An alternative to history

Around the early to mid 2000s when I was still in high school, I remember my friends echoing their parents’ sentiment that China was taking over the world. We would hear it over and again in slightly differing iterations from the alarmist to the matter-of-fact with the conclusion always being that we should all be learning Mandarin.

Of course most if not all of us heeded none of it and continued with our lives seeing no visible sign from our school that French has been cancelled with Mandarin taking its place mid-term and that it was compulsory for all. 

Instead, we all carried on with History class reminding us that America had won and that the West was on the right side of evil. Oh good. So long as it continues to be (more or less), all should stay the same. When history is written by the victors, and we are living by the influence of the victors, we start to believe that the Power dynamic we all live under is more or less permanent and that so long as the other side opposes the current victor’s power, they will be seen as being on the wrong side of right. 

If history were indeed about good and evil, then it is a perpetual balancing act between both sides. And of course these 2 concepts are subjective and dependent on each side’s perspective, and therefore the narrative they disseminate through the population they influence.  

“Those who do not know their history are doomed to repeat it” should instead read “those who do know it will definitely repeat it”. That is to say, if history is viewed as a balancing act between good and evil and you the individual learn that you are always on the right side because that is what you learn under the power dynamic that influences where you live, then how can we collectively ever learn from our mistakes? If we are right and they are wrong, and they (the seemingly opposing power) says they are right and we are wrong, then what choice does history have but to repeat (to some degree) given these 2 unchanging and unrelenting positions. 

As Ray Dalio pointed out in his free online book The Changing World Order, there is a more effective way to see this good versus evil power clash between the existing power (the U.S.) and the rising power (China). A cycle that has been ongoing since the beginning of civilization where one power rises as another one begins to fall, and depending on what stage we are in our current cycle in this power shift, there are certain markers that have consistently emerged over time horizons that are sometimes longer than our own lifetimes and therefore beyond our direct experiences of these events. Ray does a wonderful job of showing how economic prosperity and monetary policy plays a leading role in the rise and inevitable fall of all great powers. 

Economics and history have always been presented as separate subjects with history being a documentation of outcomes and not of process which would have been the more useful perspective. So what does this mean for us today?

Currently the U.S. is the existing power and has been since the end of WW2. This has allowed it to influence the world on many dimensions and especially financially by setting the dollar as the world reserve currency which means world central banks hold dollars as a store of value backed by the might of the U.S. economy and the expected continued might of it in the future because ultimately money is just government backed promissory notes.  For the U.S. owning the reserve currency carries with it a lot of powerful implications in its ability to generate and service its own ballooning debt compared with other countries because it can print the currency in which its debt is denominated. The author goes into greater detail about where we are in the power shift cycle and goes to show how this has all happened before not because it is inevitable but because of the indulgence that this power affords the current generation without an understanding of the longer time horizon which this power cycle exists within. For a deeper understanding of the markers and the stage we are currently in, check out the book.

So how do we protect ourselves as individual investors should this scenario play out in our near term future?

The current risk for the world’s dollar (USD) is a devaluation which may shake up other countries’ faith in its stability and hence its moniker as the reserve currency. The general consensus would be to diversify towards a basket of other currencies like that of China’s, and to diversify your stock portfolio to include more international stocks rather than just U.S. based ones. Given where we are at now technologically, we seem to have an option that previous generations only had through the physical accumulation of gold, which has proven to be a long lasting store of wealth for eons. The problem with it of course was that it was difficult to transport and to divide hence the need for promissory notes i.e. currency. Governments have long held the power over currency and therefore the effect over economies both good and bad. The problem as Ray elaborates in his book is that governments wielding such powers tend to make the reasonable choice for today’s prosperity which inadvertently lays the foundation for tomorrow’s misery and in the existing power’s case the loss of such privileges like reserve currency status. Bitcoin and blockchain are emerging as a third alternative that decentralizes the power that has always resided with governments because the technology is now there to do so in a transparent and secure way that allows the tracing of transaction while also allowing the individual autonomy over his/her finances and protection against currency depreciation and devaluation due to the power cycle that has existed since the dawn of civilization and money. This is not to say Bitcoin may not fluctuate in price, it has and will but the circumstances for that and its implication for all of us would no longer be decided by a few central bankers who must prioritize today’s problems over tomorrow’s. In other words, history viewed as a cycle of power shifts gives us a better view on how to change it, because for the first time since gold was carried around in purses, we may find ourselves on an unchartered but transformational trajectory. #ToTheFuture