Principles for Dealing with
THE CHANGING WORLD ORDER
RAY DALIO
© COPYRIGHT 2021
This PDF contains the charts and tables from the book for printing and easy reference.
1500 1600 1700 1800 1900 2000 Inflection during the
Industrial Revolution Invention of
capitalism (founding of Dutch Stock
Exchange)
Global real GDP is primarily a mix of European countries before 1870 due to limited reliable data coverage across other countries before that point
GLOBAL REAL GDP PER CAPITA (LOG)
7 8 9 10 11
0 10 20 30 40 50 60 70 80
1500 1600 1700 1800 1900 2000
Baby Boom
WWII WWI,
Spanish flu pandemic Thirty Years’ War Third Plague
pandemic
COVID-19
1557 influenza
pandemic Flu outbreak
& famine Dashed line based on experience of Great Britain only
GLOBAL LIFE EXPECTANCY AT BIRTH
C H A P T E R 1
THE BIG CYCLE
IN A TINY NUTSHELL
0 100 200 300 400
1500 1600 1700 1800 1900 2000
War of the Spanish Succession
Napoleonic Wars
World War I
World War II Spanish flu
HIV/
AIDS Indian
and Chinese famines
China’s Great Leap
Forward Series of Indian
famines Cocoliztli
epidemics
Thirty Years’ War, fall of Ming Dynasty,
Indian famine
GLOBAL DEATHS BY CATEGORY (RATE PER 100K PEOPLE, 15YMA)
Conflicts Natural Disasters Pandemics Famines
COVID-19
ESTIMATED DEATHS FROM CONFLICT (MAJOR POWERS, %POPULATION, 15YMA)
Internal Conflict External Conflict Total
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
1400 1500 1600 1700 1800 1900 2000
Collapse of Ming Dynasty, religious wars in Europe
Based on deaths as a share of the population for the major powers and thus will differ from the estimate of global conflict deaths shown in the prior chart
Chinese border
wars, religious
wars in Europe
Wars of Religion in
France Time of Troubles in
Russia European monarchic
wars Seven Years’ War
in Europe
Napoleonic Wars
Ethnic wars in China
WWI
WWII, Holocaust, communist revolutions
Global RGDP Per Capita (2017 USD, Log) USA Equities Cumulative Return
0 20 40 60 80 100 120 140 160
8.50 8.60 8.70 8.80
1929 1931 1933 1935 1937 1939 1941 1943 1945
~10% fall
~12% fall
0 1
1500 1600 1700 1800 1900 2000
Level Relative to Other Empires (1 = All-Time Max)
RELATIVE STANDING OF GREAT EMPIRES
France Germany
Spain Netherlands
Ottoman Empire Japan
India
United Kingdom China
United States Major Wars
Russia
United States United Kingdom
Netherlands China
0 1
-120 -80 -40 0 40 80 120
Level Relative to Peak (1 = Peak)
Years (0 = Empire Peak)
THE ARCHETYPICAL RISE AND DECLINE BY DETERMINANT
Education Innovation and Technology Competitiveness Military
Trade Economic Output Financial Center Reserve FX Status
THE TOP
THE DECLINE THE RISE
New Order New Order
New Order New Order Less productive
Overextended
Losing competitiveness Wealth gaps
Strong leadership Inventiveness Education Strong culture
Good resource allocation Good competitiveness Strong income growth Strong markets and financial centers
Large debts Printing money Internal conflict Loss of reserve currency
Weak leadership Civil war/revolution 13
14
17 18 9
10 1
2 3 4 5 6 7 8
THE TOP
THE DECLINE THE RISE
11 12
15 16
9 11
12 10
13
15 14
16 17 18 1 2
3 4
5 6
7 8
ROUGH QUANTITATIVE SCORING OF MEASURES BY STAGE IN CYCLE
THE RISE THE TOP THE DECLINE
Debt Burden
(Big Economic Cycle) Internal Conflict (Internal Order Cycle) Education
Innovation & Technology Cost Competitiveness Military Strength Trade
Economic Output
Markets & Financial Center Reserve Currency Status Resource-Allocation Effi- ciency
Infrastructure & Investment Character/Civility/
Determination
Governance/Rule of Law Gaps in Wealth,
Opportunity & Values
Dark green = gauge is strong/good Dark red = gauge is weak/bad
1
Relative Power
Time
WorldNew Order WorldNew
Order
United States United Kingdom
Netherlands
China
CHANGES TO THE WORLD ORDER (CONCEPTUAL EXAMPLE)
End of the Old, Beginning of the New (e.g., Dutch to British)
End of the Old, Beginning of the New
(e.g., British to US)
■ Debt restructuring and debt crisis
■ Internal revolution (peaceful or violent) that leads to large transfers of wealth from the
“haves” to the “have-nots”
■ External war
■ Big currency breakdown
■ New domestic and world order
■ Debt restructuring and debt crisis
■ Internal revolution (peaceful or violent) that leads to large transfers of wealth from the
“haves” to the “have-nots”
■ External war
■ Big currency breakdown
■ New domestic and world order
How the Machine Works = (f)…
Case 1 Case
2 Case 3 Case
4 Case 5 Case
6 Case 7 Case
8 Case
