Episode Transcript
[00:00:00] German Chancellor Friedrich Merz said the World Order as it has stood for decades no longer exists and that we are in a period of great power politics. He made clear that freedom is no longer a given in this new era. French President Emmanuel Macron echoed Mertz's assessment and said that Europe's old security structures tied to the previous World Order don't exist and that Europe must prepare for war.
[00:00:27] US Secretary of State Marco Rubio said that we are in a new geopolitics era because the old world is gone.
[00:00:37] The best in Bitcoin Made Audible I am Guy Swan and this is Bitcoin Audible.
[00:00:54] Foreign.
[00:01:00] What is up, guys? Welcome back to Bitcoin Audible. I am Guy Swan, the guy who has read more about Bitcoin than anybody else. You know, we've got a really long one today, but I think it's really important.
[00:01:11] This is actually a chapter from Ray Dalio's book, the Principles of Dealing with the Changing World Order.
[00:01:19] And it's super long. And I should have probably broken this up into two parts, but I just kept recording and I've been working on and off on a bunch of other things. So it's like, ah, screw it, we're just, we're just gonna dump this all as one episode. But because of that, we're not gonna waste any time. I just want to give a shout out to HRF and their amazing work. And seriously, if you guys, you can subscribe to their newsletter, the Financial Freedom Report, which you'll hear a lot about on this show. Anyway, that is a great way to help out this show. And then also they have tickets now for the OSLO Freedom Forum June 1st to 3rd this year where they literally bring freedom fighters and dissidents and importantly the people like on the ground fighting for freedom all around the world. They share their stories of how they won, stories of where they lost stories and means of using the tools that protected them. And if this piece is any indication of the kind of chaos that we are likely headed into across the globe, it is more important than ever to share capital, to share ideas, to understand what we are getting ourselves into so that we can prepare. The Oslo Freedom Forum is a profoundly valuable place to do that. Links and details right down in the show notes with that we are going to get into today's read from Ray Dalio and it's titled It's Official.
[00:02:42] The World Order has Broken down by Ray Dalio.
[00:02:49] At the Munich security conference, the post1945 world order was pronounced dead by most leaders and the picture behind it was laid out in The Security Report 2026 entitled Under Destruction, which you can read here if you're interested. More specifically, German Chancellor Friedrich Mertz said the world Order as it has stood for decades no longer exists and that we are in a period of great power politics, quote unquote. He made clear that freedom is no longer a given in this new era. French President Emmanuel Macron echoed Mertz's assessment and said that Europe's old security structures tied to the previous World Order don't exist and that Europe must prepare for war.
[00:03:35] US Secretary of State Marco Rubio said that we are in a new geopolitics era because the old world is gone.
[00:03:44] In my parlance, we are in the Stage six part of the Big Cycle in which there is great disorder arising from being in a period in which there are no rules, might is right, and there is a clash of great powers. How Stage six works is explained in detail in Chapter six, the Big Cycle of External Order and Disorder, in my book Principles for Dealing with the Changing World Order.
[00:04:10] While I previously shared a lengthy set of Excerpts from Chapter 5, the Big Cycle of Internal Order and Disorder, so you could see how what is going on with the United States tracks the classic cycle explained in that chapter, I am including all of Chapter six here for your review.
[00:04:26] Given that now nearly universal agreement that the post1945 world order has broken down and that we are entering a new World Order, I think it would be worth your time to read Chapter six, the Big Cycle of External Order and Disorder Relationships between people and the orders that govern them work in basically the same ways, whether they are internal or external, and they blend together. In fact, it wasn't long ago that there were no distinctions between internal and external orders. There are because there were no clearly defined and mutually recognized boundaries between countries.
[00:05:05] For that reason, the six stage cycle of going between order and disorder that I described in the last chapter about what happens within countries works the same way between countries with one big exception. International relations are driven much more by raw power dynamics. That is because all governance systems require effective and agreed upon 1 laws and lawmaking abilities 2 law enforcement capabilities, for example police and 3 ways of adjudicating, for example judges and 4 clear and specified consequences that both suit crimes and are enforced fines and incarcerations and those things either don't exist or are not as effective in guiding relations between countries as they are in guiding relations within them.
[00:05:55] While attempts have been made to make the external order more rule abiding, for example Via the League of nations, and the United Nations. By and large, they have failed because these organizations have not had more wealth and power than the most powerful countries.
[00:06:09] When individual countries have more power than the collective of countries, the more powerful individual countries rule. For example, if the US China, or other countries have more power than the United nations, then the U.S. china, or other countries will determine how things go rather than the United Nations. That is because power prevails and wealth and power among equals is rarely given up without a fight.
[00:06:35] When powerful countries have disputes, they don't get their lawyers to plead their cases to judges. Instead, they threaten each other and either reach agreements or fight. The international order follows the law of the jungle much more than it follows international law.
[00:06:51] There are five major kinds of fights between trade and economic wars, technology wars, capital wars, geopolitical wars, and military wars. Let's begin by briefly defining trade and economic wars conflicts over tariffs, import, export restrictions, and other ways of damaging a rival economically technology wars conflicts over which technologies are shared and which are held as protected aspects of national security.
[00:07:20] Geopolitical wars, conflicts over territory and alliances that are resolved through negotiations and explicit or implicit commitments. Not fighting capital wars, conflicts imposed through financial tools such as sanctions, for example, cutting off money and credit by punishing institutions and governments that offer it, and limiting foreign access to capital markets.
[00:07:44] And military wars cut conflicts that involve actual shooting and the deployment of military forces.
[00:07:51] Most fights between nations fall under one or more of these categories. Cyber warfare, for example, has a role in all of them. They are over wealth and power and the ideologies pertaining to them.
[00:08:03] While most of these types of wars don't involve shooting and killing, they are all power struggles in most cases. The first four kinds of war will evolve over time as intense competitions between rival nations and until a military war begins, these struggles and wars, whether or not they involve shooting and killing, are exertions of power of one side over the other. They can be all out or contained depending on how important the issue is and what the relative powers of the opponents are. But once a military war begins, all four of the other dimensions will be weaponized to the greatest extent possible.
