130
who wanted to save in dollars

0:31:25.130,0:31:29.290
because the dollar was the[br]world's reserve currency.

0:31:29.290,0:31:31.770
Similarly, the British[br]borrowed a lot of money

0:31:31.770,0:31:34.520
from its much poorer colonies

0:31:34.520,0:31:36.763
and the Dutch did the same at their top.

0:31:37.800,0:31:40.730
If the empire begins to[br]run out of new lenders,

0:31:40.730,0:31:42.160
those holding their currency

0:31:42.160,0:31:45.530
begin to look to sell and get out

0:31:45.530,0:31:50.530
rather than to buy,[br]save, lend, and get in,

0:31:55.800,0:31:58.963
and the strength of the[br]empire begins to decline.

0:32:00.210,0:32:01.203
The decline.

0:32:02.160,0:32:05.560
The decline comes from[br]internal economic weakness

0:32:05.560,0:32:07.620
together with internal fighting

0:32:07.620,0:32:11.410
or costly external fighting or both.

0:32:11.410,0:32:14.400
Typically, the decline comes gradually

0:32:14.400,0:32:15.653
and then very suddenly.

0:32:16.860,0:32:19.330
When debts become very large,

0:32:19.330,0:32:22.110
and there is an economic downturn,

0:32:22.110,0:32:24.760
and the empire can no[br]longer borrow the money

0:32:24.760,0:32:27.300
necessary to repay its debts,

0:32:27.300,0:32:29.093
the financial bubble bursts.

0:32:30.130,0:32:32.700
This creates great domestic hardships

0:32:32.700,0:32:34.990
and forces the country to choose between

0:32:34.990,0:32:39.150
defaulting on its debts or[br]printing a lot of new money.

0:32:39.150,0:32:41.823
It always chooses to[br]print a lot of new money.

0:32:42.700,0:32:46.273
At first gradually, and[br]eventually massively.

0:32:48.560,0:32:52.410
That devalues the currency[br]and raises inflation.

0:32:52.410,0:32:55.080
For the Dutch, this was[br]the financial crisis

0:32:55.080,0:32:57.510
brought about by financial excesses

0:32:57.510,0:33:00.670
and paying for the Fourth Anglo-Dutch War.

0:33:00.670,0:33:02.240
Similarly, for the British,

0:33:02.240,0:33:04.550
it was paying for its financial excesses

0:33:04.550,0:33:07.093
and its debts from the two world wars.

0:33:07.930,0:33:10.730
And for the US, it's been three cycles

0:33:10.730,0:33:14.460
of debt, finance, booms,[br]and busts since the nineties

0:33:14.460,0:33:17.240
with the central bank[br]stepping in each time

0:33:17.240,0:33:18.433
with stronger measures.

0:33:21.900,0:33:24.630
When the government has[br]problems funding itself,

0:33:24.630,0:33:27.710
when there are bad economic conditions

0:33:27.710,0:33:31.130
and living standards for[br]most people are declining,

0:33:31.130,0:33:36.130
and there are large wealth,[br]values, and political gaps,

0:33:36.630,0:33:39.880
internal conflict between[br]the rich and the poor,

0:33:39.880,0:33:43.750
as well as different ethnic,[br]religious, and racial groups

0:33:43.750,0:33:45.350
greatly increases.

0:33:45.350,0:33:47.960
This leads to political extremism

0:33:47.960,0:33:52.020
that shows up as populism[br]of the left or the right.

0:33:52.020,0:33:55.060
Those of the left seek to[br]redistribute the wealth

0:33:55.060,0:33:57.680
while those of the right[br]seek to maintain the wealth

0:33:57.680,0:33:59.480
in the hands of the rich.

0:33:59.480,0:34:03.470
Typically during such times,[br]taxes on the rich rise

0:34:03.470,0:34:06.090
and when the rich fear[br]their wealth and wellbeing

0:34:06.090,0:34:07.800
will be taken away,

0:34:07.800,0:34:11.010
they move to places,[br]assets, and currencies

0:34:11.010,0:34:12.610
they feel safer in.

