Importantly, investors must be vigilant and nimble. The time will come when the cash allocation needs to be moved quickly into another category, perhaps land, gold, or art. Likewise bonds may need to be sold once inflation emerges. This is not a “set it and forget it” portfolio. Still, it’s a good starting place for uncertain times.
Above all, investors should study history. There is nothing on the horizon that has not happened before, but there is much that has not happened lately. Memories are short. Psychologists have demonstrated that human behavior overweighs recent experience. Wall Street relies on this recency bias to rob investors by running the same playbook at ten-year intervals. P. T. Barnum said, “There’s a sucker born every minute.” The modern corollary is that suckers have short memories. Wall Street relies on this.
Reading is a fine way to study history, and travel as well. Better yet, read about a historical place, then go there. Before you structure a portfolio, pay a visit to the Eternal City. Arrange to see Palazzo Colonna from inside. As you admire the galleries and private apartments, traverse the marble floors, and gaze at gilded moldings, all still owned by the same family after nine hundred years, ask yourself how they did it.
The Colonna family remains wealthy after surviving wars, plagues, revolutions, lootings, and the ravages of time. Survival was not all about assets. The Colonnas were deeply involved in Roman politics and the Church. Friends at the Habsburg court proved helpful at crucial junctures.
Yet others had friends at court and did not survive nearly so well. The difference between mere money and dynastic wealth is profound. In Palazzo Colonna, you see the difference all around.
CONCLUSION
ON FEBRUARY 11, 2015, A BITTERLY COLD EVENING, I TOOK PART IN A FORMAL DEBATE BEFORE A LIVE AUDIENCE IN A THEATER JUST OFF BROADWAY ON MANHATTAN’S UPPER WEST SIDE. The debate proposition was a loaded gun: “Declinists Be Damned: Bet on America.” This was intended to elicit dueling points on whether America was still ascendant or a power in decline. There were two debaters on each side of the proposition, for and against. My partner and I were against. The proposition left us literally damned before we walked onstage; not a great way to start an evening.
My debate partner was a brilliant Canadian writer and member of Parliament, Chrystia Freeland. Opposing us were Josef Joffe, editor of Die Zeit, the leading newsmagazine in Germany, and Peter Zeihan, a geopolitical consultant, part of a group that founded Stratfor, the private intelligence service. The moderator was John Donvan, a seasoned, sharp-witted international correspondent for ABC News.
The audience voted on the proposition before the debate. The format then called for three presentation rounds interspersed with informal dialogue and questions from Donvan. At the end, the audience voted again. A winner was decided not by majority, but by which team changed the most minds.
Joffe’s argument was straightforward. Critics argued America’s decline for decades, and were consistently wrong. In 1957, America panicked over the Soviet Sputnik satellite, which presaged a Communist conquest of space. In fact, Sputnik was little more than a basketball-size aluminum alloy sphere with a transmitter that went dead after a few weeks. Twelve years later America put a man on the moon, a feat not equaled by another nation. The Sputnik shock energized science education in America and led directly to advances in computers, miniaturization, and telecommunications. America should have said “thank you” to the Soviets for the Sputnik launch. In Joffe’s view, America always wins in the end.
Joffe then offered a litany of other challenges to American power that failed as quickly as Sputnik. In the 1960s, John F. Kennedy was elected president on fears of a missile gap with the Soviet Union. In the 1970s, it was feared that Arab oil money would buy all the farmland in America. In the 1980s, Japan dominated to the point that the Imperial Palace grounds in Tokyo were said to be worth more than the entire state of California. In the 2000s, China was a behemoth that would leave America in the rearview mirror with its cheap labor and high savings.
Yet the Soviet, Arab, and Japanese threats evaporated, and China was failing in real time. America was number one, and remained so despite American anxieties.
Zeihan’s argument was less historical, more classically geopolitical. He articulated America’s demographic destiny and hardwired geographic advantages. Zeihan showed that Europe and China were doing demographic cliff dives, that their populations were aging from highly productive to least productive cohorts, a severe limitation on growth. Russia and Japan were in even worse shape; both had passed the point of aggregate reproductive capacity. Russian and Japanese population declines were irreversible; both nations were destined to fade into economic irrelevance. Of the major economies, only America had the right mix of demographics and immigration to provide enough population growth to produce economic growth as well.
Zeihan also elaborated the economic advantages of water transportation versus trucks. America had, by far, the largest and most widely distributed navigable river system and intracoastal waterways to facilitate cheap transport for agricultural produce, energy, and manufactured goods. Not only did the Atlantic and Pacific oceans make America invulnerable to invasion from east or west, a friendly border with Canada and the deserts and mountains of Mexico made us equally invulnerable to attack from north or south. No other country had such secure borders, and capital-creating capacity within those borders. Case closed.