[00:08:41] As discussed in the last several chapters, all of the factors that drive internal and external cycles tend to improve and worsen together. When things get bad, there are more things to argue over which leads to greater inclinations to fight. That's human nature and is why we have the big cycle which oscillates between good times and bad ones.
[00:09:03] All out wars typically occur when existential issues, one that are so essential to the country's existence, that people are willing to fight and die for them are are at stake and they cannot be resolved by peaceful means.
[00:09:16] The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters. That clarity over who sets the rules then becomes the basis of a new international order.
[00:09:29] The following chart shows the cycles of internal and external peace and conflict in Europe going back to 1500 as reflected in the deaths they caused. As you can see, there were three big cycles of rising and declining conflict averaging about 150 years each. Though big civil and external wars last only a short time, they are typically the culmination of the long standing conflicts that led up to them. While World Wars 1 and 2 were separately driven by the classic cycle, they were also interrelated.
[00:10:01] As you can see, each cycle consisted of a relatively long period of peace and prosperity. For example the Renaissance, the Enlightenment and the Industrial Revolution that sowed the seeds for terrible and violent external wars. For example the Thirty Years War, the Napoleonic wars and the two World wars, both the upswings, the periods of peace and prosperity and the downswings, the periods of depression and war, affected the whole world.
[00:10:28] Not all countries prosper when the leading powers do, because countries gain at the expense of others. For example, the decline of China from around 1840 to 1949, known as the Century of Humiliation, came about because the Western powers and Japan exploited China. As you read on, keep in mind the two things about war that one can be most confident in.
[00:10:54] One that it won't go as planned and two that it will be far worse than imagined.
[00:11:00] It is for those reasons that so many of the principles that follow are about ways to avoid shooting wars. Still, whether they are fault for good reasons or bad, shooting wars happen to be clear. While I believe most are tragic and fault for nonsensical reasons, some are worth fighting because the consequences of not fighting them. Example, the loss of freedom would be intolerable.
[00:11:24] The timeless and universal forces that produce changes to the external order.
[00:11:31] As I explained in chapter two after self interest and self Survival, the quest for wealth and power is what most motivates individuals, families, companies, states and countries.
[00:11:44] Because wealth equals power in terms of the ability to build military strength, control trade and influence other nations.
[00:11:52] Domestic and military strength go hand in hand.
[00:11:56] It takes money to buy guns, military power and it takes money to buy butter. Domestic social spending needs. When a country fails to provide adequate amounts of either, it becomes vulnerable to domestic and foreign opposition. From my study of Chinese dynasties in European empires, I've learned that the financial strength to outspend one's rivals is one of the most important strengths a country can have.
[00:12:21] That is how the United States beat the Soviet Union in the Cold War.
[00:12:25] Spend enough money in the right ways and you don't have to have a shooting war.
[00:12:30] Long term success depends on sustaining both the guns and the butter without producing the excesses that lead to their declines. In other words, a country must be strong enough financially to give its people both a good living standard and protection from outside enemies.
[00:12:47] The really successful countries have been able to do that for 200 to 300 years.
[00:12:53] None has been able to do it forever.
[00:12:56] Conflict arises when the dominant power begins to weaken or an emerging power begins to approach it in strength, or both. The greatest risk of military war is when Both parties have 1 military powers that are roughly comparable and 2 irreconcilable and existential differences.
[00:13:15] As of this writing, the most potentially explosive conflict is that between the United States and China over Taiwan.
[00:13:23] The choice that opposing countries face either fighting or backing down is very hard to make. Both are costly, fighting in terms of lives and money and backing down in terms of the loss of status since it shows weakness, which leads to reduced support.
[00:13:39] When two competing entities each have the power to destroy the other, both must have extremely high trust that they won't be unacceptably harmed or killed by the other.
[00:13:50] Managing the prisoner's dilemma well, however, is extremely rare.
[00:13:54] While there are no rules in international relations other than those that the most powerful impose on themselves, some approaches produce better outcomes than others. Specifically, those that are more likely to lead to win win outcomes are better than those that lead to lose lose outcomes. Hence this all important principle. To get more win win outcomes one needs to negotiate with consideration giving to what is most important to the other party and and to oneself and know how to trade them skilled collaborations to produce win win relationships that both increase and divide up wealth and power well, are much more rewarding and much less painful than wars that lead to one side subjugating the other, seeing things through your adversary's eyes and clearly identifying and communicating your red lines to them, that is what cannot be compromised are the keys to doing this. Well, winning means getting the things that are most important without losing the things that are most important. So wars that cost much more in lives and money than they provide in benefits are stupid. But stupid wars still happen all the time. For reasons that I will explain, it is far too easy to slip into stupid wars because of a the prisoner's dilemma, b a tit for tat escalation process, c the perceived costs of backing down for the declining power and d Misunderstandings existing when decision making has to be fast.
[00:15:26] Rival great powers typically find themselves in the prisoner's dilemma. They need to have ways of assuring the other that they won't try to kill them lest the other tries to kill them first.
[00:15:37] Tit for tat Escalations are dangerous in that they require each side to escalate while or lose what the enemy captured in the last move. It is like a game of chicken. Push it too far and there is a head on crash.
[00:15:51] Untruthful and emotional appeals that rile people up increase the dangers of stupid wars. So it is better for leaders to be truthful and thoughtful in explaining the situation and how they are dealing with it. This is especially essential in a democracy in which the opinions of the population matter.
[00:16:09] The worst thing is when leaders are untruthful and emotional in dealing with their populations and it is worse still when they take over the media.
[00:16:17] By and large, the tendency to move between win win relationships and lose lose relationships happens in a cyclical way. People and empires are more likely to have cooperative relationships during good times and to fight during bad times. When the existing great power is declining in relation to a rising power, it has a natural tendency to want to maintain the status quo or the existing rules while the rising power wants to change them to be in line with the changing facts on the ground.