9 Case 10, Etc Determinant 1 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 2 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 3 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 4 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 5 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 6 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 7 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 8 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 9 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Determinant 10 Effect Effect Effect Effect Effect Effect Effect Effect Effect Effect Etc
C H A P T E R 2
THE DETERMINANTS
Big Debt/Money/Capital Markets/Economic Cycle THE THREE BIG CYCLES
Geology
ADDITIONAL DETERMINANTS Education
OTHER KEY DETERMINANTS (EIGHT KEY MEASURES OF POWER) Big Cycle of Internal Order and Disorder
Big Cycle of External Order and Disorder
Innovation & Technology Cost Competitiveness
Military Strength Trade Economic Output Markets and Financial Center
Reserve Currency Status
Resource-Allocation Efficiency Acts of Nature
Unhealthy Disorder War
Low Low Weak Weak Unfavorable Low Weak Weak
Unfavorable Poor Disruptive Healthy
Order Peace
High High Strong Strong Favorable High Strong Strong
Favorable Efficient Beneficial
Infrastructure and Investment Character/Civility/Determination
Governance/Rule of Law
Low Weak Weak High
Strong Strong
Gaps in Wealth, Opportunity & Values Large Small
DYNAMICS TO PAY ATTENTION TO Self-Interest
Desire to Gain Wealth and Power Learning from History
Multigenerational Psychological Cycle Time Frame of Decision Making
Individual Not important Limited Decadent Short-Term Country
Important Extensive Strong Long-Term
Leadership Weak
Competent
Openness to Global Thinking Culture
Class Relationships
Closed Unproductive Divisive Open
Productive Cooperative
Political Left/Right Prisoner’s Dilemma
Relationships
Partisan At War Lose-Lose Moderate
Cooperative Win-Win
Balance of Power Peace/War Cycle
Unfavorable War Favorable
Peace
THE UNIVERSE
COUNTRY STATE EMPIRE HUMANKIND ALL LIVING THINGS
TRIBE
(i.e., community)INDIVIDUAL FAMILY
C H A P T E R 2DETERMINANTS ADDENDUM
Type 3: Fiat Money (e.g., USD Today) Maximizes Credit, Minimizes Credibility Type 1: Hard Money
(e.g., Metal Coins) Maximizes Credibility,
Minimizes Credit
Type 2: Claims on Hard Money (e.g., Banknotes)
Expands Credit, Compromises Credibility
C H A P T E R 3
THE BIG CYCLE OF MONEY, CREDIT, DEBT, AND
ECONOMIC ACTIVITY
0%
20%
40%
60%
80%
100%
RESERVE CURRENCIES VS GOLD (SPOT FX)
NLD GBR USA
Dutch Empire ends/
collapse of Bank of Amsterdam
Civil WarUS
Great Depression
Inflationary
’70s WWI WWII War of
1812
Napoleonic Wars
1600 1700 1800 1900 2000
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
1860 1880 1900 1920 1940 1960 1980 2000 2020
SPOT FX VS GOLD
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
(1) (2) (3)
(5)
(6) (4)
C H A P T E R 4
THE CHANGING
VALUE OF MONEY
2
1 10 100 1,000 10,000
1850 1870 1890 1910 1930 1950 1970 1990 2010 2030
FX TOTAL RETURN VS GOLD (LOG)
ITA
USA GBR DEU FRA
JPN CHE ESP NLD
-60%
-40%
-20%
0%
20%
1850 1860 1870 1880 1890 1900 1910
SPOT FX VS GOLD (1850–1913)
ITA
USA GBR DEU FRA
JPN CHE ESP NLD
Broad stability
US Civil War Falling silver prices produce
Japanese devaluation
Fiscal crisis in Spain
-100%
0%
100%
200%
SPOT FX VS GOLD (1913–1930)
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
Post-WWI devaluations and German hyperinflation
Broad stability during 1920s
1913 1915 1917 1919 1921 1923 1925 1927 1929
-100%
-80%
-60%
-40%
-20%
0%
20%
SPOT FX VS GOLD (1930–1950)
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
1930 1935 1940 1945 1950
DEU FX restructured in 1948, effectively confiscating nearly all financial wealth
-100%
-80%
-60%
-40%
-20%
0%
20%
1968
1966 1970 1972 1974 1976
SPOT FX VS GOLD (1966–1977)
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
End of Bretton Woods
-100%
-50%
0%
50%
98 02 06 10 14 18 22 -4%
-2%
0%
2%
4%
6%
REAL LONG RATES (1998–PRESENT) SPOT FX VS GOLD
(1998–PRESENT)
98 02 06 10 14 18
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
CURRENCY AND GOLD REAL RETURNS OF MAJOR COUNTRIES SINCE 1850 (VS CPI, ANN)
Country
Real Returns (vs CPI), Ann
1850–Present 1850–1912 1912–Present
Continuous Govt Bill
Investment Gold Continuous Govt Bill
Investment Gold Continuous Govt Bill
Investment Gold
United Kingdom 1.4% 0.7% 3.1% -0.1% 0.5% 1.1%
United States 1.6% 0.3% 3.6% -1.0% 0.4% 1.0%
Germany -12.9% 2.0% 3.0% -0.9% -18.2% 3.1%
France -0.7% 0.6% 2.6% -0.3% -2.6% 1.1%
Italy -0.6% 0.3% 4.7% -0.5% -2.6% 0.5%
Japan -0.7% 1.0% 5.0% 0.4% -2.2% 1.2%
Switzerland 1.5% 0.0% 3.4% -0.5% 0.5% 0.3%
Spain 1.4% 1.1% 4.5% 0.1% 0.3% 1.5%
Netherlands 1.4% 0.5% 3.3% 0.0% 0.4% 0.7%
China — 3.3% — — — 3.3%
Average 1.2% 0.9% 3.6% -0.3% -0.1% 1.6%
Data for Switzerland is since 1851; data for Germany, Spain, and Italy is since 1870; data for Japan is since 1882; data for China is since 1926 (excluding 1948–50). Average return is un-rebalanced and doesn’t include China.
