In the year 1566, at the end of the reign of the legendary Suleiman the Magnificent, his Ottoman Empire was the world’s dominant superpower.
Ottoman territory extend across three continents over nearly 2.3 million square kilometers. Its military was powerful… and feared. The economy was strong and the treasury plentiful.
But in time that changed. Subsequent Ottoman rulers became complacent. The government became bureaucratic. The military became softer. Society became decadent.
As a whole, they lost the elements that made them strong and powerful to begin with, and the empire began to dwindle.
Over time, France ascended as the dominant superpower; Paris became the global center of politics, commerce, and the arts. And no other European power could come close to France’s wealth or military capabilities.
But eventually the French, too, lost their way, and were eventually displaced by the British Empire as the world’s leading superpower.
To this day the British Empire is still the largest ever in the history of the world, totaling more than a quarter of the world’s land mass. They dominated global trade and oversaw a period of relative peace now called the Pax Britannica.
Yet they too eventually declined, and the British Empire was ultimately displaced by the United States, which has now been the world’s leading superpower for decades.
It goes without saying that the United States is also in decline; that’s not intended to be an emotional or controversial statement. From a rational academic perspective, it’s very difficult to not see obvious and familiar signs of an empire in decay.
I group these into four fundamental forces of decline–
The first are the Forces of Energy, both natural and political, which have created rising energy costs that are now bordering on an energy crisis.
We discussed this at length in last week’s podcast, when I walked you through the dynamics of how it now requires much more energy to produce energy than ever before.
In other words, oil producer are having to burn more oil now to fuel their equipment, for every barrel of oil that they pump from the ground.
This is a critical trend to watch; the past few centuries have proven a very clear link between energy and prosperity, and more expensive energy is a nasty, long-term barrier to economic growth.
The second major category of forces causing decline in the US are the Forces of Society. We can see this every day in the social and political divisiveness, censorship, media manipulation, the appalling decline in trust, rising crime rates, popularity of socialism, wokeness, etc.
The third category are Forces of Economy. Here we can see evidence in the absurd level of money printing, inflation, the national debt, rising taxes, multi-trillion dollar spending packages that “cost nothing”, etc.
And the fourth category are the Forces of History. This is the inevitable course of empire– rise, peak, and decline, and it includes all the geopolitical events we’ve witnessed, from the debacle in Afghanistan to the war in Ukraine and rise of China.
Each of these groups of forces are contributing to an obvious US decline.
It is by no means a one-way street. And there are many elements that could be improved. The widespread adoption of nuclear power, for example, could result in an economic bonanza in the US, which would keep the party going for quite some time.
But for now, the trajectory of the US appears to be heading down. Again, that shouldn’t be a controversial statement, and I’d encourage anyone to look at the situation rationally and dispassionately, and not through the lens of patriotism or fear.
For a long time I’ve asked myself– what comes next? Who will be the dominant superpower after the US decline?
And I’ve often thought that China is the answer… simply because it is the only viable power large enough to displace the US.
But China has always been an imperfect answer. China has a mountain of its own problems too. Some are fixable, like its giant debt bubble. Others (like its demographic crisis) are not.
So my thinking has evolved… and I’m now considering a future world that looks more like Europe in the 600s.
At the time, there was no superpower. The Byzantine Empire was still relevant. But Europe had been taken over by several barbarian kingdoms– the Ostrogoths, Visigoths, Burgundians, Frisians, Franks. Plus the Middle East and North Africa were rapidly falling to the new Islamic Caliphate.
No single power dominated the rest. And I think that may be the world we’re headed for– where China, Russia, Europe, India, and North America are like the Barbarian Kingdoms of the 600s.
This has huge implications, especially for the US dollar.
The dollar has been the dominant reserve currency for so long, which is a privilege that the US government has been able to enjoy for decades.
It means that the Treasury Department has been able to borrow a whopping $30 trillion worth of debt, and has never had a problem finding lenders.
But in a world of Barbarian Kingdoms where no single superpower looms so large, there won’t be as much demand for US dollars.
And that’s decline in demand for dollars is going to make it awfully difficult for the US government to keep spending. Or for the Federal Reserve to keep printing.
This is the topic of today’s podcast. We do a deep dive on this ‘Barbarian Kingdom’ thesis, the Four Forces of decline, the implications for the US dollar, and ways to think about your Plan B.
You can download and listen here.