My partner, Chrystia Freeland, offered a critique based not on technological or geopolitical prowess, but on social justice. She described how the middle class in America has been squeezed almost out of existence. No longer did a rising tide lift all boats; instead the rich got immeasurably richer as the poor grew desperate. America was divided into an elite who attended Ivy League schools and aspired to jobs at Wall Street banks, and an underclass who could not read. Those left in the middle were indebted with mortgages and student loans, and got lower real wages as a result of globalization and the winner-take-all dynamics of twenty-first-century competition. Political polarization emerged from economic polarization, as night follows day. Division was seen daily in the media, polls, and political process. Similar division and decay destroyed representative systems from the Roman Republic to Weimar Germany. Now division defined America.
I was the last debater at the podium. I said our opponents were right. Joffe was correct that prior reports of America’s demise had been greatly exaggerated. Zeihan was right that America’s resources and demographics gave her long-term advantages over rivals. That much was easy to concede.
My line of attack was that a hundred years is too narrow a frame to fathom collapse. History is abundant with sudden collapses of kingdoms, essentially complex social systems, that had stood for centuries. Understanding American decline took a longer perspective.
A dawn observer at the battle of Hastings would have expected the English king Harold to prevail—he had a larger force, higher ground, and home field advantage. That view would have been reinforced by late morning. William the Conqueror’s archers failed to do decisive damage. By afternoon, Harold’s lines stood firm against repeated charges by William. As nightfall approached, Harold had only to hold out awhile longer. William’s forces, without hope of resupply, might have retreated to leave Harold and his progeny on the English throne. Then William mustered one last charge using flanking maneuvers. The English lines suddenly broke. Harold and his closest supporters were killed. William took the throne of England. The collapse of Harold’s kingdom came swiftly, unexpectedly. That is the nature of complexity.
Joffe’s complacency about American success did not diminish my concerns about a sudden reverse. His small slice of history was insufficient bedrock. Joffe was focused on Harold at high noon. I weighed William at twilight.
Zeihan’s case also missed the real threat to America. His history and geography were flawless. Still, no one expects amphibious landings on the Jersey shore or Mexican armored columns advan
cing across Arizona. America was safe from these threats, yet these were not threats that mattered. On March 1, 2016, Admiral Michael S. Rogers, director of the National Security Agency and commander of U.S. Cyber Command, said, “It’s only a matter of . . . when . . . you are going to see a nation state, a group or an actor engage in destructive behavior against critical infrastructure of the United States.” Zeihan’s oceans won’t keep America safe from missiles, satellites, and computer viruses.
Zeihan’s point that America’s waterborne transportation network was an enormous source of capital creation was also correct. Still, what good is capital creation if capital is wasted through inefficient and corrupt public policy? Benefits reaped from America’s natural bounty are repeatedly wasted in asset bubbles and speculation enabled by Federal Reserve interest rate policies. America’s wealth is diverted to a few instead of shared among many.
In pre-debate, I considered reciting the dismal litany of debt and deficits that undermine America’s future. It would have been easy to list CBO projections on U.S. debt-to-GDP ratios, the coming insolvency of Social Security, pathetic growth in the current recovery compared with robust recoveries from the 1950s to the 1990s, declining labor force participation, stagnant real wages, growing income inequality, and more. These trends are not more of the same as Joffe would have it. These trends are new and threatening.
In the event, I took a different, more theoretical approach. I did not posit a long, slow decline. My warning was about instantaneous decline, what I refer to in this book as catastrophic collapse. This type of decline made Joffe’s and Zeihan’s cases irrelevant. The United States might have better prospects in 2025 based on comparative trends. My point was that we would not make it that far.
Collapse could come sooner with consequences so profound that a demographic edge on Russia or Japan would not matter. The United States might have more people to pick up the pieces; the vase would still be shattered.
I took the crowd through a simplified complexity model, using the audience itself to show how a few panicked attendees could cause the entire audience to panic and flee. Fear is contagious, like a virus. My next point was to show that as a system grows in a linear way, instability of the system grows exponentially.
I showed that systemic risk has grown exponentially by concentration of bank assets, growth in derivatives, and increased density through asset swaps, leverage, and shadow banks. I challenged the audience to see how a systemic collapse was not only possible, but inevitable. It will be the greatest collapse in history because it begins at the greatest scale.