10 100 1,000 10,000
REAL RETURN OF GOLD (VS CPI, LOG)
USA GBR DEU FRA ITA
JPN CHE ESP NLD CHN
1860 1880 1900 1920 1940 1960 1980 2000 2020
1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 0 4 8 12 16 20
REAL RETURN OF BILLS (VS CPI)
ITA
USA GBR DEU FRA
JPN CHE ESP NLD
THE TOP
THE DECLINE THE RISE
CHN USA
Peace and prosperity Excesses and widening of wealth and other gaps New internal order
and new leadership Resource-allocation systems and government bureaucracies are built and refined
Bad financial conditions and intense conflicts Civil wars and revolutions 5
6 3
4 1
2
THE TOP
THE DECLINE THE RISE
3 4
2 5
6 1
1
23 4
5 6 123 4 5 6 1
2
3 4
56 1
23 4 56 1 2
3 4
56 1
4 23 5 1
6 2
3 4
56 C H A P T E R 5
THE BIG CYCLE OF INTERNAL
ORDER AND DISORDER
MAJOR CHINESE DYNASTIES AND THEIR STAGES (WITH INDICATIVE UPWARD EVOLUTION)
DynastyTang Ming
Dynasty Qing Dynasty DynastySong Yuan
Dynasty RC PRC
1000 1200 1400 1600 1800 2000
600 800
1
2 3 4 5 6
1
2 3 4 5
6
1 2 3 5 4 6
12 3 4 6 5
1 23
MAJOR CHINESE DYNASTIES AND THEIR STAGES
DynastyTang Ming
Dynasty Qing Dynasty DynastySong Yuan
Dyn RCPRC
1000 1200 1400 1600 1800 2000
0 1(1 = All-Time Max) Level Relative to Other Empires
600 800
123
5 6 1
2
4 3 4
5
6 1
2
3 4
5 6
1 2 3 4
5 6
1 2
3
GLOBAL RGDP PER CAPITA (2017 USD, LOG)
1500 1600 1700 1800 1900 2000
7 8 9 10 Emergence 11
of German Empire, 2nd
Industrial Revolution Panic
of 1873
Peak of Qing Dynasty Invention
of printing press (1440)
Dutch Revolt, war with Ottomans Beginning of capitalism
(Amsterdam Stock Exchange)
Thirty Years’
War Collapse
of Ming Dynasty,
English Civil War
Anglo-2nd Dutch War Mahal,Taj peak of Mughal Empire
Glorious Revolution,
Great Turkish War
South BubbleSea
Seven Years’
War American Revolution
French Revolution, collapse of Dutch Rep
Revolutions of 1848
1st Industrial Revolution
Taiping Rebellion,
Opium2nd War
Roaring
’20s Peak of American
Empire Digital Revolution
2008crisis
XiaopingDeng reforms
Meiji Restoration
Great Depression
World War II COVID-
19
Collapse of Qing, WWI, and
post-war recession Napoleonic Wars
Global RGDP is primarily a mix of European countries before 1870 due to limited reliable data coverage across other countries before that point.
HISTORICAL LIKELIHOOD OF INTERNAL CONFLICT BASED ON SHARE OF ECONOMIC MEASURES WORSE THAN THRESHOLD (>1Z)
12% 11%
17%
30%
<40% 40–60% 60–80% >80%
Likelihood of Conflict in Next 5 Years
Share of Economic Measures Worse Than Threshold (>1z) As you go from fewer problems with economic measures to
problems across all measures, the risk of conflict nearly triples
0%
10%
20%
30%
40%
3
3 This chart is based on historical analysis of nine great powers (covering about 2,200 years of history in total). The likelihood of conflict is based on
CONFLICT COUNTRY BEGAN IN…
Dutch Revolt NLD 1566
English Civil War GBR 1642
Glorious Revolution GBR 1688
American Revolution USA 1775
French Revolution FRA 1789
Cas- es that created changes to the system or regime
Trienio Liberal ESP 1820
French Revolution of 1848 FRA 1848
Meiji Restoration JPN 1868
Xinhai Revolution CHN 1911
Russian Revolution and Civil War RUS 1917 German Revolution/End of Monarchy DEU 1918 Rise of Hitler/Political Violence DEU 1929 Rise of Japanese Militarists JPN 1932
Spanish Civil War ESP 1936
Chinese Civil War CHN 1945
Jacobite Risings GBR 1745
Pugachev’s Rebellion RUS 1773
Dutch Patriot Revolt NLD 1781
White Lotus Rebellion CHN 1794
German Revolutions of 1848 DEU 1848
Cases that didn’t create changes to the system or regime
Taiping Rebellion CHN 1851
Panthay Rebellion CHN 1856
US Civil War USA 1861
Muslim Rebellion CHN 1862
Paris Commune FRA 1871
Boxer Rebellion CHN 1899
1905 Russian Revolution RUS 1905
National Protection War CHN 1915
6 February 1934 Crisis FRA 1934
EST EUROPEAN DEATHS FROM CONFLICT (%POP, 15YR MOVING AVG)
Internal Conflict External Conflict Total
0.0%
0.1%
0.2%
0.3%
0.4%
1400 1500 1600 1700 1800 1900 2000
Renaissance, Age of Exploration
Wars of Religion, Thirty Years' War
Enlightenment, capitalism,
Industrial Revolution
Napoleonic Wars
World Wars
Britannica,Pax Second Industrial
Revolution EU integr-
ation C H A P T E R 6
THE BIG CYCLE OF EXTERNAL
ORDER AND DISORDER
DEU EQUITY RETURNS (LOCAL FX,
CUMULATIVE EXCESS) DEU PER CAPITA INCOME (2017 USD)
1933 1935 1937 1939 1933 1935 1937 1939 5,500
6,500 7,500 8,500
-20%
0%
20%
40%
60%
Equities rise nearly 80%
70% between January 1933 and 1938
Per capita income rises 22%
between 1933 and 1938
WARTIME ECONOMIC CONTROLS
Rationing Production
Controls Price/Wage Controls
Import or Export
Restrictions Takeover of Central Bank Allies
United States Yes Yes Yes Yes Yes
United Kingdom Yes Yes Yes Yes Partial
Axis
Germany Yes Yes Yes Yes Yes
Japan Yes Yes Yes Yes Yes
REGULATIONS IMPACTING ASSETS
Market Closures
Asset Price Controls
Asset Ownership Restrictions FX
Controls
Top Marginal
Tax Rate
Limits on New Issuance
Limits on Corp
Profits Allies
United States No Yes Yes Yes 94% — Yes
United Kingdom Yes Yes Yes Yes 98% Yes Yes
Axis
Germany Yes Yes Yes Yes 60% Yes Yes
Japan Yes Yes Yes Yes 74% Yes Yes
0.0 1.0 2.0 3.0
1940 1942 1944 1946 1948 1950
Markets closed in Germany
and Japan Equities in
Germany perform well as the Axis powers
dominate from 1939 to 1942
...while the Japanese war boom fades more quickly, with strict government controls keeping equity prices flat In contrast, both US and UK equities rally almost continuously after the 1942 Battle of Midway until the end
of the war...