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Today we're going to go back in time to September 4, 476 Ad, to the city of Ravenna in modern day Italy. And it was an important day, because that's the day that historians regard as the end of the Western Roman Empire. Himself at that time was split into two. You had the Eastern Empire and the Western Empire. The Eastern Empire was really where all the power and all the wealth was.[00:00:22.540]
The Eastern Empire had its own emperor. A guy named Zino at the time was emperor in the east. Zeno had his own imperial court, he had his own succession, he had his own everything was totally different in the east. The west had its own emperor. And the emperor in the west was technically a guy named Julius Nepos.[00:00:39.890]
Julius Nepos, though, had recently been deposed. Julius Neppos had decided to elevate to his chief general. You could think of as like, his chairman of the joint chiefs, that the head of all the Roman military. Julius Nepos had elevated this guy named Orestes to become his chief general. Orestes was a famous guy.[00:00:57.860]
He had previously served atilda the Hun a couple of decades before, and Orestes then essentially became the head of all Roman military forces. Naturally, you can imagine what happens next. Oresty says, oh, wow, I have the entire Roman military, the Western Roman military behind me, so I'm going to go take over. So Resty goes and he marches into Ravena. Ravena, by the way, at the time was actually the capital city of Rome.[00:01:21.770]
The Western Roman Empire was so weak that the city of Rome wasn't even the capital anymore. The city of Rome had been sacked decades prior, and all these barbarians had moved in. And so they actually had to move the capital to Ravana, which is on the opposite end of Italy. It's in northeastern Italy again, on the Adriatic Sea. And so, arrested now with all the entire Roman militaries back, he goes into Ravana.[00:01:43.200]
He says, guess what, Julius nepos, you're out. And Julius Nepos left without a fight. He fled to the Roman province of Dalmatia, which is in modern day Croatia. He tried to set up a fledgling government. He reached out to his colleague in the east, emperor Xeno and Constantinobi, please help me, send me forces.[00:02:00.430]
I need to take my crown back. And Zeno said, no, I don't think so. I'm going to wait and see what happens here. So now we've got arrestes. Who was the head general.[00:02:09.570]
Now he's taken over the Western Roman capital in Ravana. He's chased out the emperor, Julius Nepos, and he decides he's going to declare a new government. So he installs his son as emperor. His son is just a kid, a 1011 year old kid, and the kid's name Romulus Augustus, which in theory is actually quite an auspicious name. Romulus was one of the founders of Rome.[00:02:30.230]
Augustus was its most revered emperor in the first century Ad. So you got this kid as Emperor Romulus Augustus. You got Orestes, who's essentially the de facto Emperor, and then you've got Julius Neppos, who still claims to be Emperor, who's sitting hundreds of miles away off the coast in Croatia. Now, the thing you've got to understand about especially the Western Roman Empire at the time, is that most of the military was made up of foreigners, foreign mercenaries, really, they were called Federati. Now, before going back hundreds of years, before Rome started cooperating with all these foreign barbarian tribes that were really at their borders, and they decided to create something they call this Federati.[00:03:11.190]
Federati is the same word, the same root of the word, the English word, Federation. And we can think of Federation as a league of independent countries, independent states. You can think of your Star Trek fan. Think about United Federation of Planets. You have all these independent planets that come together in a pact and agree to whatever they're doing, fighting the Klingons and the Romulans, whatever.[00:03:30.320]
This is sort of the same thing in Rome. They said, okay, all these barbarian tribes are going to have this federation together where we agree to cooperate with each other. And we, as Rome, we will provide you certain things, and you, as you barbarian kings, you provide us certain things. And that certain thing provided by the barbarian kingdoms was usually military assistance. But by 476, this Federati was basically just foreign mercenaries and it made up a huge part of the Roman military.[00:03:56.030]
So there was another soldier at the time, his name was Odoacer, and Odo Acer. We don't know much about him. We know he was not Romantic. Historians think he might have been Germanic or from one of these barbarian tribes. He might have been a Goth, we're not really sure.[00:04:08.840]
But we know he was a soldier and he worked his way up in the Roman military. In the Legion. He became an officer and eventually head of the Federati. Now, the Federati had been promised the world by successive Roman Emperors for years and years and years, and they said, look, you come and you give us security and you give us peace, and we promise you the world, we're going to give you lands, we're going to give you farms, we're going to give you all these things that you want. And of course, they never actually followed through on their promises.[00:04:36.650]
And so eventually, when arrested, chased away Julius Nepos and installed his son as Emperor, he got Romulus Augustus and the federal he came to arrestis and said, hey, we want all that stuff that we were promised. We want the land, we want the farms, we want the peace, we want all of that and arrest. You said, no, sorry, I can't do it. All those other guys promised you that. You can't expect these other guys to have made you promises, and then I'm going to follow through with it.[00:05:00.370]
Sorry, I can't do it. So naturally, the Federati raced up. They were angry, and so they chose one of their own, this guy, Odoacer. Odoacer wasn't a Roman. He was one of them.[00:05:11.190]
He was ready. The head of the federati. He was the natural choice to be leader in this rebellion in the Federatei marched into Ravana, which again was the capital of the time. Rome, the city of Rome wasn't the capital, had already been sacked. They had to move the city, move the capital city to Ravena.[00:05:26.180]
And so Odawayser, at the head of the Federal, he marched into Ravana and he met arrestes in battle. And there was a battle. arrestes lost. The Western Romans lost arrest. He was slain in battle.[00:05:37.430]
And ODA racer walks up to Romulus Augustus and he looks at this kid and he says, I'm not going to murder this kid. But he throws the kid out. He said, look, you got to go. And Romulus Augustus went off and lived the rest of his life. But at that point, Odo acer essentially crowned himself king.[00:05:55.250]
