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Economic Cycles
/Principles for Dealing with the Changing World Order
/The Big Cycle

The Big Cycle

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The Big Cycle

I'll start with a quick overview, then give you a more complete version and then direct you to my book if you want more. As I studied the 10 most powerful empires over the last 500 years and the last three reserve currencies, it took me through the rise and decline of the Dutch empire and the guilder, the British empire and the pound, the rise and early decline in the United States empire and the dollar, and the decline and rise of the Chinese empire and its currencies, as well as the rise and decline of the Spanish, German, French, Indian, Japanese, Russian, and Ottoman empires, along with their significant conflicts as measured in this chart.

To understand China's patterns better, I also studied the rise and fall of Chinese dynasties and their monies back to the year 600. Because looking at all these measures at once can be confusing, I'll focus on the four most important ones, the Dutch, British, US and Chinese. You'll quickly notice the pattern. Now let's simplify the form a bit. As you can see, they transpired in overlapping cycles that lasted about 250 years with 10 to 20 year transition periods between them.

Typically, these two transitions have been periods of great conflict because leading powers don't decline without a fight. So, how am I measuring an empire's power? In this study, I used eight metrics. Each country's measure of total power is derived by averaging them together. They are education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, the power of their financial center for capital markets and the strength of their currency as a reserve currency.

Because these powers are measurable, we can see how strong each country is now, was in the past, and whether they're rising or declining. By examining the sequences from many countries, we can see how a typical cycle transpires. And because the wiggles can be confusing, we can simplify it a bit to focus on the pattern of cause-effect relationships that drive the rise and decline of a typical empire. As you can see, better education typically leads to increased innovation and technology development, and with a lag, the establishment of the currency as a reserve currency.

You can also see that these forces then declined in a similar order, reinforcing each other's decline. Let's now look at the typical sequence of events going on inside a country that produces these rises and declines. In a nutshell, the big cycle typically begins after a major conflict, often a war, establishes the new leading power and the new world order. Because no one wants to challenge this power, a period of peace and prosperity typically follows.

As people get used to this peace and prosperity, they increasingly bet on it continuing. They borrow money to do that, which eventually leads to a financial bubble. The empire's share of trade grows. And when most transactions are conducted in its currency, it becomes a reserve currency, which leads to even more borrowing. At the same time, this increased prosperity distributes wealth unevenly. So the wealth gap typically grows between the rich "haves" and the poor "have-nots".

Eventually, the financial bubble bursts, which leads to the printing of money, an increased internal conflict between the rich and the poor, which leads to some form of revolution to redistribute wealth. This can happen peacefully or as a civil war. While the empire struggles with this internal conflict, its power diminishes relative to external rival powers on the rise. When a new rising power gets strong enough to compete with the dominant power that is having domestic breakdowns, external conflicts, most typically wars, take place.

Out of these internal and external wars come new winners and losers. Then the winners get together to create the new world order. And the cycle begins again. As I looked back, I saw that these cause and effect relationships drove the cycles of rises and declines all the way back to the Roman empire. I saw how the stories of each one of these cycles blended together with others before, during, and after in the same way as each individual story blends with others to make the epic 500 year story that is our collective history.

And like human life cycles, no two are exactly the same, but most are similar. They're driven by logical cause and effect relationships that progress through stages from birth to strength and maturity to weakness and inevitably decline. However, that's like saying a person's life cycle takes 80 years on average without recognizing that many are much shorter and many are longer. While age can be a good indicator of future longevity, a better way is to look at health indicators.

One can do that with empires and their vital signs too. I found that by watching the indicators of power change, I was able to see what stage a country was in, which helped me to anticipate what was likely to come next. Now, I'll take you through the big cycle in more detail. Give me 20 minutes and I'll give you the last 500 years of history and show you the similar patterns across the Dutch, British, US and Chinese empires. 500 years of big cycles.