Global power dynamics: The big cycle... a return of events?

Published on
January 4, 2023
November 23, 2022

The world is in stress mode, both financially and geo-politically. A good understanding from the past usually is a good indicator for what will be happening in the future. From a macro perspective, what is happening and how is this going to play out?

There's major geopolitical forces at work that are reshaping some of the world dynamics. The European energy crises, the petrodollar under siege, BRIC + KSA economic power dynamics shifting political influence.

Ray Dalio calls it the "The Big Cycle" and it is a fascinating theory which consists of three big cycles: 1) the long-term debt-money-economic cycle, 2) the internal order-disorder cycle, and 3) the external order-disorder cycle.

These cycles intertwine and reinforce each other. Together it determines the levels of financial stability, internal stability, and international stability. It's a benchmark of the "status quo" of the world power forces...

These cycles tend to take longer than our lifetime and for that reason it’s hard to recognize the reoccurrence of an event, without studying and understanding our history. From a macro perspective, in an instance when financial disruption occurs, in conjunction with internal and external conflicts, it tends to be strong indicator for "storm", which, eventually, in some shape or form could result in major change.

2). The current stage

Where are we now in the three separate cycles and where does that put us in the big scheme of things?

2.1 Economics

For many countries, the current + accelerating growth of debt levels is unsustainable. In certain countries it's even more unprecedented than in the years leading up to World War II. This puts these countries in the contraction/restructuring stage of the long-term debt-money-economic cycle, meaning that debt assets and debt liabilities have both risen to levels which are impossible for the debtor to meet its payment obligations. A situation like this puts the central bank in an extremely difficult position. It's twofold, either they will have to allow interest rates to rise, which is depressing asset prices and the wider economy, or they have to (continue to) print a lot of money (out of thin air?) to buy debt assets, which in turn depreciates the value of money. This is how countries like Argentina, Turkey or Venezuela started their inflationary journey. A terrible example is Venezuela’s inflation, which hit 686.4% in 2021, whilst Turkey and Argentina forecast their inflation at around 80-90% YoY (most probably this is still "underreported" to the actual numbers).

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Above scenario is playing out in various countries as we speak, each of them dealing in different ways (governments + citizens and institutional powers). Two prime examples recently in the news are the UK and Japan: In both cases, the holders of financial assets experienced big depreciations in asset values through a mix of declines in prices and declines in the value of money. And much more countries are likely going to face similar problems, we do not see any other way out. For most governments, fiscal spending will remain much greater than tax revenues which will require to sell debt which will be met with inadequate demand. As an example, Australia’s gross debt is expected to increase to $1,138B in 2023/24, in the same year the US is forecasted to have a gross debt of $32,887B and India will have a gross debt of approximately 291 trillion Indian rupees.

2.2 Internal disorder

When it comes to the long-term internal order-disorder cycle, most countries, especially Western democracies, and the United States in particular, are now approaching the dangerous internal conflict part of this cycle. New (and extremer) ideologies are popping up on the left and right side of the political spectrum, and conflicts between these two are intensifying, leaving no room for compromises.

2.3 External disorder

The last one of our three cycles is the long-term order-disorder external cycle. We are experiencing heavy conflict between the world’s leading powers, and some are at the brink of, or already in a classic military war. Powerful rival countries fighting over existential wealth and power differences. Look around us, Russia is in conflict with Ukraine and all NATO countries, the US is in conflict with China, North Korea threatens its neighbors and Iran is in conflict with Israel and Saudi Arabia. And these are only the big ones (daily in news). There is conflict between Turkey and Greece, India with Pakistan and China, Yemen and the UAE and KSA, and Palestine is in conflict with Israel.

When conflicts intensify there is a lot of pressure on independent parties to pick sides. Forming allies fuels the conflict even more and turns it into a risky situation. The conflict between Russia and Ukraine has obviously already progressed into a military war, but the fighting is so far limited to conventional weapons and only in Russia and Ukraine.

If combining above mentioned cycles, we are definitely seeing the early signs of being on the brink of a worldwide conflict, which most likely will transform the world order.

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Stage 1: the new order begins after a war, the new leadership consolidates power, debts are restructured or monetized, and wealth gaps and conflicts are reduced.

Stage 2: a further consolidation of power and the building of resource allocation systems

Stage 3: peace and prosperity

Stage 4: great excesses in spending and debt and a widening of the wealth and political gaps

Stage 5: bad financial/economic crises and intense conflicts between comparably powerful parties within countries and between countries

Stage 6: actual wars

The past is not prediction of the future, but one might learn more from it than you actually ever imagine! Definitely an interesting theory and something to watch closely!

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