0:34:12.610,0:34:15.870
These outflows reduce[br]the empire's tax revenue,

0:34:15.870,0:34:19.000
which leads to a classic,[br]self-reinforcing,

0:34:19.000,0:34:20.453
hollowing out process.

0:34:21.949,0:34:24.649
When the flight of wealth gets bad enough,

0:34:24.650,0:34:26.460
governments outlaw it.

0:34:26.460,0:34:29.710
Those seeking to get out begin to panic.

0:34:29.710,0:34:33.260
These turbulent conditions[br]undermine productivity,

0:34:33.260,0:34:36.600
which shrinks the economic[br]pie and causes more conflict

0:34:36.600,0:34:40.070
about how to divide the[br]shrinking resources.

0:34:40.070,0:34:42.330
Populist leaders emerge from both sides

0:34:42.330,0:34:45.620
and pledge to take control[br]and bring about order.

0:34:45.620,0:34:48.100
That's when democracy is most challenged,

0:34:48.100,0:34:50.679
because it fails to control the anarchy,

0:34:50.679,0:34:53.769
and it is when the move to[br]a strong populist leader

0:34:53.770,0:34:57.250
who will bring order to[br]the chaos is most likely.

0:34:57.250,0:34:59.700
As conflict within the country escalates,

0:34:59.700,0:35:03.610
it leads to some form of[br]revolution or civil war

0:35:03.610,0:35:07.253
to redistribute wealth and[br]force the necessary big changes.

0:35:08.830,0:35:12.253
This can be peaceful and[br]maintain the existing order,

0:35:13.560,0:35:17.127
but it's more often violent[br]and changes the order.

0:35:18.440,0:35:21.910
For example, the Roosevelt[br]revolution to redistribute wealth

0:35:21.910,0:35:23.540
was relatively peaceful

0:35:23.540,0:35:26.810
and maintained the[br]existing internal order,

0:35:26.810,0:35:30.930
while the French revolution,[br]the Russian revolution,

0:35:30.930,0:35:33.990
and the Chinese revolution[br]were much more violent

0:35:34.950,0:35:37.093
and led to new internal orders.

0:35:37.940,0:35:40.890
This internal conflict[br]makes the empire weak

0:35:40.890,0:35:44.220
and vulnerable to rising external rivals

0:35:44.220,0:35:46.690
who, seeing this domestic weakness,

0:35:46.690,0:35:48.713
are more inclined to mount a challenge.

0:35:49.800,0:35:53.760
This raises the risk of[br]great international conflict,

0:35:53.760,0:35:57.890
especially if the rival has[br]built up a comparable military.

0:35:57.890,0:36:00.890
Defending one's self and[br]one's empire against rivals

0:36:00.890,0:36:05.050
requires great military[br]spending, which has to occur

0:36:05.050,0:36:08.580
as domestic economic[br]conditions are deteriorating

0:36:08.580,0:36:11.230
and the empire can least afford it.

0:36:11.230,0:36:13.410
Since there is no viable system

0:36:13.410,0:36:16.780
for peacefully adjudicating[br]international disputes,

0:36:16.780,0:36:18.990
these conflicts are typically resolved

0:36:18.990,0:36:20.283
through tests of power.

0:36:22.510,0:36:24.540
As bolder challenges are made,

0:36:24.540,0:36:27.550
the leading empire is faced[br]with the difficult choice

0:36:27.550,0:36:30.230
of fighting or retreating.

0:36:30.230,0:36:32.930
Fighting and losing is the worst outcome,

0:36:32.930,0:36:37.230
but retreating is bad too as[br]it cedes progress to the rival

0:36:37.230,0:36:39.250
and signals that the empire is weak

0:36:39.250,0:36:43.180
to those countries that are[br]considering which side to be on.

0:36:43.180,0:36:44.970
Poor economic conditions

0:36:44.970,0:36:47.800
cause more fighting for wealth and power,

0:36:47.800,0:36:50.453
which inevitably leads[br]to some kind of war.