[00:16:49] While I don't know about the love part of the saying all is fair in love and war, I know the war part is right. As an example, in the American Revolutionary War, when the British lined up in rows for the fight and the American revolutionaries shot at them from behind trees, the British thought that was unfair and complained. The revolutionaries won, believing the British were foolish and that the cause of independence and freedom justified changing the rules of war.
[00:17:16] That's just how it is.
[00:17:18] This leads me to one final have power, respect power and use power wisely.
[00:17:26] Having power is good because power will win out over agreements with rules and laws all the time. When push comes to shove, those who have the power to either enforce their interpretation of the rules and laws or to overturn them will get what they want. It is important to respect power because it's not smart to fight a war that one is going to lose. It is preferable to negotiate the best settlement possible. That is, unless one wants to be a martyr, which is usually for stupid ego reasons rather than for sensible strategic reasons. It is also important to use power wisely Using power wisely doesn't necessarily mean forcing others to give you what you want that is Bullying them. It includes the recognition that generosity and trust are powerful forces for producing win win relationships, which are fabulously more rewarding than lose lose relationships. In other words, it is often the case that using one's hard powers is not the best path and and that using one's soft powers is preferable.
[00:18:28] When thinking about how to use power wisely, it's also important to decide when to reach an agreement and when to fight. To do that, a party must imagine how its power will change over time. It is desirable to use one's power to negotiate an agreement, enforce an agreement, or fight a war when one's power is greatest. That means that it pays to fight early if one's relative power is declining and fight later if if it's rising.
[00:18:56] If one is in a lose lose relationship, one has to get out of it one way or another, preferably through separation, though possibly through war. To handle one's power wisely, it's usually best not to show it because it will usually lead others to feel threatened and build their own threatening powers, which will lead to a mutual escalation that threatens both.
[00:19:18] Power is usually best handled like a hidden knife that can be brought out in the event of a fight, but there are times when showing one's power and threatening to use it are most effective for improving one's negotiation position and preventing a fight. Knowing what matters most and least to the other party, especially what they will and won't fight for, allows you to work your way toward an equilibrium that both parties consider a fair resolution of a dispute.
[00:19:47] Though it is generally desirable to have power, it is also desirable to not have power that one doesn't need. That is because maintaining power consumes resources, most importantly your time and your money.
[00:19:59] Also, with power comes the burden of responsibilities. I have often been struck by how much happier less powerful people can be relative to more powerful people.
[00:20:10] Case study World War II now that we have covered the dynamics and principles that drive the external order and disorder cycle, which we derived by looking at many cases, I'd like to briefly look at the World War II case because it provides the most recent example of the iconic dynamic of going from peace to war.
[00:20:32] Though it is only one case, it clearly shows how the confluence of the three big cycles, that is the overlapping and interrelated forces of the money and credit cycle, the internal order and disorder cycle, and the external order disorder cycle, created the conditions for a catastrophic war and laid the groundwork for a New World Order.
[00:20:53] While the stories from this period are very interesting in and of themselves, they are especially important because they provide lessons that help us think about what is happening now and what might be ahead.
[00:21:05] Most importantly, the United States and China are in an economic war that could conceivably evolve into a military war, and comparisons between the 1930s and today provide valuable insights into what might happen and how to avoid a terrible war.
[00:21:23] The Path to War to help convey the picture of the 1930s, I will run through the geopolitical highlights leading up to the official start of the war in Europe in 1939 and the bombing of Pearl harbor in 1941.
[00:21:41] Then I will quickly move through the war and the start of the New world order in 1945. With the US at the peak of its power, the global depression that followed the great crash of 1929 led to almost all countries having big internal conflicts over wealth. This caused them to turn to more populist, autocratic, nationalistic and militaristic leaders in policies. These moves were either to the right or to the left and occurred in varying degrees according to the country's circumstances and the strengths of their democratic or autocratic traditions.
[00:22:14] In Germany, Japan, Italy and Spain, extremely bad economic circumstances and less well established democratic traditions led to extreme internal conflicts and a turn to populist and autocratic leaders of the right, that is Fascists. Just as at different points in time, the Soviet Union in China, which also endured extreme circumstances and had no experience with democracy, turned to populist autocratic leaders of the left, that is Communists. The US and the UK had much stronger democratic traditions and less severe economic conditions, so they became more populist and autocratic than they had been, but not nearly as much as other nations.
[00:22:53] Germany and Japan.
[00:22:56] While Germany had previously been saddled with tremendous reparation debts Following World War I, by 1929 it was beginning to emerge from under their yoke via the Young Plan, which which provided for considerable debt relief and the departure of foreign troops from Germany by 1930. But the global depression hit Germany hard, leading to nearly 25% unemployment, massive bankruptcies and extensive poverty.
[00:23:24] As is typical, there was a struggle between populists of the left and populists of the right.
[00:23:31] Adolf Hitler, the leading populist and fascist, tapped into the mood of national humiliation to build a nationalistic fervor. Casting the Treaty of Versailles and the countries that imposed it as the enemy, he created a 25 point nationalistic program and rallied support around it. In response to internal fighting and the desire to Restore order. Hitler was appointed Chancellor in January 1933, drawing large support for his Nazi Party from industrialists who feared the Communists.
[00:24:03] Two months later, the Nazi Party won the most support and the most seats in the German parliament, the Reichstag.
[00:24:11] Hitler refused to pay any further reparation debts, left the League of Nations and took autocratic control of Germany. In 1934, holding the dual roles of Chancellor and President, he became the country's supreme leader. In democracies there are always some laws that allow leaders to grab special powers. Hitler seized them all. He invoked Article 48 of the Weimar Constitution to put an end to many civil rights and suppress political opposition from the Communists and forced the passage of the Enabling act, which allowed him to pass laws without the approval of Reichstag and the President.
[00:24:48] He was ruthless against any opposition. He censored or took control of newspapers and broadcasting companies, created a secret police force, the Gestapo, to root out and crush opposition, deprived Jews of their rights of citizenship, seized the Protestant church's finances and arrested church officials who opposed him. Declaring the Aryan race superior, he prohibited non Aryans from serving in government.
