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2- The best of the time and the worst of the times -The typical Long-Term Debt Cycle

Updated: Jun 13, 2021

The typical Long-Term Debt Cycle

During history Empires (democratic or not) come and go. There seems to be a long term cycle (100 years) governing these events. Broadly speaking, we can look at these rises and declines as happening in three phases:

1) the ascent phase characterized by the gaining of competitive advantages;

This is the prosperous and enjoyable period where productivity gains produce rising wealth and better living standards for the many. Resources are well allocated as there is a coordination of the economic, political, and military forces into a profitable economic/political/military system. Relatively low levels of indebtedness, small wealth, values, and political gaps makes the country fundamentally strong. Hard money is used making it also a good store of wealth.

People work well together to produce prosperity; good education and infrastructure, strong and capable leadership, and a peaceful world order. These peaceful periods last for about 40 to 80 years. Within these cycles are smaller cycles like the short-term debt/business cycle that last about 8 to 10 years.

2) the top phase characterized by sustained strength but eventually sowing the seeds for the loss of the initial competitive advantages

Those who are most successful typically become even more successful but are copied by emerging competitors and become less competitive overtime. At the same time those who become richer tend to work less hard, engage in more leisurely and less productive activities, and at the extreme, become decadent and unproductive. Economic success leads to larger wealth gaps because those who produce a lot of wealth disproportionately benefit.

The currency of most powerful and rich country become the world’s reserve currencies, which gives them the “exorbitant privilege” of being able to borrow more money, which gets them deeper into debt. This makes the cost of maintaining the leadership greater than the revenue it brings in, until the country becomes unprofitable and weakens financially. Money becomes "fiat" and is leveraged "ad infinitum" creating more unfunded debt.

3) the decline phase characterized by self-reinforcing declines these strengths.

Then Come Debt Crises, Defaults, and Devaluations

The decline phase typically happens as the excesses of the top phase are reversed in a mutually reinforcing set of declines.

-Debt levels become very large, and the central banks lose their ability to stimulate debt and economic growth. Economic downturn and high debt levels force authorities to the printing of money, which eventually devalues it.

-Wealth and values gaps get larger and larger with high probabilities of greater conflict between the rich and the poor. That combination of circumstances typically leads to increased political extremism—i.e., populism of both the left(communism) and right(fascism)

-Times also come when another country gains enough economic, geopolitical, and military power to challenge the existing dominant power. When a leading country’s costs of maintaining its empire abroad become greater than the revenue that the empire brings in, that economically weakens the country. When that happens at the same time that other countries are emerging as rival powers, the leading power feels compelled to defend its interests.

This is especially threatening to the leading country both economically and militarily, because greater military spending is required to maintain the empire, which comes when domestic economy start worsening. These conflicts escalates until they are typically resolved through tests of power.

-When the rich fear that their money will be taken away and/or that they will be treated with hostility, that leads them to move their money and themselves to places, assets, and/or currencies that they feel are safer.(Capital flights ) which reduce the tax and spending revenue in the locations experiencing these conflicts, which leads in turn to a classic self-reinforcing hollowing-out process in the places that money is leaving. That’s because less tax money worsens conditions,

When these sorts of disruptive conditions exist, they undermine productivity; that shrinks the economic pie and causes more conflict about how to divide the shrinking resources well, which leads to even more internal conflict that increasingly leads to fighting between the populist leaders from both sides who want to take control to bring about order. That is when democracy is most challenged by autocracy.


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