Now, he's actually fairly cunning about doing it. He didn't say, I'm now the head of the Western Roman Empire. He just said, I'm King of Italy. We're going to carve out this new state here. We're going to call it Italy.[00:06:06.450]
I'm king of Italy now, and in fact, I'm just going to act like I'm subordinate to the Easter Emperor. So he writes to Zeno and he says, you know what? I've just taken over Italy, and I'm going to be your subordinate. I'm going to pay homage to you, I'm going to give you tax, et cetera, and you're going to be my overlord. And for Xeno we thought, Great, that's fantastic.[00:06:27.150]
Now there's no more Western Roman Empire. The Western Roman Empire has essentially been dissolved because Odoacer, who just took over the throne, has decided he doesn't even want to be emperor. He's going to be my subordinate. And so essentially, that was it. That was the end of the Western Roman Empire.[00:06:42.090]
From that point forward, there's only the Eastern Empire, which again ended up calling itself the Roman Empire. And that was basically it for the Western Roman Empire. Rome continued in the east and the Eastern Empire eventually became known as the Byzantine Empire, though they still refer to themselves as Romans. But that was it for the Western Roman Empire. The interesting thing about this, though, is that at the time, if you had been in revenue, or if you were still one of the handful of people left in Rome, it didn't seem like it was that significant.[00:07:13.930]
Today, it's literally the date, september 4, 476 to go. That was the day that Rome fell. But if you had been on the ground in Rome at the time, if you've been on the ground in ravine, if you'd been on the ground and Byzantium and you would have seen September 4, 76th, guess what? The next day wasn't really that different. It wasn't like everything changed all of a sudden overnight.[00:07:35.750]
In fact, for the most part, people viewed on the ground at the time, locals viewed this as just another passing event. It was just another embarrassing debacle. It was just another humiliating embarrassment for Rome. They go, Here we go again. Another guy marching in, taking over another battle, another emperor gets deposed, blah, blah, blah.[00:07:55.070]
We've seen this a million times before, and they had for the longest time, there had hardly been any peaceful succession, any peaceful transition between Roman emperors, especially in the west. There was all this political conniving and murder and intrigue, and it was just a normal part of life in Rome. And some people looked at this and said, Here we go again, just another thing. And it didn't seem like it was any different. In fact, for days, weeks, months, even years after the fact, nobody really got the implication of what had just happened, that quite literally, the Western Empire ceased to exist, and that that was a huge watershed moment in history.[00:08:33.050]
Now, granted, it wasn't like that was really the cause. We can't go back and say with any kind of intellectual honesty that September 4, 476, that was the most important day in the fall of Rome. Or that was the fact that Odo. Acer came into revenue and went up to Romulus August and said, you're out of here, kid. That was really what caused the decline.[00:08:54.440]
The decline of Rome, again, is a very long, very complicated story that involves so many different forces of military nature and economic nature and social nature and all these things that happened over very long periods of time. But that day, that was it. The Roman Empire in the west ceased to exist. And this is actually, in my opinion, a very important lesson from history, because it shows us that there are events that happen from time to time that are actually far more important than anyone realizes. And there are actually many examples of this throughout history we can think about.[00:09:30.540]
The assassination of Archduke Franz Ferdinand In. This clearly wasn't like it was no big deal, but I don't know that anybody would have necessarily looked at that and immediately thought, oh, my God, it's going to be war. It's going to be this huge war. It's going to be the war to end all wars like nobody has ever seen before. That wasn't really the immediate reaction, right?[00:09:50.020]
Certainly wasn't something that people off in the United States would have thought, oh, my God, this guy got killed, and so we're all going to end up at war, and it's going to be so devastating and so costly. Nobody really thought that at the time, but that's what happened because it was a trigger that created different escalations, and this whole war broke out as a result of it. Another great example, martin Luther Nailing, the 95 theses that he wrote up to the door of church in Wittenburg, Germany. And that was essentially the event that triggered the entire Reformation movement, that brought the Catholic Church to its knees and the Reformation, the counterreformation, all the movements and things that happen. It was one of the biggest moments in history.[00:10:31.740]
But at the time, it was just no big deals. Some guy goes as a monk, he puts something on the door, and that's it, walks away. And at the time, nobody would have thought that that was this historical watershed moment, and yet it was. And this is the sort of thing that happens from time to time. It's usually never about that single event.[00:10:48.300]
The event is really just a representation. It's not like the assassination of Archduke Franz Ferdinand was the cause of World War I. The cause of World War I was the years, even decades prior to building of all the alliances. And suddenly, Germany literally creates itself out of nowhere in the forms itself out of a confederation of different kingdoms, independent kings that came together and decided, one day, we are now Germany. And they signed some papers, and poof.[00:11:15.080]
Now suddenly, one of the largest powers in Europe just exists overnight. And you've got Britain, and you've got France, and the United States have become the largest economy in the world, and you had all these forces competing with each other, making alliances with one another and so forth. And this is something that was literally years and years and years of conflict and tension in the making. And then all of a sudden, there was just this one event that triggered it, and it was this event, the trigger. At the time, nobody realized that's it, that's the trigger, and yet that's what happened.[00:11:43.210]
The same thing with Martin Luther. There are all sorts of misgivings and conflict and turmoil and tension between the church and other groups. Martin Luther was just the trigger. Nobody thought it was at the time, but that's what happened. And we could see this over and over and over again throughout history.[00:11:58.020]