[00:25:12] Hitler took that same autocratic and fascist approach to rebuilding Germany's economy, coupled with big fiscal and monetary stimulation programs. He privatized state owned businesses and encouraged corporate investment, acting aggressively to raise Aryan Germans living standards.
[00:25:28] For example, he set up Volkswagen to make cars affordable and accessible. And he directed the building of the Autobahn. He financed the substantially increased government spending by forcing banks to buy government bonds. The debts that were produced were paid back by the earnings of companies and the central bank, the Reichsbank monetizing debt. These fiscal policies, by and large, worked well in achieving Hitler's goals. This is another example of how borrowing one's own currency and increasing one's own debt and deficits can be highly productive if the money borrowed is put into investments that raise productivity and produce more than enough cash flow to service the debt.
[00:26:06] Even if it doesn't cover 100% of the debt service, it can be very cost effective in achieving the economic goals of the country.
[00:26:14] As for the economic effects of these policies, when Hitler came to power in 1933, the unemployment rate was 25%. By 1938, it was nil.
[00:26:26] Per capita income increased by 22% in the five years after Hitler took power. And real growth averaged over 8% per year between 1934 and 1938. As shown in the following charts, German equities rallied nearly 70% in a steady trend between 1933 and 1938 until the onset of the hot war.
[00:26:49] In 1935, Hitler began to build the military, making military service compulsory for Aryans. Germany's military spending increased much faster than any other country because the German economy needed more resources to fuel itself and it intended to use its military power to seize them.
[00:27:09] Like Germany, Japan was also hit exceptionally hard by the Depression and became more autocratic in response. Japan was especially vulnerable to the Depression because as an island nation without adequate natural resources and it relied on exports for income to import necessities. When its exports fell by around 50% between 1929 and 1931, Japan was economically devastated. In 1931, Japan went broke. That is, it was forced to draw down its gold reserves, abandoned the gold standard and float its currency, which depreciated it so greatly that Japan ran out of buying power.
[00:27:48] These terrible conditions and large wealth gaps led to fighting between the left and the right. By 1932, there was a massive upsurge in right wing nationalism and militarism. In the hope that order and economic stability could be forcibly restored, Japan set out to get the natural resources, for example Oil, iron, coal and rubber and human resources, that is Slave labor it needed by seizing them from other countries, invading Manchuria in 1931 and spreading out through China and Asia. As with Germany, it could be argued that Japan's path of military aggression to get needed resources was more cost effective than relying on classic trading and economic practices. In 1934, there was severe famine in parts of Japan, causing even more political turbulence and reinforcing the right wing, militaristic, nationalistic and expansionistic movement.
[00:28:43] In the years that followed, Japan's top down fascist command economy grew stronger, building a military industrial complex to protect its existing bases in East Asia and Northern China and support its excursions into other countries.
[00:28:58] As was also the case in Germany, while most Japanese companies remained privately held, their production was controlled by the government.
[00:29:06] What is Fascism?
[00:29:08] Consider the following three big choices that a country has to make when selecting its approach to 1 bottom up democratic or top down autocratic decision making 2 capitalist or communist, with socialist in the middle ownership of production and 3 individualistic, which treats the well being of the individual with paramount importance or collectivist which treats the well being of the whole with paramount importance. Pick the one from each category that you believe preferred approach fascism is autocratic, capitalist and collectivist.
[00:29:47] Fascists believe that top down autocratic leadership in which the government directs the production of privately held companies such that individual gratification is subordinated to national success is the best way to make the country and Its people wealthier and more powerful.
[00:30:04] The US and the allies in the US debt problems became ruinous for American banks after 1929, which curtailed their lending around the world, hurting international borrowers. At the same time, the depression created weak demand which led to a collapse of US imports and other countries sales to the US as incomes weakened, demand fell and more credit problems occurred in a self reinforcing downward economic spiral.
[00:30:34] The US responded by turning protectionist to safeguard jobs, raising tariffs via the passage of the Smoot Hawley Tariff act in 1930, which further depressed economic conditions in other countries.
[00:30:46] Raising tariffs to protect domestic businesses and jobs during bad economic times is common, but it leads to reduced efficiency because production does not occur where it can be done most efficiently.
[00:31:00] Ultimately, tariffs contribute to greater global economic weakness as tariff wars cause the countries that impose them to lose exports.
[00:31:08] Tariffs do, however, benefit the entities that are protected by them and they can create political support for the leaders who impose them.
[00:31:16] The Soviet Union had yet to recover from its devastating 1917-22 revolution and civil war. A lost war to Germany, a costly war with Poland and a famine in 1921. And it was wracked by political purges and economic hardships throughout the 1930s.
[00:31:35] China also suffered from civil war, poverty and a famine in 1928-30. So when things worsened in 1930 and tariffs began, bad conditions became desperate conditions in those countries.
[00:31:49] To make matters worse, there were droughts in the US and in the Soviet Union in the 1930s.
[00:31:55] Harmful acts of nature, for example droughts, floods and plagues, often cause periods of great economic hardship that when combined with other adverse conditions, lead to periods of great conflict in combination with extreme government policies. Millions died in the ussr. At the same time, internal political fighting and fears of Nazi Germany led to purges of hundreds of thousands of people who were accused of spying and and shot without trials.
[00:32:24] Deflationary depressions are debt crises caused by there not being enough money in the hands of debtors to service their debts. They inevitably lead to the printing of money, debt restructurings and government spending programs that increase the supply of and reduce the value of money and credit. The only question is how long it takes for government officials to make this move.
[00:32:47] In the case of the U.S. it took three and a half years from the crash in October 29th until President Franklin D. Roosevelt's March 1933 actions. In Roosevelt's first 100 days in office, he created several massive government spending programs that were paid for by big tax increases and big budget deficits financed by debt that the Federal Reserve monetized, he instituted jobs programs, unemployment insurance, Social Security supports and labor and union friendly programs. After his 1935 tax bill, then popularly called the Soak the Rich tax, the top marginal income tax rate for individuals rose to 75% versus as low as 25% in 1930. By 1941, the top personal tax rate was 81% and the top corporate tax rate was 31%, having started at 12% in 1930.