Massive declines when markets reopen
EQUITY RETURN INDEX (USD)
USA GBR DEU JPN
Risk Premiums &
Discount Rates
EURUSA Individual
Sectors
CHNJPN Rising
Growth
Assets Rising Inflation
Assets
Falling Growth
Assets Falling Inflation
Assets EquitiesUSA
Credit Spreads
THE BUILDING BLOCKS OF A WELL-DIVERSIFIED PORTFOLIO
C H A P T E R 7
INVESTING IN LIGHT OF THE BIG CYCLE
A LOOK AT ASSET RETURNS ACROSS THE GREAT POWERS
(Real Returns, 10-Year Window, Ann)
UNITED STATES GREAT BRITAIN JAPAN GERMANY
Equity Bond Cash Equity Bond Cash Equity Bond Cash Equity Bond Cash
1900–10 9% 0% 1% 3% 2% 2% 4% 1% 4% 3% 2%
1910–20 -2% -4% -3% -6% -7% -5% 1% -5% -4% -14% -10% -14%
1920–30 16% 7% 5% 10% 8% 7% -3% 12% 10% -24% -95% -86%
1930–40 0% 7% 3% 1% 5% 1% 6% 4% -1% 7% 11% 6%
1940–50 3% -2% -5% 3% -1% -4% -28% -34% -33% -4% -16% -19%
1950–60 16% -1% 0% 13% -1% -1% 27% -1% 5% 26% 5% 2%
1960–70 5% -1% 2% 4% 0% 2% 8% 8% 2% 3% 5% 1%
1970–80 -2% -1% -1% -4% -3% -3% 3% -2% -1% -7% 4% 0%
1980–90 13% 9% 4% 16% 8% 5% 19% 9% 4% 10% 6% 3%
1990–00 14% 6% 2% 12% 8% 5% -7% 9% 2% 13% 7% 3%
2000–10 -3% 8% 0% 0% 4% 2% -3% 4% 1% -2% 6% 2%
2010–20 11% 4% -1% 5% 5% -1% 10% 2% 0% 7% 5% -1%
A LOOK AT ASSET RETURNS ACROSS THE GREAT POWERS
(Real Returns, 10-Year Window, Ann)
FRANCE NETHERLANDS ITALY
Equity Bond Cash Equity Bond Cash Equity Bond Cash
1900–10 1% 3% 2% 5% 1% 1% 3% 4%
1910–20 -7% -8% -6% 1% -6% -3% -9% -8% -6%
1920–30 -2% -1% -4% 1% 11% 6% -6% -5% -1%
1930–40 -10% 2% 0% 2% 6% 3% 4% 5% 5%
1940–50 -20% -22% -23% 2% -3% -6% -13% -30% -30%
1950–60 17% 0% -2% 14% 0% -2% 20% 2% 1%
1960–70 0% 2% 1% 2% 0% 0% 0% 2% 0%
1970–80 -2% -3% 0% -3% 2% -2% -13% -8% -1%
1980–90 16% 9% 5% 16% 7% 5% 15% 4% 6%
1990–00 13% 10% 5% 20% 7% 4% 9% 15% 6%
2000–10 -2% 5% 1% -6% 5% 1% -4% 5% 1%
2010–20 7% 6% -1% 8% 5% -1% 3% 8% -1%
RUSSIA CHINA AUSTRIA-HUNGARY Equity Bond Cash Equity Bond Cash Equity Bond Cash
1900–10 -2% 3% 4% 7% 6% 3% 4% 3% 2%
1910–20 -100% -100% -36% 3% 1% 4% -9% -10% -8%
1920–30 9% 6% 1% -6% -44% -44%
1930–40 2% -7% -6%
1940–50 -100% -100% -73%
1950–60 1960–70 1970–80 1980–90 1990–00
2000–10 15% -2% 4% 1%
2010–20 7% 4% 1% 2% 2% 0%
4
SHARE OF PORTFOLIOS LOSING X% OVER 5 YEARS BY COUNTRY (60/40 PORTFOLIO, REAL RETURNS)
-50% or worse
-90% or worse -25% or worse -10% or worse
0%
20%
40%
60%
80%
100%
1900 1920 1940 1960 1980 2000 2020
4 For China and Russia, bond data pre-1950 is modeled using hard currency bond returns held as though hedged back to local currency by a domestic investor; stocks and bonds modeled as full default at time of revolution. Annualized returns assume a full 10-year period even if markets closed during the decade.
WORST INVESTOR EXPERIENCES (ACROSS MAJOR COUNTRIES)
Major Cases of 60/40 Real Returns Below -40% over a 20-Year Window Country 20yr Window Worst 20yr
Return
(Real, Cumul) Detail
Russia 1900–1918 -100% The Russian Civil War ended with communist rule, debt repudiation, and the destruction of financial markets.
China 1930–1950 -100% Asset markets closed during WWII and were de- stroyed when communist rule took hold in the late 1940s.
Germany 1903–1923 -100% Weimar Republic hyperinflation led to a collapse in assets following WWI.
Japan 1928–1948 -96% Japanese markets and currency collapsed as markets reopened post-WWII and inflation soared.
Austria 1903–1923 -95% Similar to Weimar Germany (though less infamous);
hyperinflation led to poor asset returns post-WWI.
France 1930–1950 -93% The Great Depression, followed by WWII and German occupation, led to poor returns and high inflation.
Italy 1928–1948 -87% Similar to those of other Axis powers, Italian markets collapsed as WWII concluded.
Italy 1907–1927 -84% Post-WWI, Italy suffered from economic depression and high inflation, helping lead to Mussolini’s rise.
France 1906–1926 -75% The early 20th century saw WWI, followed by France’s inflationary currency crisis in the early 1920s.
Italy 1960–1980 -72% Italy endured a series of recessions, high unemployment rate and inflation, and currency declines in the 1960–70s.
India 1955–1975 -66% Post-independence, a series of major droughts caused weak Indian economic growth and high inflation.