So many different instances of some event that seems maybe relatively innocuous or, okay, maybe it's a big deal, but nobody necessarily expected, wow, this is going to lead to so much change, so much turmoil, so much disruption. And it wasn't about the single event. It was about the years and decades. In the case of Rome, even centuries of buildup, of trends building. In 2005, you may have probably seen this on YouTube or something.[00:12:25.330]
Steve Jobs gave a very famous commencement address to Stanford University. He talked about life, and he talked about going back in time and connecting the dots. And he would say, you know, he would talk about his own life. He'd say, I did this, and then I did this, and then I did this, and all these sort of weird things. I dropped out of school, and I kept showing up to classes, even though I technically dropped out, and all these things that impacted my life and that's resulted in the way where I am today, and all these products that we've created at Apple and so forth, of all these bizarre, seemingly random events that happened in my life.[00:12:55.900]
But in retrospect, when I connect the dots, I can see how it all led to this point. And Steve Jobs at the point also kind of famously said, you can never connect the dots going forward, only backward. But that's not entirely true. With all deference to Steve Jobs, it's not entirely true if you think about life really itself, and many of us have had that same experience. We look back, I know I can.[00:13:18.450]
I'm sure many of you can as well. You look back and connect the dots on things that seemingly random events, totally accidental. You meet somebody that something happens and this door opens and it creates this opportunity and something else happens and whatever, you meet your spouse, whatever, almost accidental events, and you look back on it in life and connect the dots and say, wow, these sort of things that weren't delivered. And that's how I ended up where I am today. And that is true to a degree.[00:13:45.850]
But there are also other things that are seemingly extremely deliberate. Extremely deliberate because in life, while there are some things that are accidental, there are some things that are deliberate. There are some things that we plan on. And I can't believe I'm going to use this as an example. I'm kind of vomiting in my mouth right now.[00:14:01.380]
But if you think of Hillary Clinton, it is no accident that she ended up where she did. I mean, that was a grand plan for a very long period of time to become this political insider and work her way up. And eventually she wanted to be present. She didn't make it. But it is no accident that her career and her life has had the trajectory that it did.[00:14:20.310]
And she is a great example of somebody that really connected the dots going forward. So I look at all this in context. If I think about the historical element of it and so many things that are going on today, and I'm going to actually rely on this cliche right now. This is one of the most overused quotes, especially in business and finance people think about Wayne Gretzky, this famous Wayne Gretzky quote where he talks about skating to where the puck is going to be, not where it's been. It's actually miscredited to Wayne Gretzky.[00:14:49.410]
He would actually himself credit his father. Walter Gretzky is the guy that said that. But the point is that it's this concept of connecting the dots going forward and trying to look at big picture trends and think about what's happening. We're not talking about thinking about looking into appearing into a crystal ball and thinking about this is exactly what's going to happen on this date, at this time. That's ludicrous.[00:15:10.890]
There are obviously always people that think that they know exactly what's going to happen, and that's totally ludicrous. Pompous. It's petty, it's narcissistic. But we're talking about major trends. You don't have to be a rocket scientist.[00:15:23.190]
You don't have to have a PhD in history or economics or any of these things to see major trends, to connect the dots, especially if you have a little bit of humility. And if you think about the fall of Rome, the fall of Rome was so obvious. It was so obvious. Everybody knew it. Everybody could see it.[00:15:38.470]
This is why Rome lost so much of its population during the 400s, during the 300s as well. People said, screw it, I'm out of here. This place is going the way of the dodo bird. And they were right. They were right because the fall of Rome was so obvious.[00:15:51.060]
They were losing military power. They lost all their economic power. They're losing territory. They were getting invaded by barbarian tribes. People were happy.[00:15:58.580]
They were getting invaded by barbarian tribes. People in the countryside are saying, please deliver us from these high taxes. Thank you, barbarian tribes, for invading us so we don't have to pay these ridiculous taxes anymore. We had price controls and wage controls under penalty of death. It was so obvious that they were in decline and that they were eventually going to fall into the dustbin of history.[00:16:18.780]
It was so obvious. World War I was also so obvious, right? If you look at the power dynamics in Europe, it was obvious there needed to be a war. Somebody had to get their ass kicked to prove who was the big cheese in Europe. Now it had to happen, right?[00:16:34.800]
So if we look back in history, the Reformation was obvious. It was just one of these things. The trends, the tensions, the conflicts were building for so long. So while we can't necessarily connect the dots and say, this exactly is going to happen, we can look at these major trends and things that are so obvious and still have a little bit of humility and say, I could be wrong. However, there are some really obvious things happening to try and connect the dots going forward.[00:16:59.870]
Obviously, we're talking about this because I think it is pretty clear that the United States is in decline. We've been writing about this sovereign man for a really long time, and a lot of the things that we've been writing about have continued to accelerate and get bigger and bigger and bigger and bigger. A lot of the things that we thought in terms of the direction of the US. It's happening. It's happening in front of our very eyes.[00:17:21.270]
And I would say, just to summarize, the US. Is subject to what I consider four forces of decline. And I think those forces aren't, by the way, just in the United States. I think we can see this in a lot of different places, but one of those is the forces of energy. Now, I talked about this actually in a podcast last week.[00:17:39.700]