[00:33:42] Despite all of these taxes and the pickup in the economy that helped raise tax revenue, the budget deficits increased from around 1% of GDP to about 4% of GDP because the spending increases were so large. From 1933 until the end of 1936, the stock market returned over 200% and the economy grew at a blistering average real rate of about 9%.
[00:34:07] In 1936, the Federal Reserve tightened money and credit to fight inflation and slow an overheating economy, which caused the fragile US economy to fall back into recession and the other major economies to weaken with it, further raising tensions within and between countries.
[00:34:25] Meanwhile in Europe, the conflict in Spain between the populist of the left, the communists and the populists of the right, the fascists, flared into the brutal Spanish Civil War. Right wing Franco, with the support of Hitler, succeeded in purging left wing opposition. In Spain, during periods of severe economic distress and large wealth gaps, there are typically revolutionarily large redistributions of wealth. When done peacefully, these are achieved through large tax increases on the rich and big increases in the supply of money that devalue debtors claims. And when done violently, they are achieved by forced asset confiscations. In the US and the uk, while there were redistribution of wealth and political power, capitalism and democracy were maintained in Germany, Japan, Italy and Spain. They were not.
[00:35:17] Before there is a shooting war, there is usually an economic war as is also typical before all out wars are declared. There is about a decade of economic, technological, geopolitical and capital wars during which the conflicting powers intimidate each other, testing the limits of each other's power.
[00:35:37] While 1939 and 1941 are known as the official starts of the wars in Europe and the Pacific, the conflicts really began about 10 years before that. In addition to the economically motivated conflicts within countries and the political shifts that arose from them, all of these countries faced increased external economic conflicts as they fought for greater shares of a shrinking economic pie. Because power, not law, rules international relations, Germany and Japan became more expansionist and increasingly began to test the uk, the US and France in the competition over resources. And influence over territories.
[00:36:17] Before going on to describe the hot war, I want to elaborate on the common tactics used when economic and capital tools are weaponized.
[00:36:25] They have been and still are.
[00:36:28] 1. Asset freezes and seizures Preventing an enemy or rival from using or selling foreign assets they rely on.
[00:36:37] These measures can range from asset freezes for targeted groups in a country, for example the current US sanctions of the Iranian Revolutionary Guard or the initial US asset freeze against Japan in World War II, to more severe measures like unilateral debt repudiation or outright seizures of a country's assets.
[00:36:56] For example, some top U.S. policymakers have been talking about not paying our debts to China.
[00:37:01] 2. Blocking capital markets access Preventing a country from accessing their own or another country's capital markets. For example, in 1887, Germany banned the purchase of Russian securities and debt to impede Russia's military buildup. The US is now threatening to do this to China.
[00:37:22] 3. Embargoes or blockades Blocking trade in goods and or services in one's own country and in some cases with neutral third parties for the purpose of weakening the targeted country or preventing it from getting essential items for example the US's oil embargo on Japan and cutting off its ship's access to the Panama Canal in World War II or blocking exports from the targeted country to other countries, thus cutting off their income, for example France's blockade of the UK in the Napoleonic Wars. If you're interested in seeing how these tactics have been applied from 1600 until now, they are available at economicprinciples.org the hot war begins In November 1937, Hitler secretly met with his top officials to announce his plans for German expansion to gain resources and bring together the Aryan race.
[00:38:18] Then he put them into action, first annexing Austria and then seizing a part of what was then Czechoslovakia that contained oil resources. Europe and the US watched warily, not wanting to get drawn into another war so soon after the devastation of World War I.
[00:38:35] As with all wars, the unknowns were far greater than the knowns because a rival powers go into wars only when their powers are roughly comparable.
[00:38:45] Otherwise it would be stupidly suicidal for the obviously weaker power and b there are way too many possible actions and reactions to anticipate.
[00:38:55] The only thing that is known at the outset of a hot war is that it will probably be extremely painful and possibly ruinous as a result. Smart leaders typically go into them only if the other side has pushed them into a position of either fighting or losing by backing down.
[00:39:12] For the Allies, that moment came on 9-1-1939 when Germany invaded Poland, Germany looked unstoppable. In short order, it captured Denmark, Norway, the Netherlands, Belgium, Luxembourg and France, and strengthened its alliances with Japan and Italy, which had common enemies and were ideologically aligned. By seizing territory rapidly, for example oil rich Romania, Hitler's army was able to conserve its existing oil resources and gain new ones quickly. The thirst for and acquisition of natural resources remained a major driver of the Nazi war machine as it pushed its campaigns into Russia and the Middle East.
[00:39:55] War with the Soviets was inevitable. The only question was when.
[00:40:00] Although Germany and the USSR had signed a non aggression pact, Germany invaded Russia in June of 1941, which put Germany in an extremely costly war on two fronts. In the Pacific. In 1937, Japan expanded its occupation of China, brutally taking control of Shanghai and Nanking, killing an estimated 200,000 Chinese civilians and disarmed combatants in the capture of Nanking alone. While the US remained isolationist, it did provide Chiang Kai Shek's government with fighter planes and pilots to counter the Japanese.
[00:40:36] Putting a toe in the war. Conflicts between the US and Japan began to flare. A Japanese soldier struck the US Consul, John Moore Allison in the face in Nanking and Japanese fighter planes sank a US gunship. In November 1940, Roosevelt won re election after campaigning on the promise to keep the US out of the war. Even though the US was already taking economic actions to protect its interests, especially in the Pacific. Using economic supports to help countries it sympathized with and economic sanctions against those it did not. Earlier in 1940, Secretary of War Henry Stimson had initiated aggressive economic sanctions against Japan, culminating in the Export control Act of 1940. In mid-1940, the US moved the US Pacific Fleet to Hawaii. In October, the US ramped up the embargo, restricting all iron and steel to destinations other than Britain and nations of the Western hemisphere.