0:36:51.300,0:36:54.150
Wars are terribly costly.

0:36:54.150,0:36:57.330
At the same time, they[br]produce the tectonic shifts

0:36:57.330,0:36:59.840
that realign the new orders

0:36:59.840,0:37:03.800
to the new realities of[br]wealth and power in the world.

0:37:03.800,0:37:06.300
When those holding the[br]reserve currency and debt

0:37:06.300,0:37:09.680
of the declining empire[br]lose faith and sell them,

0:37:09.680,0:37:12.740
that marks the end of its big cycle.

0:37:12.740,0:37:17.530
Of the roughly 750 currencies[br]that existed since 1700,

0:37:17.530,0:37:20.310
less than 20% now exist,

0:37:20.310,0:37:23.160
and all of them have been devalued.

0:37:23.160,0:37:25.680
For the Dutch, this[br]happened after their defeat

0:37:25.680,0:37:28.010
in the Fourth Anglo-Dutch War,

0:37:28.010,0:37:30.010
when they weren't able to repay

0:37:30.010,0:37:33.210
the massive debts they built up during it.

0:37:33.210,0:37:35.940
This led to a run on the bank of Amsterdam

0:37:37.330,0:37:39.370
and a desperate sell off,

0:37:39.370,0:37:41.713
forcing massive money printing,

0:37:43.770,0:37:45.560
which devalued the currency

0:37:46.510,0:37:49.793
and the empire into irrelevance.

0:37:50.720,0:37:53.413
For the British, this[br]happened after World War II,

0:37:54.800,0:37:56.860
when despite their victory,

0:37:56.860,0:37:59.610
they could not repay the[br]massive debts they borrowed

0:37:59.610,0:38:01.180
to fund their war effort.

0:38:01.180,0:38:06.050
This led to a series of[br]money printing, devaluations,

0:38:06.050,0:38:08.670
and selloffs in the British pound

0:38:08.670,0:38:11.710
as the US and the dollar emerged dominant

0:38:11.710,0:38:14.750
and created a new world order.

0:38:14.750,0:38:16.250
At the time of this recording,

0:38:16.250,0:38:19.580
the United States hasn't[br]yet reached this point.

0:38:19.580,0:38:23.110
While it has massive debt,[br]spends more than it earns

0:38:23.110,0:38:25.620
and funds this deficit with more borrowing

0:38:25.620,0:38:28.490
and printing huge amounts of new money,

0:38:28.490,0:38:30.950
the big sell off in[br]dollars and dollar debt

0:38:30.950,0:38:32.530
hasn't yet begun.

0:38:32.530,0:38:36.000
And while there are great[br]internal and external conflicts

0:38:36.000,0:38:38.240
occurring for all the classic reasons,

0:38:38.240,0:38:41.350
they've not yet crossed[br]the line to become wars.

0:38:41.350,0:38:43.500
Eventually out of these conflicts,

0:38:43.500,0:38:45.700
whether they're violent or not,

0:38:45.700,0:38:47.740
come new winners who get together

0:38:47.740,0:38:51.670
and restructure the losers'[br]debts and political systems

0:38:51.670,0:38:54.670
and establish the new world order.

0:38:54.670,0:38:58.470
Then the old cycle and empire ends

0:38:58.470,0:39:00.580
and the new one begins

0:39:00.580,0:39:02.920
and they do it all over again.

0:39:02.920,0:39:05.010
That's a lot of detail I just threw at you

0:39:05.010,0:39:09.340
to paint a picture of how the[br]typical big cycle transpires.

0:39:09.340,0:39:13.160
Of course, not all of them[br]transpire exactly this way,

0:39:13.160,0:39:16.130
but most largely do, so much so

0:39:16.130,0:39:19.380
that it seems like the[br]stories of rises and declines

0:39:19.380,0:39:21.330
stay essentially the same

0:39:21.330,0:39:23.040
and the only things that change

0:39:23.040,0:39:25.170
are the clothes the characters wear

0:39:25.170,0:39:27.283
and the technologies they use.

