Everything that has happened happened because of causes that made it happen, so reality works like a perpetual motion machine that began an eternity ago and will take us into the future. That perspective has driven my approach to life which has led to whatever success I have had--i.e., I seek understanding of how the reality machine works to build into mental models that allow me to produce bets that, if they are better that those are taking the opposite side of the bets, are profitable.
I’m now at a stage in my life that I want to share my thinking with you to take or leave as you like. I know (and I want you to know) that I will be wrong as well as right. For several reasons, I believe I will be more right than wrong, but I don’t want to bet on that. What I want to give you is the reasoning behind my conclusions for you to assess for yourself. In my study “Principles for Dealing with The Changing World Order” which is being turned into a book, I explain the cause/effect relationships and my mental model for how the world works. In this excerpt that I am sharing now, I explain what I believe are the key determinants that drive “the machine” that is behind the rises and falls of empires and the values of money through time. I will first summarize them at a high level and then, in the coming weeks, I will share more detailed descriptions of a number of them. If you’re interested in what you read below and would like to preorder the book, which is more comprehensive, you can do that here.
As the saying goes, and most people agree, “history rhymes.” It “rhymes” because its most important events repeat, though never in exactly the same way. That is because, while the cause/effect relationships behind those events are timeless and universal, all things evolve and influence each other in different ways. By studying many analogous events in different times and places, their underlying causes and effects become clearer. I have learned that history’s continuously evolving story transpires like a perpetual-motion machine that is driven by cause/effect relationships that both evolve and repeat over time.
To deal with the realities that are coming at me, my process is to . . .
- Interact with this machine and try to understand how it works
- Write down my observations of its workings, along with the principles I have learned for dealing with them
- Backtest those principles through time
- Convert the principles into equations and program them into a computer that helps me with my decision making
- Learn from my experiences and my reflections on my experiences, so I can refine my principles
- Do that over and over again
Imagine a chess player who records their criteria for making different moves in different situations, which they then encode into a computer that plays alongside them like a partner. Each player brings what they are best at to the game. The human player is more inventive, more lateral in thinking, and better able to reason, while the computer can calculate more data faster, is better able to identify patterns, and is much less emotional. This never-ending process of learning, building, using, and refining in partnership with computers describes what I do, except my game is global macro investing, not chess.
In this chapter, I will share my description of the workings of the perpetual-motion machine that drives the rises and declines of empires and their reserve currencies as I have come to understand it thus far, giving you a glimpse into how I play my game. While I’m sure my mental model is wrong and incomplete in any number of ways, it is the best one that I have now and it has proven invaluable to me. I am passing it along for you to probe and explore, take or leave, and build on as you like. My hope is that I will prompt you and others to think about the timeless and universal cause/effect relationships that drive the realities that are coming at us, and the best principles for dealing with them. By stress testing and improving this model through full-throated debate, we will get to the point where we have a largely agreed-upon template of the processes and their causes. By using that template, we can then strive to agree on which stage each country is in and what the best practices are for interacting with it, whether we are individuals taking care of our own interests or we are leaders taking care of our country’s.
In the last chapter, I conveyed a very simplified description of the determinants of the evolution and cyclical rises and declines of empires— most importantly, what I believe to be the primary drivers of the Big Cycles. In this chapter, I will explain the model in much greater detail. It is based on what I saw happen repeatedly through time in the 11 leading empires of the last 500 years, the 20 most important countries of the last 100 years, and the major dynasties of China over the last 1,400 years. To be clear, I do not consider myself to be an expert historian in these cases, and these cases represent only a small percentage of all cases. I only glanced at some of the most important empires in early history, such as the Roman, Greek, Egyptian, Byzantine, Mongol, Han, Sui, Arab, and Persian empires, and I completely neglected many of the other empires that have risen and declined throughout the world in Africa, South Asia, the Pacific Islands, and precolonial North and South America. In other words, what I didn’t examine was much greater than what I did examine. Still, I believe I have seen enough to develop a good mental model that applies to most countries, which has been very helpful to my efforts to understand what is going on today and which helps me to form a valuable, though hazy, picture of the future.
THE CONSTRUCTION OF MY MENTAL MODEL OF THE PERPETUAL-MOTION MACHINE
Just as we can see the arc of the human life cycle from birth to death and how one generation impacts the next, we can do the same with countries and empires. We can see how values, assets, liabilities, and experiences are handed down and how their evolutionary effects ripple out across the generations. We can tell when an empire is approaching its peak and when it is in decline.
All peoples throughout history have had systems or orders for governing how they deal with each other. I call the systems within countries “internal orders,” those between countries “external orders,” and those that apply to the whole world “world orders.” These orders affect each other and are always changing. Such orders have always existed at every level—within families, companies, cities, states, and countries, as well as internationally. They determine who has what powers and how decisions are made, including how wealth and political control are divided. What they are and how they run is a function of human nature, culture, and circumstances. The US now has a certain set of existing political conditions within its democratic system, but both the conditions and the system are ever-changing be- cause of the pressure of timeless and universal forces.
The way I see it, at any moment in time there are both 1) the existing set of conditions that include the existing domestic and world orders and 2) timeless and universal forces that cause changes in these conditions. Most people tend to pay too much attention to what exists relative to the timeless and universal forces that produce the changes. I do the opposite in my attempt to anticipate change. Everything that has happened and everything that will happen has had and will have determinants that make it happen. If we can understand those determinants, we can understand how the machine works and anticipate what will likely be coming at us next.
Since everything that happened and will happen was and is due to the interactions of the parts of this perpetual-motion machine, one can say that everything is predestined. I believe that, if we had a perfect model that took every cause/effect relationship into consideration, we could perfectly forecast the future—that the only thing that stands in the way is our inability to model all those cause/effect dynamics. While that might or might not be right, it tells you where I’m coming from and what I’m striving for.
Most people don’t see things that way. Most people believe the future is unknowable and that destiny doesn’t exist. To be clear, while having a perfect model that gives a nearly perfect picture of that pre- destined future would be great, I don’t expect my model to come close to that. My goal is simply to have a crude yet evolving model that gives me a leg up relative to the competition and relative to the position I would be in if I didn’t have the model.
To build this model, I looked at history quantitatively as well as qualitatively because 1) by measuring conditions and their changes, I can more objectively determine the cause/effect relationships behind them, develop a likely range of expectations, and systemize my decision making accordingly but 2) I can’t measure everything quantitatively.
Continue reading here.