[00:41:34] The plan was to cut Japan off from resources in order to force them to retreat from most of the areas they had taken over. In March 1941, Congress passed the Lend Lease act, which allowed the US to lend or lease war supplies to the nations it deemed to be acting in ways that were vital to the defense of the United States, which included Great Britain, the Soviet Union and China.
[00:41:58] Helping the Allies was good for the US both geopolitically and economically because it made a lot of money selling weapons, food and other items to these soon to be allied countries who were struggling to maintain production while waging war. But its motivations weren't entirely mercenary. Great Britain was running out of money, that is gold. So The US allowed them to postpone payment until after the war, in some cases waiving payment entirely. Although not an outright declaration of war, Lend Lease effectively ended the United States neutrality.
[00:42:31] When countries are weak, opposing countries take advantage of their weaknesses to obtain gains. France, the Netherlands, and Great Britain all had colonies in Asia. Overstretched by the fighting in Europe, they were unable to defend them against the Japanese. Starting In September of 1940, Japan invaded several colonies in Southeast Asia, beginning with French Indochina, adding what it called the Southern Resource Zone to its Greater East Asia Co Prosperity Sphere.
[00:43:00] In 1941, Japan seized oil reserves in the Dutch East Indies.
[00:43:05] This Japanese territorial expansion was a threat to the US's own Pacific ambitions. In July and August 1941, Roosevelt responded by freezing all Japanese assets in the United States, closing the Panama Canal to Japanese ships, and embargoing oil and gas exports to Japan. This cut off 3/4 of Japan's trade and and 80% of its oil. Japan calculated that it would run out of oil in two years. This put Japan in the position of having to choose between backing down or attacking the US.
[00:43:39] On December 7th and 8th, 1941, Japan launched coordinated attacks on US military forces at Pearl harbor and in the Philippines. This marked the beginning of the declared war in the Pacific, which brought the US into the war in Europe too. While Japan didn't have a widely recognized plan to win the war, the most optimistic Japanese leaders believed that the US would lose because it was fighting a war on two fronts and because its individualistic capitalistic political system was inferior to Japan's and Germany's authoritarian and fascist systems with their command military industrial complexes. They also believed that they had a greater willingness to endure and die for their country, which is a big driver of which side wins in war. One's ability to withstand pain is even more important than one's ability to inflict pain.
[00:44:32] Wartime Economic Policies Just as it is worth noting what classic economic war tactics are, it is also worth noting what classic wartime economic policies are within countries.
[00:44:46] These include government controls on just about everything as the country shifts its resources from profit making to war making. For example, the government determines a what items are allowed to be produced, b what items can be bought and sold in what amounts rationing, c what items can be imported and exported d prices, wages and profits e access to one's own financial assets and f the ability to move one's own money out of the country.
[00:45:16] Because wars are expensive, classically the government g issues lots of debt that is monetized, h relies on non credit money such as gold for international transactions because its credit is not accepted, I governs more autocratically J imposes various types of economic sanctions on enemies, including cutting off their access to capital, and K experiences enemies imposing these sanctions on them.
[00:45:42] When the US Entered the European and Pacific wars after the attack on Pearl harbor, classic wartime economic policies were put in place in most countries by leaders whose more autocratic approaches were broadly supported by their populations. The following table shows those economic controls in each of the major countries.
[00:46:01] The market movements during the hot war years were heavily affected by both government controls and how countries did in battles as the odds of winning and losing changed. The next table shows the controls over market and capital flows that were put in place by the major countries during the war years.
[00:46:18] Stock market closures were common in a number of countries, leaving investors in stocks stuck without access to their capital. I should also note that money and credit were not commonly accepted between non allied countries during the war because of a justifiable wariness about whether the currency would have any value. As noted earlier, gold or in some cases silver or barter is the coin of the realm during wars. At such times, prices and capital flows are typically controlled, so it is difficult to say what the real prices of many things are because losing wars typically leads to a total wipeout of wealth and power. Movements of those stock markets that remained open in the war years were largely driven by how countries did in key battles, as these results shifted the probability of victory or defeat for each side. For example, German equities outperformed at the beginning of World War II as Germany captured territory and established military dominance, while they underperformed after Allied powers like the US and UK turned the tide of the war after the 1942 Battle of Midway, Allied equities rallied almost continuously until the end of the war, while Axis equities were flat or down. As shown, both the German and Japanese stock markets were closed at the end of the war, didn't reopen for around five years, and were virtually wiped out when they did, while US Stocks were extremely strong.
[00:47:43] Protecting one's wealth in times of war is difficult as normal economic activities are curtailed. Traditionally, safe investments are not safe, capital mobility is limited, and high taxes are imposed when people and countries are fighting for their survival.
[00:47:59] Protecting the wealth of those who have it is not a priority relative to the need to redistribute wealth to get it to where it is needed most. As for investing, sell out of all debt and buy gold because wars are financed by borrowing and printing money, which devalues debt and Money because there is a justifiable reluctance to accept credit.
[00:48:21] Conclusion Every world power has its time in the sun thanks to the uniqueness of their circumstances and the nature of their character and culture. For example, they have the essential elements of a strong work ethic, Smarts, discipline, education, etc. But they all eventually decline. Some do so more gracefully than others with less trauma, but they nevertheless decline. Traumatic declines can lead to some of the worst periods in history when big fights over wealth and power prove extremely costly, both economically and in human lives.
[00:48:57] Still, the cycle needn't transpire this way if countries in their rich and powerful stages stay productive, earn more than they spend, make the system work well for most of their populations, and figure out ways of creating and sustaining win win relationships with their most significant rivals. A number of empires and dynasties have sustained themselves for hundreds of years. And the United States, at 245 years old, has proven itself to be one of the longest lasting.
[00:49:29] The most important takeaway from this, and obviously the conclusion is across the board, debt and money are devalued.