We explained all about what's happening in energy and energy markets and energy commodities in general. And I would really actually encourage you to go back and listen to that because it's really important to understand the forces of energy. And energy as a decline. Force is so powerful. It is so powerful, it's transnational, it's global.[00:17:59.540]
It's something that really makes everybody poor and there are solutions to it. We talked about nuclear. We talked about I made an analogy to the collapse of Bronze Age civilizations and ushering in the Iron Age when people discovered steel. We have fission, we have fusion technology, we have our steel. It's coming, right?[00:18:17.430]
We have things that we can do to actually improve that. But the bottom line is that it is taking a lot more energy to produce energy. And that makes everybody poor. There is a very clear, very clear trend between cheap energy and when I say cheap energy, I mean essentially, it doesn't take very much energy to produce energy. It doesn't take very much you don't have to burn a whole lot of oil to produce barrels of oil, right?[00:18:43.390]
So that's cheap energy. And when you have cheap energy, you have prosperity. Where you have expensive energy, you have a lack of prosperity. And so what we're seeing right now, this increase in energy prices, and I don't just mean in dollar terms, I'm talking about in energy terms. And if you don't know what I'm talking about, I would really encourage you to go back and listen to that.[00:19:01.840]
But energy is getting more expensive, makes everybody poorer. That is definitely a force of decline in the US. But the US. Is also subject to forces of in addition to forces of energy, forces of society, where we see the rise of socialism and wokeness and this horrible division that exists where two people just can't even have a conversation and people get in fist fights on airplanes because they're just so tightly wound. And we see all of this leads to things, terrible, terrible national priorities where we say, oh, we got all these problems going on.[00:19:31.960]
You know what? Let's forgive student debt. Let's take a trillion dollars that we don't have and just make it go away because people need to study underwater basket weaving and all these kind of ridiculous things. And you know what, just to be fair, there are a lot of people, and I think especially more conservative pundits, that have said, oh, this is something that it sticks the cost onto people. Blue collar workers that didn't go to college, the working class, so that people who study whatever gender studies and things like that can get their degrees for free.[00:20:05.610]
And that's not entirely true. Obviously, there are a lot of people who go to medical school they study computer engineering, whatever. But if you really look at the statistics in terms of the degrees, degrees of study courses study that most people take, a lot of it's not exactly hard science. Most of the stuff that people study is not hard science is not technology. It's things that don't actually move the needle economically for the United States.[00:20:29.970]
So if you think of it in terms of return on investment, let's be honest, we're probably going to get a higher return on investment. If we even think this is a good idea at all to say let's forgive education, you're probably going to get a higher return on investment, incentivizing engineering and math and science and all the Stem fields. But that's not really what they're doing. So they're saying, oh come on, come all, we're just going to forgive all this student debt, which is extremely inflationary, but this is a terrible priority, or another terrible priority. As an example, they got so insane over their vaccine mandates and he had the federal government going and literally firing people because they wouldn't get a COVID-19 vaccine.[00:21:05.810]
And there are people that were high up in national security positions, people with literally decades of black ops experience going and doing clandestine missions overseas, but we're going to fire them because they can't get a vaccine. They don't want to get totally fine that they go and risk their lives with terrorist cells, but not okay that they don't get a covet shot, so we're going to fire them, right? That's an insane priority that we're going to prioritize. Subordination over public health policy is a higher priority than national security. That is a horrible priority.[00:21:35.520]
But this is an example of the forces of society that the US is gripping with, that is an indication of its decline. Another one of these four forces. In addition to the forces of energy. The forces of society. We have our forces of economy.[00:21:47.310]
The overspending. The constant insane deficit spending. The inflation. The money printing. The national debt.[00:21:53.210]
The fact that Social Security is about to go bankrupt and is going to require a bailout to the tune of literally tens of trillions of dollars and I say about to go bankrupt. I mean in the context and the timeline of retirement where the Social Security Board of Trustees itself is saying. Look guys. Basically within the next ten years these trust funds are going to run out of money and that's going to cause a serious problem. We're going to have to cut back on the promises we made.[00:22:17.500]
We're going to have to cut back on the benefits that we pay every month. We might have to do all sorts of other things in order to keep this program going. And I don't even think they scratched the surface of that realization. Are they doing anything about it? No, of course not.[00:22:29.910]
They're going to keep kicking the cannon on the road and saying nothing to see here, people don't worry about it. And in ten years, this is going to be a massive problem, I guarantee you. The last force that we're dealing with in terms of US decline is the forces of history. The forces of history involve the natural cycle of things, the rise and fall of empires, the rise and fall of reserve currencies, the rise and fall of military power, all these things that we've seen over and over and over again. And this idea of cyclicality is really important.[00:23:00.980]
We spent a whole podcast last week talking about the forces of energy. We write all the time about the forces of society and the forces of economy. I want to talk a little bit about the forces of history today, this idea of the natural cycle, where there's always been a dominant superpower, there's always been a dominant reserve currency, there's always been a dominant economic system, and these things change over time. And I've talked about this and I've written about this really since I started Soccer Man 13 years ago. But I will admit again, you have to have humility with this.[00:23:30.970]
