History has proven that no empire can last forever and when its decline begins, things get very ugly. The empire then fights back harder, radical measures are taken in the interests of national security to try and extend its eventual demise. The world has witnessed many changes in world orders from the Chinese, to the Dutch, the British and currently, the US. In his book “Principles for Dealing with The Changing World Order,” Ray Dalio presents us with a graph demonstrating “The Relative Standing of Great Empires” (graph at the bottom).
His analysis takes into account various aspects that forge, strengthen and weaken an empire, such as education, innovation, military and others. While I find it hard to believe that China will be the next world order, it's very clear that the path the US has embarked on, especially as it relates to money printing and debt issuance is not helping its world standing or the credibility to the US dollar. Furthermore, it’s currently administered by a very polarized political system as well as dealing with other internal conflicts that it needs to urgently address if it wants to retain it global leadership position.
According to Dalio, one of the determinants of an empire entering its decline phase is when it carries large debts and prints money, as can be seen in his graph at the bottom of this note, depicting "The Rise, The Top and The Decline" of an empire.
The US is unfortunately in the phase where it has enjoyed decades of power, abundance and as issuer of the global reserve currency, it has lost sight of its true values and foundation that took it to the top. If this path continues, one of the unfortunate outcomes is the further weakening of the US dollar to the point where it might face a challenger. The US has reached a debt/GDP ratio of about 120%; a point where reversing course is not getting easier and the solution could be quite harsh. That transition period could be painful for fiat denominated investors; and it’s important to understand how one should hedge their fiat exposure.
Bitcoin alongside gold are two great hedging candidates and they both share and differ in their qualities. Even though gold has an extensive track record of holding its value across time, bitcoin shares the same qualities such as durability, fungibility and scarcity but also has its own such as divisibility, portability and verifiability. Aside from these, bitcoin goes further in that it can also be used at its protocol level to solve great pains of cross-border financial transactions. Using bitcoin for these transactions can lead to better foreign exchange rates than banks, it makes financial settlements instant and disintermediates money. This means that bitcoin can be used at an industrial scale, ready to solve real world problems. Although it currently trades as a speculative asset, bitcoin’s value is the sum of its economic qualities and its industrial use potential. Bitcoin is slowly on its way to be the main base layer for faster, cheaper and more open-access money.
It’s hard to fathom a world where the US is not the leader, but if/when that times comes we will all live a very turbulent economic environment where I foresee bitcoin and gold outperforming all other assets.