0:39:28.650,0:39:30.283
So, where are we heading?

0:39:39.107,0:39:40.024
The future.

0:39:48.540,0:39:50.890
Most empires have their time in the sun

0:39:50.890,0:39:52.503
and inevitably decline.

0:39:55.660,0:39:57.470
Reversing a decline is difficult

0:39:57.470,0:39:59.560
because that requires undoing a lot

0:39:59.560,0:40:02.860
that's already been[br]done, but it's possible.

0:40:02.860,0:40:06.430
By looking at these indicators,[br]it's pretty easy to see

0:40:06.430,0:40:09.760
which stage of the big[br]cycle an empire is in,

0:40:09.760,0:40:11.110
how fit it is,

0:40:11.110,0:40:14.973
and whether its condition[br]is improving or worsening,

0:40:16.910,0:40:20.063
which can help one estimate[br]how many years it has left.

0:40:21.480,0:40:23.970
Still, these estimates aren't precise

0:40:23.970,0:40:25.760
and the cycle can be extended

0:40:25.760,0:40:28.800
if those in charge pay[br]attention to their vital signs

0:40:28.800,0:40:29.693
and improve them.

0:40:30.560,0:40:34.660
For example, knowing that[br]a person is 60 years old,

0:40:34.660,0:40:38.200
how fit they are,[br]whether they smoke or not

0:40:38.200,0:40:40.800
and a few other basic vital signs,

0:40:40.800,0:40:43.253
one can estimate the person's longevity.

0:40:44.560,0:40:47.603
One can do that with empires[br]and their vital signs too.

0:40:48.850,0:40:53.220
It won't be precise, but it[br]will be broadly indicative

0:40:53.220,0:40:55.540
and give clear direction on steps to take

0:40:55.540,0:40:57.023
to increase longevity.

0:40:58.280,0:41:00.130
It's most often the case

0:41:00.130,0:41:03.830
that a nation's greatest[br]war is with itself

0:41:03.830,0:41:07.060
over whether or not it can[br]make the hard decisions

0:41:07.060,0:41:09.243
needed to sustain success.

0:41:10.310,0:41:12.200
As for what we need to do,

0:41:12.200,0:41:14.640
it comes down to just two things -

0:41:14.640,0:41:19.370
earn more than we spend,[br]and treat each other well.

0:41:19.370,0:41:21.180
All other things I mentioned -

0:41:21.180,0:41:23.740
strong education, inventiveness,

0:41:23.740,0:41:26.420
being competitive and all the rest -

0:41:26.420,0:41:29.003
are just ways of getting[br]at these two things.

0:41:29.920,0:41:32.560
It's easy to measure if we're doing them.

0:41:32.560,0:41:35.240
So like people who want to get fit,

0:41:35.240,0:41:38.910
let's get on the program[br]and improve our vitals.

0:41:38.910,0:41:42.643
Let's do that individually[br]and collectively.

0:41:45.560,0:41:48.430
My goal for sharing this[br]picture of how the world works

0:41:48.430,0:41:50.980
and a few principles[br]for dealing with it well

0:41:50.980,0:41:53.700
is to help you recognize where we are

0:41:53.700,0:41:55.910
and the challenges we face,

0:41:55.910,0:41:58.530
and to make the wise decisions needed

0:41:58.530,0:42:00.600
to navigate these times well.

0:42:06.940,0:42:10.790
Since there is a lot more to[br]discuss and we are out of time,

0:42:10.790,0:42:12.407
you can learn more in my book

0:42:12.407,0:42:15.900
Principles for Dealing with[br]the Changing World Order.

0:42:15.900,0:42:19.010
And I look forward to[br]continuing this conversation

0:42:19.010,0:42:21.290
at economicprinciples.org

0:42:21.290,0:42:23.420
and on social media.

0:42:23.420,0:42:24.330
Thank you,

0:42:24.330,0:42:27.473
and may the force of[br]evolution be with you.

0:42:32.799,0:42:35.549
(dramatic music)