I've been wrong. I've been wrong a lot. One of the areas I've been wrong is I've thought there's always been and there's always going to be a dominant superpower. And we can think about this throughout history. The United States the dominant superpower.[00:23:42.860]
Now, before the US, the US displaced Great Britain, which used to be the dominant superpower. Britain displaced France, which in the 17 hundreds, the 1617 hundreds, was the dominant superpower. France displaced Spain, spain displaced the Ottoman Empire, et cetera. So you can go back and sort of walk that dog throughout history and see one empire declining, another empire rising, that empire declining, another one taking its place. And I've applied this thinking to trying to determine what's going to be the next dominant superpower, and I just sort of assumed by default, it's got to be China.[00:24:15.930]
It has to be. It's the only possible option. But I've always had some misgivings about that, because China has its own problems, right? China has I mean, if you think about the US. The US has a massive amount of debt.[00:24:26.150]
It's got all these bizarro financial crises, looming retirement crisis, currency issues, etc. And guess what? China has that too. China has massive amount of debt, has its own really weird financial crises brewing. It's got its shadow financial system and all these things with just huge debt bubbles.[00:24:42.800]
China has its own retirement crisis, unfunded pensions, etc. It's got serious currency issues in terms of lack of convertibility, and nobody really trusts it. But more importantly, it's got all these continued economic tumultuous, economic issues from its COVID response that to this day, now going on almost three years since it was first discovered in China, in Wuhan, that they're still shutting down the economy, they're still locking people in their homes, they're still doing all these crazy draconian. Things and you could just keep looking at this, etc and etc. There are so many issues in China now, I would look at all of these and say, well, that's fixable, because while China has a lot of debt, it has a lot of problems with its pensions and problems with its currencies, et cetera.[00:25:26.730]
All that stuff is actually fixable because China does have a lot of assets. It's got a lot of financial reserves, it's got huge foreign reserves, lots and lots of savings, lots of production. So a lot of these financial and economic issues are fixable. But there are some things in China that are not fixable. And the biggest one of those really is its demographic issues.[00:25:48.070]
Decades of this one child policy, which is one of the dumbest ideas since the feudal system, have really vanquished future Chinese prosperity. What you want in any nation, in any healthy nation, for any healthy economy, you have to have a demographic period, demographic pyramid, basically, it's got a lot of young people at the bottom and not as many old people at the top. You don't want it to be really steep. But you want it to be enough. Where you've got younger people that are eventually going to go into the workforce and there are going to be more people in the workforce and they are retired.[00:26:22.990]
And that the people in the workforce can pay for the people that are retired. And it's not going to be a huge burden and so forth. And you've got this kind of constantly, steadily growing, not by a whole lot, but a steadily growing population that keeps a very steady, safe demographic pyramid, where you constantly have this new flow of young people. And they just destroyed that in China. They said, okay, we're only going to have one child.[00:26:44.660]
Well, guess what? If you have two parents and one child, that means by the time those children come of age, now you've got one person taking care of two older people. It just doesn't work. It just does not compute arithmetically. It doesn't work.[00:26:57.210]
And you can't just fix that, right? Because now they finally realized, oh, my God, that was stupid. So they're getting away. They've gotten away from their one child policy. But you can't just fix that overnight because it takes literally decades and decades to fix that.[00:27:10.540]
You can't just conjure out of thin air 30 year old people, right, who are in the workforce and they're contributing and they're paying taxes and they're paying into pension funds and paying into Social Security programs. You can't just conjure that out of thin air. The only way you can is with immigration, right? If you have immigration, say, okay, we're going to open our borders. Everybody that's 30 years old, between 30 and 45, we want you coming into our country, paying taxes and working and so forth, because we have all these older people and we don't have enough young people in theory, you could fix that problem with immigration.[00:27:40.640]
Now, you get too much of that all at one time, you create a whole other set of problems. But it doesn't even matter because this immigration wave in China is extremely unlikely. It's extremely unlikely because who wants to deal with that? Who wants to deal with the environmental crisis? Who wants to deal with all this COVID nonsense?[00:27:55.230]
Who wants to deal with the lack of freedom? Most people can't even speak Chinese. It's a tonal language, and there's not that many tonal languages in the world. And it's very unlikely that China is going to be able to just fix this all of a sudden with immigration. It's possible, but it's unlikely.[00:28:08.970]
And on top of that, they have their debt problems, retirement crises and currency issues and all these things that I need to fix. So again, in theory it's fixable, but it's highly unlikely that they're going to be able to fix all of this. And this is essentially what leads to the conclusion that China isn't necessarily bound to become the world's dominant superpower. And I've had to unlearn this. Now, I said earlier, one of the key lesson from history that we talked about earlier is that sometimes things happen, events happen in history that are far more important than anybody realizes at the time.[00:28:40.680]
Again, like the fall of Rome on September 4, 476 Ad. Like Martin Luther in 1517. Like the assassination of Archduke Franz Ferdinand. That's lesson one that we can learn about from history today. Lesson two is that the world doesn't necessarily need to have a dominant superpower.[00:28:58.070]