[00:49:40] This is exactly what every country does to fuel the scale of the war. What's really interesting about World War I and World War II is that, and as I've talked about on this show, is I think it can be more properly seen as essentially the growing conflicts between the breakdown of the gold standard, which was a breakdown of the late 1800s gold standard due to the issuance of debt and paper money. So I mean he just like he talks about this is a debt cycle. But I think it's important to note that the structure of the financial system, the structure of the money and prices that are supposed to keep it, to rein it in, simply were not able to function because all money being used was proxy money. There was simply too much credit and too much debt. And you could not distinguish it from quote unquote legitimate money that was supposedly backed by gold. And this is exactly what, I don't think it's a coincidence at all that World War I and 2 occurred. The First World War occurred just within, within a decade of the creation of the Federal Reserve.
[00:50:47] And what you saw during World War I and World War II were massive run ups in the amount of debt, the total debt to GDP, I believe actually about about 1929, 1930, just before the onset of the Great Depression. The total debt over that decade grew by 300%. The boom wasn't really a boom. It was, it was a credit boom. It was all owed back.
[00:51:14] And I find something interesting too about Ray Dalio's assessment of some of this era when he talks about in the 1930s when the FDR pumped a ton of money into the economy and took out a ton of debt and then put it into the economy and actually suggested that this caused significant economic growth and that it was growing at 9% per year and the stock market was surging and all this stuff. And doesn't recognize when he's got so many of the other pieces of this picture properly, like talking about the loss of the lowering value of debt and money and currency specifically doesn't realize that that wasn't real growth. None of that was real growth. And more fundamentally, that you cannot establish growth on credit. All you actually do is shift resources away from someone who would spend savings to acquire it or utilize it to someone who is spending it on debt, which literally just means you're lowering the quality of how that capital is being spent by putting it into the hands of someone who normally would not have access to it. And specifically, you're destroying the actual price mechanism, the interest rates ability to determine what is a good investment and what is not. The fact that the stock market goes up and there's quote unquote, 9% GDP increase is obvious because you're just flooding the the economy with new money. That's like saying that if I, you know, if there's five people going to the market to buy eggs and so the equilibrium price is like $1 per egg, and then I just flood a bunch of debt money to a bunch of people. Like, like if those people are the only ones who have actually earned anything or produced anything, then if someone is taking out a loan to buy more eggs, they should have to borrow it from those people. Like, it should explicitly be done by the people who would go to buy those eggs from market, that they would defer that expense in order to lend it to those other people.
[00:53:15] If it is not done that way, then it is not done at a market price and it is not done under any real value constraints whatsoever. It's just a form of fraud that moves resources away from the savers, the people who actually produced stuff, and into the hands of the debtors.
[00:53:31] So if you just loan out, you just create $200 or $500 out of thin air and just give it to a whole bunch of random people at like nearly no interest. Of course they're going to go to the market and they're going to bid up all the egg prices to $2 an egg. That's not growth, that's not production, that's not a better economy. And it doesn't do anything except take money from the savers, take the capital away from the people who actually probably produce the actual eggs, which is why they had the dollars to pay for them. And they don't get to eat the eggs now because now the eggs are $2 because you just issued a bunch of money on it, thin air. And you distribute it to a bunch of debtors and you did it outside of the actual market price. So we don't even know what the eggs are worth anymore. We don't know what the cost of borrowing that stuff over time is. And what actually is going to happen on the back end of this when everybody has to pay it back because we're destroying resources thoughtlessly and we don't have real market prices. And we literally did it only at the expense for the entire output is just. Or the entire result is just the destruction of the value of the people who produce stuff. So to the contrary, the reason the Great Depression lasted the entire 30s and didn't end until the war was over is because that wasn't real growth. It was a disaster. It was just a credit bubble. That was where the stock market and the quote unquote GDP was just reflecting the fact that, oh, we're buying eggs for $2 now. And all you have to do is look at the actual supply and the actual output like they were actually putting caps on like what farmers could make. And what's really funny is they talk about it, he talks about it too, that this wasn't, this onset wasn't, didn't occur until fdr. That's actually not the case either. Hoover basically implemented all of these programs before. And then even though FDR ran a campaign on oh, Hoover didn't do anything to the contrary. He massively raised federal spending and deficits. He, I think it was about 50% increase nominally at the time. Put in a ton of agricultural interventions that ended up being extended and amplified by fdr. He was given out loans to corporations and cooperatives trying to, trying to prop up prices so that prices wouldn't fall back to actual market levels and the market couldn't actually readjust. He actually started the plan or the systems to pay farmers to not produce food at a time when people are poor and they cannot eat. He started putting in a bunch of wage controls and labor policies thinking stupidly that this was going to preserve purchasing power which only made unemployment way worse because it effectively made real wages increase because of the attempt to actually draw back in all of the credit so what happened is basically the. All the people who went to the eggs to buy eggs for $2 are now completely underwater because they never actually had any valuable thing to do with them. They were paying completely like impossible interest rates. And everybody ran out of, literally ran out of eggs. They ran out of eggs because it was taken from all of the people who produced it. And then when they went bankrupt, instead of letting the eggs fall back to $1, which is exactly where they're supposed to be, they propped it up. They forced people to stop the making eggs so that the eggs would stay expensive. And they start, they. They started forcing wages down and, and putting, putting price controls on what you could pay people so that the egg makers had to pay the employees the same price they were paying when eggs were $2. And so what happened? People starved. And unemployment was massive because nobody could afford that shit because it was all fake to begin with. There was financial support. He did loans to banks, to railroads, to tons of different institutions. The Emergency Relief and Construction act was expanded. This is when the Smoot Hawley Tariff act was, was done. It's like 1931 or 1930, I think. And then he implemented the revenue act of 1932, which was the largest peacetime tax hike in U.S. history, again before FDR. And there's actually a. So FDR's New Deal. So not only did FDR claim that Hoover was like, laissez faire when it could not have been anything of the sort of. And then position the New Deal as this like, big thing that Hoover wasn't doing, but now FDR is going to come in and save the day. To the contrary, one of the top economic advisors, and I cannot remember his name, but he wrote like a memoir about his time under FDR and everything. And one of the things that he says in it, which is one of the excerpts that I read, because I didn't actually, actually hadn't read the whole thing, but I read a chapter and there was a really important excerpt that has stuck with me ever since. And he essentially said along the lines of like, we position. FDR claimed all of our politics and everything was that like, Hoover's not doing anything and we're, we're making a completely drastic and different change. This is the New Deal. This is a new plan. Everything's different now.