Spain 1962–1982 -59% The post-Franco transition to democracy coupled with the inflationary 1970s strained Spain’s economy.
Germany 1929–1949 -50% The Great Depression followed by the devastation of WWII led to a terrible period for German assets.
France 1961–1981 -48% Like other European nations, the 1960–70s saw weak- er growth, currency declines, and high inflation.
UK 1901–1921 -46% The early 20th century saw World War I, followed by the depression of 1920–21.
5
5 Cases of poor asset returns in smaller countries such as Belgium, Greece, New Zealand, Norway, Sweden, Switzerland, and across the emerg-
PERIODS OF WEALTH CONFISCATION
1900 1920 1940 1960 1980 2000
UK
USA Yes Yes
China Yes Yes
Germany Yes
France
Russia Yes Yes Yes
Austria-Hungary
Italy Yes
Netherlands
Japan Yes
6
PERIODS OF STRICT/RISING CAPITAL CONTROLS
1900 1920 1940 1960 1980 2000
UK Yes Yes Yes Yes
USA Yes Yes
China Yes Yes Yes
Germany Yes Yes Yes Yes
France Yes Yes
Russia Yes Yes Yes Yes Yes Yes
Austria-Hungary Yes
Italy Yes
Netherlands Yes
Japan Yes Yes
6 While this diagram is not exhaustive, I include instances where I could find clear evidence of each occurring in the 20-year period. For this analysis, wealth confiscation was defined as extensive seizure of private assets, including large-scale forced, non-economic sales by a government (or revolutionaries in the case of revolution). Relevant capital controls were defined as meaningful restrictions on investors moving their money to and from other countries and assets (although this does not include targeted measures directed only at single countries, such as sanctions).
STOCK MARKET CLOSURES ACROSS MAJOR ECONOMIES
Count Share of Global GDP
10%
20%
30%
40%
50%
0 1 2 3 4 5 6 7
1900 1920 1940 1960 1980 2000 2020
World War I
World War II
9/11 Fall of USSR,
reopening of China's equity markets
0%
DEATHS IN MAJOR VIOLENT CONFLICTS (%POPULATION)
INTERNAL AND EXTERNAL
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
UK 0% 2% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0%
USA 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
China 0% 0% 1% 2% 3% 1% 1% 1% 0% 0% 0% 0%
Germany 0% 3% 0% 9% 15% 0% 0% 0% 0% 0% 0% 0%
France 0% 4% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0%
Russia 0% 4% 5% 10% 13% 0% 0% 0% 0% 0% 0% 0%
Austria-Hungary 0% 2%
Italy 0% 2% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0%
Netherlands 0% 0% 0% 1% 2% 0% 0% 0% 0% 0% 0% 0%
Japan 0% 0% 0% 1% 4% 0% 0% 0% 0% 0% 0% 0%
7
IMPACT OF TAXES ON ROLLING 20-YEAR S&P TOTAL RETURNS
Pre-Tax Post-Tax
(401[k]) Post-Tax (Brokerage)
Avg Ann Total Return 9.5% 8.2% 7.9%
Avg Drag from Taxes (Ann Total Return) -1.3% -1.6%
Avg Drag from Taxes (% of Total Returns) -14% -17%
Avg Ann Real Return 6.2% 4.9% 4.6%
Avg Drag from Taxes (Ann Real Return) -1.2% -1.6%
Avg Drag from Taxes (% of Real Returns) -20% -26%
USA FINANCIAL ASSETS SHARE OF TOTAL ASSETS
40%
45%
50%
55%
60%
65%
1900 1920 1940 1960 1980 2000 2020
1929 stock market bubble
WWII
WWI
FDR Nifty Fifty
1970s
devaluation Volcker tightening/
Reagan Revolution Dot-com
bubble
Housing bubble
7 Tax impact for 401(k) method applies a 26 percent income tax rate (effective average federal tax rate for top quintile from the Congressional Budget Office as of 2017) at the conclusion of each 20-year investment period (i.e., tax-free investment growth). Tax impact for brokerage method separately taxes dividends (at the same 26 percent income tax rate) and capital gains, paying taxes on all capital gains (at a 20 percent rate) from both principal and dividend reinvestment at the conclusion of each 20-year investment period and netting losses against any gains.
REAL RETURN OF BILLS (VS CPI)
USA GBR DEU FRA ITA JPN CHE ESP NLD
-100%
0%
100%
200%
300%
1900 1920 1940 1960 1980 2000 2020
GOLD RETURNS DURING 60/40 DRAWDOWNS
Gold Returns (in Global FX) Global 60/40 Drawdowns
-50%
0%
50%
100%
150%
200%
1900 1920 1940 1960 1980 2000 2020
REAL BOND YIELD
USA EUR JPN
NOMINAL BOND YIELD
-2%
0%
2%
4%
6%
8%
1900 1925 1950 1975 2000 2025
0%
4%
8%
12%
16%
1900 1925 1950 1975 2000 2025 Nearlowest
ever
Nearlowest ever
REAL CASH RATE
USA EUR JPN
NOMINAL CASH RATE
Nearlowest ever
Lowest since
WWII -8%
-4%
0%
4%
8%
1900 1925 1950 1975 2000 2025 -3%
0%
3%
6%
9%
12%
15%
18%
1900 1925 1950 1975 2000 2025
NOMINAL PAYBACK PERIOD (YEARS)
Cash Bonds
REAL PAYBACK PERIOD (YEARS)
0 20 40 60 80 100
00 20 40 60 80 00 20
0 40 80 120 160 200
00 20 40 60 80 00 20
Will never get your buying power back
England
Portugal Habsburg Spain
France
Genoa Venice German (non-Habsburg)
Holy Roman Empire
Ottoman Empire Russia
Poland-Lithuania Sweden
Habsburg Central Europe Habsburg
CountriesLow
Habsburg Italy Papal States
Ming China
Fragmented smaller states
C H A P T E R 8
THE LAST 500 YEARS
IN A TINY NUTSHELL
BOOK/MANUSCRIPT PRODUCTION IN MAJOR EUROPEAN COUNTRIES (MLN)