We've had this unipolar superpower world that's very US centric, and that's certainly on the way out, as the US is clearly in decline for years before that, decades, it was kind of a bipolar world, but the US. Was clearly the more dominant one when it was the US and the Soviet Union, which you had in the had these two superpowers together. But there was obvious that the Soviet Union was in decline and it wasn't going to last, and eventually they went away. But there is a case to be made that the world doesn't need to have a dominant superpower at all, doesn't need to have a single superpower or dual competing superpowers. It's possible the world has no superpower at all.[00:29:38.510]
And to this I would actually point to this period of time after the fall of the Western Roman Empire. So we go back to 476. And now initially you've got Emperor Zeno says, hey, now I'm the big cheese, I'm the sole guy. I get to be emperor now of all of Rome, and it's all that's going to take place from Constantinople. But over time, the Eastern Roman Empire, which was just known as the Roman Empire, again became known as the Byzantine Empire, started to fall into decline after you have the Justinian era, et cetera.[00:30:10.170]
By the 600s, Byzantium was still relevant, but it was no longer the dominant superpower. And you had all these different barbarian kingdoms. If you look at a map of Europe and the have all these different kingdoms, the Visigoths, the Franks, the Phryzians, the Jews, the Saxons, the Slavs, the Avar Kingdom, then he had the Arabs. This was after Muhammad and the Muslim caliphates were rising. They were conquering all over in the Middle East and parts of Africa.[00:30:36.390]
The Vikings were going to emerge soon, right? So you had all these different barbarian kings and all of them, each of them was powerful in its own way. Not one of them was so much more powerful than the others. There wasn't one of them that could just command the rest to heal and say, okay, here's what we're going to do, like the US has been able to do for so long, right? The Byzantine Empire was no longer powerful enough that it could do that.[00:30:58.870]
It couldn't tell the Saxon, hey, here's what you're going to do. Saxons, here's what you're going to do. Franks, here's what you're going to do. Goths, they couldn't do that anymore, right? And so it wasn't a unipolar world or a bipolar world.[00:31:12.170]
It was just a no superpower world. And the world just sort of existed that way. And my thinking has evolved in this way now, where I start, instead of thinking about, OK, China is going to be the next dominant superpower. Now, I think of it as this barbarian kingdoms theory and thinking, what are the barbarian kingdoms of tomorrow? And clearly China is going to be one of them.[00:31:37.320]
China is going to be one of these kingdoms. Just say, okay, it has all these problems. Yeah, great big deal. Still a billion people, a huge economy. Huge economy, right.[00:31:45.680]
Probably will be continued to be the large it might even be today already the largest economy in the world. Will probably continue to be the largest economy in the world for quite some time. But that doesn't necessarily make it the dominant superpower that gets to command everything that happens in the world. Europe, the EU, Eurozone, whatever that ends up looking like in the future. And I think that's clearly going to change.[00:32:06.890]
That's still relevant. It's still there, right? It's a lot weaker. Europe is having so many issues. It's energy issues, it's refugee issues, all sorts of things.[00:32:15.980]
That debt issues. It wasn't that long ago they had the Pigs crisis. Portugal, Portugal, Italy, Greece, Spain. Europe is still going to be relevant. That we can't say that Europe is just going to fall off the face of the Earth is a very advanced civilization with hundreds of millions of people.[00:32:32.970]
This is still going to be a very relevant place that has power, greater Russia, whatever context that means, whether it's just Russia or a smaller Russia or even larger Russia than it is today. If they win this war in Ukraine and they annex Ukraine, and the annex, other places and they start sort of piecing together almost a Soviet Union. Again, I think there's a very strong case to be made that Russia becomes and remains really quite a powerful place. India I think is fairly obvious as well, just by sheer size. And look.[00:33:05.800]
The US. Is not going anywhere. Anything is possible, but most likely the US. Continues to exist and I think it remains still powerful. I think it's likely that the US.[00:33:16.280]
Tries to sort of ally itself in some kind of North American union. Canada's got a lot of oil reserves, mexico's got a lot of commodities and there becomes sort of a North American union I would say, and we'll talk about this in a minute, that the future of this is actually very commodity oriented, commodity versus today it's all about money is power. Well I think in the future, and we're getting there very quickly, is that wealth, real wealth is in commodities, it's in stuff, it's in real things as opposed to money in dollars and paper assets. And so if you combine North America is incredibly wealthy in stuff, in resources and commodities, especially if you include Mexico and Canada together in some North American union, that could be an extremely powerful alliance, a federation if you will. There are other players that I think are also going to be very relevant.[00:34:07.050]
I think you've got the United Kingdom is always going to be I think, relevant. Venezuela, which now by many official statistics has the largest oil reserves in the world. If I'm honest. I think there's a case to be made that there's an invasion of Venezuela at some point just to sort of take over their oil reserves and pull Venezuela into some sort of federation, some North American union or American union. I think even the UK maybe joins that.[00:34:32.670]
You have the US. The UK, canada, Mexico, Venezuela, possibly a couple of places together in some union to try and compete against China which makes its own union with Southeast Asia. So you've got all this sort of manufacturing capacity and economic power against North America, but you've got Russia and you've got Europe and different places in the world and I think there's a case to be made and again there's no crystal ball here. So I in no way could say this is exactly what it looks like. But if we try and connect the dots and use the Gretzky cliche and try and figure out where is the pot going to be, it seems pretty obvious that the US.[00:35:09.800]
Is in decline for all these forces that we talked about, the forces of history and the forces of economy, the forces of society, the forces of energy that are pushing the US. And decline. It's not inevitable. Some of these things can change. They can certainly change the trajectory of these forces of energy.[00:35:25.160]