[00:58:19] And to the contrary, what we were doing behind the scenes and everything, as we laid out, we literally took Hoover's plan and we just did doubled down, but we did all of the exact same things that Hoover did. We just did it bigger public works, social safety net loans, direct subsidies for, for, for building, for farmers. This was actually where there are still things in place from the 30s that FDR put in place that literally just there were, there were whole programs to just slaughter like millions of pigs to keep the price of food high.
[00:58:56] Again, destroying eggs because the eggs are trying to go back down to some sort of a reasonable price. Because the only reason they inflated in price was because a whole bunch of credit that nobody could actually afford. There were, there were not actually the eggs to feed everybody, to do all the projects you cannot grow with credit created out of thin air. All you do is break the pricing mechanism to determine what the cost of time is and what interest rate people ought to pay. Because the people who actually have the resources and now do not have the, have the ability to actually carry the weight of that value into the market to determine what the price of using that shit up is. That is what happens when you have to borrow from people who actually produced the stuff. If you can borrow from people who have no attachment whatsoever because you can just create credit out of thin air, you destroy that mechanism. You obliterate it. And this is exactly how you get this huge freaking cycle. It's almost in 100% across the board. It's because of debt creation. It's because of completely unbacked capacity to, to limit the amount of currency and debt and credit issuance against the actual amount of stuff. It's a disconnect. It's a broken record keeping system literally that can be so easily defrauded that society completely starts to break apart because of how badly it gets out of whack with the real world. And I want you to listen to this list because he talks about. So before going on to describe the hot war, I want to elaborate on the common tactics used when economic and capital controls are weaponized. I want you to listen to this. One, asset freezes and seizures.
[01:00:35] Two, blocking capital markets access and three, embargoes and blockades. Then there's another more piecemeal thing that I'm not, I'm not finding right now. It's like an A through G or whatever on all the different things that are actually going on. More specifically, but notice that all of this is about controlling capital, blocking capital markets access so that people can't, so that other countries can't trade. You can't do contracts seizing assets that are in the possession or, or debt assets that are controlled by, you know, some other country. Like we just did with Russia. Russian sanctions during The Ukrainian war, we seized like $13 billion or whatever of their reserves that are within US banking system. And then hard assets and real money become the. That. That's it, right? Gold is money for enemies. And so the only way that you can actually settle international trade and actually continue to do business is where gold is available, where you still have gold, and where you can actually make that exchange.
[01:01:37] Now, of course, embargoes and blockades are. Are very physical things, but this is why I talk about. And I've. One of my first talks at Bitblock Boom was about the fact that if you go back to World War II and then you put bitcoin in that world, all of the outcomes are entire. Completely different.
[01:01:57] Everything's totally different. Because the ability to move capital, the ability to have capital that is insanely difficult to confiscate, that is insanely easy to hide and to carry with you, to be do. To be able to leave or enter a country with literally millions or billions of dollars worth of capital, to be able to operate in a capital market that cannot be shut down, that the best bet is to just DDoS.
[01:02:22] How long can that be kept up? You're going to try to prevent someone from just accessing all of the global Internet communications technology is making this increasingly difficult. And there are new decentralized systems and a decentralized stateless money that is making it insanely hard for people to stop. Like, even if you can't get access, if it's sent to your keys, there's not really anything anybody can do. And this is also why it's important to get more and more of the market into a real money, into sound money.
[01:02:55] Because what it will do is it will prevent the capacity to issue that credit at prices that don't make sense. The larger the bitcoin market is, the more those interest rates must reflect the opportunity cost of the access of the liquidity in bitcoin. Now, it's still not big enough to do that yet. But once you're looking at a $10 trillion asset, a 15 or $20 trillion asset, and, you know, getting close to where gold is, the story changes very dramatically. And the capital markets and financial markets across the globe change dramatically.
[01:03:32] And we are headed into exactly these times. We are in exactly these times. There's a massive amount of political turmoil. There is the collapse of the old world order. We don't know where things are going. There is a massive alternative monetary structure, global monetary structure is issued by brics. And we are in a very, very great instability for monetary dominance and stability.
[01:03:59] And for the exact same reasons we are in instability when it comes to political and military dominance and stability. So the moral of the story is be careful, watch very closely, stay humble and stack zats and hold your keys because nothing is guaranteed anymore.
[01:04:19] There will be a massive amount of redrawing of boundaries and reshaping of the world, but the more decentralized technology we can build, the more we can build infrastructure outside, explicitly outside, or to be able to get around government controls. The more we can integrate Bitcoin into our daily lives, the better, and I think the more likely we prevent a hot war from getting as bad as it could get. It's like a valve on a pressure cooker that keeps that actually tries to settle to correct the debt problem through financial means, through the through the the actual economic shifting of resources instead of the destruction of the obligations.
[01:05:09] But the one thing you're not gonna want want to have is to be holding on to any of those obligations to have any of that credit or any of the government money.
[01:05:18] So plan accordingly.
[01:05:20] A shout out to Ray Dalio always for an amazing work, amazing book. I'll have the link to it in the show notes so you can check it out if you haven't. Highly recommended.
[01:05:30] And a shout out to the HRF and the Financial Freedom Report.
[01:05:33] Don't forget about the OSLO Freedom Forum June 1st to 3rd this year. Tickets right down in the description and I will catch you on the next episode of Bitcoin. Audible. And until then, everybody, that's my two cents.
[01:06:01] I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want. Maturity is about the ability to project good alternatives in order to pursue even better ones.
[01:06:15] Ray Dalio.