0 100 200 300 400 500 600
1000 1100 1200 1300 1400 1500 1600 1700 1800 Printing press
Hundreds of millions of texts produced in each of the subsequent centuries
500 600 700 800 900
UK CONSUMER PRICE INDEX
0.0 0.2 0.4 0.6 0.8 1.0
1300 1400 1500 1600 1700 Spanish
Price Revolution
SILVER PRODUCTION FROM MEXICO AND PERU (METRIC TON)
1520 1600 1680 1760 0
2,000 4,000 6,000 8,000
0 2 4 6 8 10
1360 1416 1472 1528 1584 1640 1696 1752 1808 1864 Treasure voyages and
early Ming expansion
Ming-Qing transition
ROUGH COUNT OF TRIBUTARY AREAS
(BASED ON TRIBUTARY VOYAGES OVER 30YR WINDOW)
Level Relative to Own History (1 = Max)
THE NETHERLANDS: INDEX OF KEY DETERMINANTS
0 1
1500 1600 1700 1800 1900 2000
Major Wars Education Innovation and Technology Competitiveness Military Trade
Economic Output Financial Center Reserve FX Status C H A P T E R 9
THE BIG CYCLE RISE AND
DECLINE OF THE DUTCH
EMPIRE AND THE GUILDER
DUTCH ARC 1550–1850
Major Wars Netherlands Habsburg Spain United Kingdom
Level Relative to Other Empires (1 = Max)
0.2 0.3 0.4 0.5 0.7
0.6
1550 1600 1650 1700 1750 1800 1850
Thirty Years’
War Innovation Ships & first
global corporation
Rising Inequality
New Order Congress of
Vienna External Conflict
4th Anglo- Dutch War (1)
(2)
(3) (4)
(5)
(6) Economic
Problems Run on Bank of Amsterdam
Napoleonic Wars Global Empire &
Military Strength New Order
Dutch independence
Year of Disaster (1672)
Economic Prosperity &
Reserve FX
War of the Spanish Succession Dutch
Rebellion
& Eighty Years’ War
HABSBURG SPAIN’S ARC IN THE 1500S AND 1600S
Major Wars Spain Netherlands
Level Relative to Other Empires (1 = Max)
0.1 0.2 0.3 0.4 0.5 0.7
0.6
1500 1540 1580 1620 1660 1700
NewOrder Union of Spain
& Holy Roman Empire
Innovation Ships &
Age of Exploration
Global Empire
Economic Problems Multiple sovereign defaults
Internal Conflict Start of Dutch Revolt
LeadershipWeak Philip II & III
External Conflict
New Order Peace of Westphalia
Habsburgs inherit
Spain
Conquest in the Americas
Spanish Armada defeated
Thirty Years’
War
Catalan &
Portuguese rebellion
Habsburg rule over Spain ends (1)
(2)
(3) (4)
(5)
(6)
SHARE OF MAJOR INVENTIONS (TRAILING 30 YEARS)
0%
4%
8%
12%
16%
1400 1500 1600 1700 1800 1900
EMPIRE SIZE (% WORLD, EST)
1400 1500 1600 1700 1800 1900 20000%
2%
4%
6%
8%
10%
12%
SHARE OF GLOBAL OUTPUT
1400 1500 1600 1700 1800 19002%
3%
4%
5%
6%
7%
SPANISH MARAVEDI COIN (GRAMS OF SILVER, INDEXED)
20 40 60 80 100 120
Spanish coin devalued massively during the 17th century
NLD UNIVERSITIES FOUNDED
(% WLD) NLD BOOKS PUBLISHED (% WLD)
NLD SHARE OF MAJOR
INVENTIONS (OVER 30 YEARS) NLD EXPORTS (% WLD)
0%
2%
4%
6%
8%
1500 1600 1700 1800 1900 2000
0%
10%
20%
30%
40%
1500 1600 1700 1800 1900 2000 0%
2%
4%
6%
8%
10%
12%
1500 1600 1700 1800 1900 2000
0%
10%
20%
30%
1500 1600 1700 1800 1900 2000
MAJOR INVENTIONS (PER MLN POPULATION)
NLD GBR FRA
0 1 2 3 4 5 6 7 8 9
1500 1600 1700 1800 1900
Unprecedented innovation during Dutch
Golden Age UK innovation rises with Industrial Revolution
France lags
REAL GDP PER CAPITA (2017 USD)
EUR NLD GBR ESP DEU FRA
1,000 2,000 4,000 8,000
1400 1500 1600 1700 1800 1900
Dutch outperformance
Spanish decline
British industrialization
German catch-up
DUTCH EAST INDIA CO DIVIDENDS (%GDP)
0.0%
0.2%
0.4%
0.6%
0.8%
1625 1675 1725 1775
5 8 10 13 15 18 20
1550 1600 1650 1700 1750 1800
Limited debasement after the founding of the Bank of Amsterdam
GRAMS OF FINE SILVER PER GUILDER
(A) The Dutch declare independence from Spain
(B) Dutch East India Co, Bank of Amsterdam, and stock exchange founded (C) First and Second Anglo-Dutch Wars
(D) Seven Years’ War and Shadow Banking Crisis of 1763 (E) Fourth Anglo-Dutch War, run on the Bank of Amsterdam
(F) Dutch East India Co nationalized, downfall of the Dutch Empire
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
1500 1550 1600 1650 1700 1750 1800 1850 1900 1950 2000
DUTCH STANDING RELATIVE TO OTHER GREAT POWERS (EST)
Major Wars Netherlands
(A) (B)
(C) (D)
(E) (F) Dutch Golden Age
France takes control of the Netherlands
The Dutch lose to the British The Dutch
defeat the British
Key Events
ACCOUNTS AT BANK OF AMSTERDAM
BANK OF AMSTERDAM HOLDINGS (%GDP)
Gold and Silver Deposits
0%
2%
4%
6%
8%
1600 1650 1700 1750 1800 0
1,000 2,000 3,000
1600 1650 1700 1750 1800
-10%
0%
10%
20%
30%
1600 1625 1650 1675 1700 1725 1750 1775
DUTCH EAST INDIA COMPANY BALANCE SHEET (%GDP)
Assets Debt Equity
Dutch East India Company effectively wiped out in the Fourth Anglo-Dutch War
8
-15 -10 -5 0 5 10
1750 1760 1770 1780 1790 1800
DUTCH EAST INDIA COMPANY PROFIT & LOSS (GUILDER, MLN)
8 This chart only shows the financial results from the Dutch East India Company reported in patria, i.e., the Netherlands. It does not include the parts of the revenue and debt from its operations in Asia but does include its revenue from goods it sourced in Asia and sold in Europe.