They could turn the forces of energy into growth instead of decline if they would just get their shit together and realize, oh wow, nuclear is so powerful and we can get on board this, and this is really going to solve a lot of our problems. And by getting on board and stemming the decline in terms of the forces of energy that can really turn around a lot of other things and create a lot of prosperity, which helps unleash a lot of to reverse the decline in terms of the economic issues in the US. Etc. And so there are a lot of things that can happen here. But if we look at the trajectory right now and the forces and trends that are in front of us, this is certainly a plausible scenario that doesn't necessarily look exactly like I've been outlining here.[00:36:04.170]
But there are a lot of different this barbarian kingdom theory where there is no single dominant superpower. And the reason that's worth thinking about is because whether it's China that rises or multiple this sort of multiple barbarian kingdom theory, it has a significant effect on the US dollar. And that's going to have implications for just about every single person alive, because what it ultimately means is a different global financial system. The world right now, the financial system in the world is this we go back in time a little bit. Now we go back in time to July 1944.[00:36:41.190]
It's at the tail end of World War II. The invasion of Normandy was successful in the US. Knows now the writing is on the wall. Most of the world knows the writing is on the wall, at least in Europe, that the war is going to come to an end fairly soon. And they got together in a hotel in the United States in Bretton Woods, which is a city in New Hampshire.[00:37:00.570]
And they said, okay, we're going to create a new financial system. Over the month of July 1944, they created a whole new financial system, decided the US. Is going to be the center of this new financial universe. The US dollar is going to be pegged to gold, and every other currency is going to be pegged to the US. Dollar.[00:37:14.930]
And it was basically the system of fixed exchange rates, which existed for a very long time. In August of 1970, 115 August to be exact, richard Nixon terminated gold convertibility once and for all. There was some kind of movements before that and et cetera, but in August 1971, Nixon terminated gold convertibility. So in terms of the Bretton Woods system that existed, where they said the US dollar is pegged to gold and everything else is pegged to the US. Dollar.[00:37:41.940]
Well, Nixon terminated that. So now we have the system of free floating exchange rates where the dollar goes up or down against the pound, and the pound goes up and down against the German mark and so forth. And this kind of colloquially became known as Bretton Woods Two. So the original one was Bretton Woods one. Now we have Bretton Woods two.[00:37:57.720]
And during that time, the US. Remained still the dominant superpower. It wasn't long after that the Soviet Union was an obvious decline, then collapsed entirely. And for the last 30 years, it's been a unipolar world, and the US. Has been the dominant superpower.[00:38:11.810]
And why is that? Right? Why is the US. They took the dollar off of gold and they've kind of done whatever, they printed a bunch of money and all these things. Why does this continue to be the case?[00:38:20.780]
Well, one, because obviously there is no alternative. The US. Has been the dominant power for so long. The dollar has been the dominant currency for so long. That's just the way it's been.[00:38:30.140]
And since there's no obvious alternative at the moment, the world just sort of remained that way. But also specifically because the US. Has very mature financial infrastructure. You've got very free flowing markets. There's no formal capital controls in the US.[00:38:45.030]
You can move money in, move money out. It's got a very robust banking system. It's got financial markets. These financial markets are very deep and relatively transparent. You can throw literally, if you have to, you could put trillions of dollars to work in the United States, whether you talk about stocks or bonds or whatever else, real estate, even.[00:39:04.230]
They're very deep financial markets in the United States where you could put money to work. And so that's a major factor in why you couldn't do that. For example, this is why I hate to pick on Costa Rica. It's a wonderful country, but Costa Rica Cologne is just never going to be the reserve currency in the world because it's just not a big enough economy. The financial markets in Costa Rica really aren't even any financial markets in Costa Rica.[00:39:27.360]
You couldn't do anything. You couldn't put that money to work. So anybody that's holding Costa Rica Cologne, what are you going to do with that money, right? You can't invest, you can't put it to work anywhere. You can't buy assets with it, so it just doesn't work.[00:39:38.490]
The US. Has a really huge economy with very deep and liquid financial markets, so it makes it very easy and very convenient to put money to work. The other thing that really has kind of maintained the US financial lead in the world has kept the dollar being in the position that it is, is for the longest time, the US. Has had unmatched military power. And believe it or not, that actually is a very big deal.[00:40:01.650]
And the reason why is because the US military is what supports this concept of the I call it the petrodollar loop. The concept of petrodollar is very common. People know about this. This terminology basically refers to the fact that oil and oil contracts around the world are priced in dollars, whether it's the Saudis selling to Europeans or different oil producing people in Indonesia, selling to Australia. Those oil contracts are priced and quoted and settled in US dollars.[00:40:33.070]
And that's a really big deal. And the reason that's such a big deal is because it creates this loop. It creates this essentially artificially engineered demand for US dollars. Means every country has got to buy oil. So if you want to buy oil, you've got to be able to have US dollars because that's how you pay.[00:40:51.320]
You pay for oil in US dollars, right? And so you pay for oil in US dollars, which means that you need US dollars. So you have to hold US dollars. So if you're holding US dollars, you have to hold those dollar somewhere. And this essentially what do I do?[00:41:05.050]
If you're a country, you got $100 billion in US dollar reserves. What am I going to do with this money? I got to put it to work somewhere. So I have to put it in US financial markets. And most of the time that means US bond markets and most of the time that specifically means US government debt.[00:41:19.580]
- Treasuries, right? US. Government debt. So people, essentially the fact that oil and by extension coffee and copper and all these major commodities are priced in US dollars creates demand for US dollars.