0%
1%
2%
3%
4%
5%
6%
7%
1700 1725 1750 1775 1800
BANK OF AMSTERDAM HOLDINGS (%GDP)
Gold and Silver
As deposit holders exchange their guilder for gold and silver, the Bank of Amsterdam loses its holdings in precious metals
0 2 4 6 8 10 12 14
BANK OF AMSTERDAM LOANS OUTSTANDING (GUILDER, MLN)
Govt City Chamber Dutch East India Company
Bank of Amsterdam starts to print to save Dutch East India Company
1775 1780 1785 1790
0.70 0.80 0.90 1.00 1.10
1775 1780 1785 1790 1795 1800
DUTCH GUILDER
vs Gold vs GBP
(A)
(B)
(C)
(D)
(A) Guilder stable through most of the decline era
(B) Fourth Anglo-Dutch War leads to money printing and initial pressure on the guilder (run on the Bank of Amsterdam)
(C) Short period of stabilization as investors seek safe havens at the start of the French Revolution
(D) The French overthrow the Dutch; accounts at the bank basically wiped out
9
VALUE OF THE DUTCH GUILDER
0%
20%
40%
60%
80%
100%
1600 1650 1700 1750 1800
BANK OF AMSTERDAM RESERVE RATIO (PRECIOUS METAL TO MONETARY LIABILITIES)
After the Fourth
Anglo-Dutch War, there is a sharp decline in the ratio of precious metal to deposits (as depositors flee) 0.0
0.2 0.4 0.6 0.8 1.0 1.2 1.4 vs Gold vs Silver vs GBP1.6
Stable during Golden Age
1600 1650 1700 1750 1800
9 To fully represent the likely economics of a deposit holder at the Bank of Amsterdam, we assumed depositors each received their pro-rated share of precious metal still in the bank’s vaults when it closed (that was roughly 20 percent of the fully backed amount, thus the approximately 80 percent total devaluation).
10 100 1,000 10,000
1600 1625 1650 1675 1700 1725 1750 1775 1800
DUTCH EIC TOTAL RETURNS BY YEAR OF INITIAL INVESTMENT (100 = STARTING WEALTH, 50YR INTERVALS, LOG)
1610 1660 1710 1760
Returns go from
incredible to devastating
10 100 1,000
1%
3%
5%
7%
9%
1600 1650 1700 1750 1800 1700 1720 1740 1760 1780 1800
TOTAL EQUITY RETURNS (INDEXED)
Dutch East India Company British East India Company
GOVERNMENT BOND YIELDS
GBR NLD
0 1
1600 1650 1700 1750 1800
DUTCH BOND PRICES (TERM ANNUITIES)
Fourth Anglo- Dutch War and conquest by France Start of various
wars in 1672
Rebound after the wars end, but fall with the Glorious Revolution
Series of military losses against the French
Relative Power
Time
WorldNew Order WorldNew
Order
United States United Kingdom
Netherlands
China
CHANGES TO THE WORLD ORDER (CONCEPTUAL EXAMPLE)
C H A P T E R 1 0
THE BIG CYCLE RISE AND
DECLINE OF THE BRITISH
EMPIRE AND THE POUND
0 1
Level Relative to Own History (1 = Max)
UNITED KINGDOM: INDEX OF KEY DETERMINANTS
1550 1600 1650 1700 1750 1800 1850 1900 1950 2000 Major Wars Education Innovation and Technology Competitiveness Military Trade
Economic Output Financial Center Reserve FX Status
UK ARC 1600–PRESENT
Major Wars United Kingdom Netherlands United States
Level Relative to Other Empires (1 = Max)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
New Order Peace of Westphalia
Global Empire &
Reserve FX Innovation
Industrial Revolution
External Conflict & High
Indebtedness
Inequality
& Losing Innovative
Edge
New Order US-led Western
Block New UK-led Order
Congress of Vienna
English Civil War Victorian EraWWI & Suez crisis WWII
1600 1650 1700 1750 1800 1850 1900 1950 2000
Napoleonic wars (1)
(3)
(4)
(5)
(6) Internal Conflict &
Emergence of Better Government
Glorious Revolution (2) Innovation Financial innovations,
competition with the Dutch
2%
3%
4%
5%
6%
7%
8%
9%
10%
1700 1750 1800 1850 -3%
-2%
-1%
0%
1%
2%
3%
1700 1750 1800 1850
GBR GOVT BOND YIELD
GBR GOVT BOND YIELD (VS MAJOR
COUNTRY MEDIAN)
GBR GOVT REVENUE (%GDP)
Massive expansion of fiscal state
1500 1550 1600 1650 1700 1750 18000%
2%
4%
6%
8%
10%
12%
14%
0 2 4 6 8
1500 1600 1700 1800 1900 1500 1600 1700 1800 1900
NLD GBR FRA
MAJOR INVENTIONS
(PER MLN POPULATION) SHARE OF
MAJOR INVENTIONS
0%
20%
10%
30%
40%
50%
60%
70%
REAL GDP PER CAPITA (2017 USD)
EUR NLD GBR ESP DEU FRA
1,000 2,000 4,000 8,000
1400 1500 1600 1700 1800 1900
Dutch outperformance
Spanish decline
British industrialization
German catch-up
FRA GBR
FRENCH UNIVERSITIES FOUNDED (%WLD, 30YR AVG)
0%
10%
20%
30%
40%
50%
1500 1600 1700 1800 1900 1500 1600 1700 1800 1900
LITERACY RATE (% POP)
10%
20%
30%
40%
50%
70%
90%
60%
80%
FRENCH INFLATION (5-YEAR AVG)
-10%
30%
10%
50%
70%
90%
1700 1720 1740 1760 1780 1800 1820
FRENCH CURRENCY VS GOLD (INDEXED, LOG)
.01%
.1%
10%
1%
100%
1,000%
1750 1770 1790 1810 1830 1850 1870
Currency collapse accelerates from 1792 to 1796
GBR EMPIRE SIZE (% WORLD, EST)
1600 1650 1700 1750 1800 1850 1900 1950 2000 0%
5%
10%
15%
20%
25%
GBR SHARE OF WORLD EXPORTS (% TOTAL)
0%
30%
20%
40%
50%
10%
1700 1800 1900 2000
Between 1850 and 1914, about 60% of world trade denominated in pound sterling
0%
20%
40%
10%
30%
50%
60%
70%
INTERNATIONAL INVESTMENTS (% DEV WLD GDP)
1825 1835 1845 1855 1865 1875 1885 1895 1905
GBR NLD FRA DEU USA
SHARE OF GLOBAL DEBT IN GBP (EST)
0%
20%
40%
60%
80%
1700 1800 1900 2000
SHARE OF GLOBAL
TRANSACTIONS IN GBP (EST)
0%
10%
20%
30%
40%
50%
60%
1700 1800 1900 2000
USA GBR DEU
INVENTIONS
(% OF GLOBAL INVENTIONS)
10%
20%
30%
40%
50%
1870 1890 1910
1870 1890 1910
(% OF GLOBAL GDP) GDP
10%
20%
30%
UK declines as US and Germany catch up
Rise of the US Steady UK decline
10
10 GBR GDP share includes income of countries controlled by the British Empire.
UK WEALTH GAP (TOP 1% WEALTH SHARE)
55%
65%
60%
70%
75%
1800 1820 1840 1860 1880 1900 1920
0%
1%
2%
3%
1870 1913
PUBLIC EDUCATION EXPENDITURE (%GDP)
GBR
DEU FRA
Germany outspends both Britain and France to develop its education system
I
% OF NOBEL PRIZES WON FROM 1900 TO 1913
0%
10%
20%
5%
15%
25%
30%
1870 1880 1890 1900 1910 DEU GBR USA
DEU GBR
SHARE OF WORLD PATENT APPLICATIONS
0%
5%
15%
25%
10%
20%
German patent applications become a significant share of the world’s total and overtake Britain
GBR
DEU FRA
2%
10%
18%
26%
6%
14%
22%
1860 1880 1900
RELATIVE SHARES OF WORLD MANUFACTURING OUTPUT
German manufacturing goes from
less than a half of Britain's in 1860... …to around 75% by 1900
GBR DEU
WARSHIP TONNAGE (THOUSAND TONS)
0 2,000
1,000 3,000
1870 1880 1890 1900 1910 1880 1890 1900 1910 1914
SHARE OF GLOBAL MILITARY SPENDING (EST, 10YR AVG)
5%
15%
10%
Competition between 20%
Germany and Britain leads to a ramp-up in military armament by both countries
DEU REAL GDP PER CAPITA
40%
80%
120%
160%
40%
80%
120%
160%
JPN REAL GDP PER CAPITA
35 37 39 41 43 45 47 49 35 37 39 41 43 45 47 49
JPN SPOT FX VS USD (INDEXED TO 1935)
35 37 39 41 43 45 47 49 35 37 39 41 43 45 47 49
DEU Black Market Spot FX vs USD (Indexed to 1935)
DEU Spot FX vs USD (Indexed to 1935)
0 20 60 100
40 80
0 20 60 100
40 80 June 1948:
FX replaced, with financial asset holders facing -90% haircut
11
GBP SHARE OF GLOBAL RESERVES
(EX-GOLD, EST)
GBP SHARE OF GLOBAL DEBT (EST)
GBP SHARE OF GLOBAL TRANSACTIONS
(EST)
0%
20%
40%
60%
80%
100%
1900 1960 2020
WWII
1900 1960 20200%
10%
20%
30%
40%
50%
60%
70%
1900 1960 20200%
10%
20%
30%
40%
50%
11 This chart shows the official exchange rate between dollars and deutschemarks as well as an unofficial (black market) rate that was based on actual transactions between New York and Germany during that time period. The unofficial rate shows that the true value of the deutschemark was col- lapsing during the period.
USD/GBP (INV) GBR FX VS GOLD (£/OZ, INV)
0.15
0.25
0.35
1900 1935 19700.45
First devaluation (1946–49):
Convertibility crisis when the UK removes capital controls
Second devaluation (1967): UK gives up defending the peg
1935
1900 1970
2 4 6 8 10 12 14 16 18 20
USD/GBP (INV) GBR REAL FX VS TWI
-20%
-10%
0%
10%
20%
1930 1940 1950 1960
0.15
0.25
0.35
1930 1940 1950 19600.45
GBR CURRENT ACCOUNT (%GDP)
-15%
-10%
-5%
0%
5%
10%
15%
1930 1940 1950 1960
GBR CURRENT
ACCOUNT (%GDP) GBR GOLD
RESERVES (OZ, MLN)
60 62 64 66 68 70 20
30 40 50 60 70 80 90
Gold reserves fall over the decade, accelerating in 1967 -3%
-2%
-1%
0%
1%
2%
3%
60 62 64 66 68 70
Deterioration of the current account, connected to EUR recession
GBR REAL FX VS TWI
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
60 62 64 66 68 70
GBR SHORT RATES (DIFF TO USA)
60 62 64 66 68 70 -1%
0%
1%
2%
3%
4%
Sharp rate hikes 5%
amid currency defense
USD/GBP (INV)
60 62 64 66 68 70
0.25
0.30
0.35
0.40
0.45
0%
10%
20%
30%
40%
50%
60%
All Countries Sterling Agreement Countries 70%
Central banks begin selling their sterling reserves following the devaluation. The share of the pound collapses.
Sterling Agreement countries promise to continue holding pounds, but only if 90 percent of their dollar value is gua