To complete the case for America in decline, I described what would ensue in the next collapse. The Federal Reserve would be unable to print money as it had in past crises because its balance sheet remains bloated. Another $4 trillion of money on top of $4 trillion already printed since 2008 could push confidence past the breaking point. Emergency liquidity would come from the IMF in the form of SDRs. An IMF rescue would entail greater control of the international monetary system by China, Russia, and Germany. This dollar hegemony denouement would illuminate American decline as decisively as Bretton Woods ended the British Empire.
When I mentioned SDRs, someone in the live audience laughed aloud. Whether this was ridicule, nerves, or the shock of recognition is impossible to say.
Having taken the audience through complexity, scale, and the consequences of collapse, I concluded my case for America in decline. I trusted the audience to realize this has all happened before, and would happen again.
Complexity theory is a guide to the future, yet there is no greater guide than the past. About fifty yards off Turkey’s southern coast, near a place called Uluburun, lies one of the most important archeological discoveries ever made. Two hundred feet underwater is the wreck of a vessel reliably dated to 1300 BC with its cargo scattered around the site. The wreck was discovered by a local sponge diver, Mehmed Çakir, who reported it to officials.
Authorities arranged for expert archeologists to explore the wreck in dive expeditions starting in 1984. What divers found was a mélange of trade, culture, and economy culled from the interconnected civilizations of the Late Bronze Age. They found evidence of financial complexity 3,300 years ago that would not be unfamiliar to financiers today.
Cargo included ten tons of copper and one ton of tin that could be alloyed to make bronze weapons. Also found were precious materials such as ebony, ivory, gold, cobalt blue glass ingots, and amber. Among the weapons were swords, spears, and daggers. Foodstuffs in the cargo included figs, olives, and grapes. The most spectacular find was a gold scarab inscribed with the name of Egyptian queen Nefertiti.
What most impressed archeologists was the cargo’s provenance. Copper came from Cyprus, and tin from Turkey. Amber came from the Baltic Sea area, more than two thousand miles away. The cobalt blue glass ingots were bound for Egypt where they were highly prized. Foodstuffs originated in the areas of present-day Israel and Syria. What emerged is an ancient version of today’s globalized system of trade and finance.
The wrecked vessel was part of an eastern Mediterranean coastal trade that used prevailing winds—westerly along the African coast, easterly along the Turkish coast—to conduct a counterclockwise circuit through lands now known as Egypt, Syria, Cyprus, Turkey, and Greece.
The cargo revealed a wider trade network that stretched from the Baltic Sea in the north to Sudan in the south, and from the Indus River in the east to Spain in the west—more than sixteen million square miles. The wealth, sophistication, and density of this network are difficult to comprehend, even today.
Then suddenly it collapsed.
The collapse of Bronze Age civilization around 1200 BC, one century after the Uluburun wreck, came with surprising swiftness. Within fifty years, almost every major kingdom and empire crumbled.
Collapse did not affect one culture, but all—Hittites, Egyptians, Mycenaeans, Mesopotamians, and more fell into chaos. Cities burned, trade vanished, invaders arrived, and wealth was lost. Urbanites fled to villages and abandoned the complexity of city life to adopt agrarian lifestyles. A three-hundred-year dark age began that lasted until the rise of Athens and Rome.
The Bronze Age collapse and dark age 3,000 years ago resembles the better-known collapse of the Roman Empire and subsequent dark age about 1,500 years ago. What these twin collapses teach us is that civilization is not linear, it’s cyclical. Society does not get endlessly richer and more sophisticated. Periodically things collapse. It is not the end of the world. It is the end of an age.
The Bronze Age and Roman collapses took place 1,500 years apart. It has been 1,500 years since the last collapse. Is another catastrophe in the works?
It is difficult to know. One can say a civilization’s complexity is the cause of its own collapse. In a stratified society, elites demand more inputs to maintain their privileged position. In ancient societies, these inputs were tribute, taxes, forced labor, slavery, and the spoils of war. In postindustrial societies, these inputs are energy and money. When carbon-based energy is scarce we drill deeper and in more remote locales. We seek substitutes such as nuclear power. When money becomes scarce we print more or seek substitutes such as swaps and SDRs. Societal scale increases. Instability grows exponentially. Complexity breeds complexity.
The collapses of Bronze Age civilization and ancient Rome were not monocausal. Linkages that lift a civilization during its rise accelerate its ruin. Tax revolts in parts of an empire can incite barbarian invasions. Invasion disrupts transportation routes, which cuts off food at a terminus. Commerce along the route withers, which injures precincts far from invaders, and so on.
Historians might identify one of these factors—taxes, invasion, transportation, commerce—and point to it as the cause of civilizational ruin. In fact, all of the factors were causes because all were tightly linked in a network. Once a network is perturbed, nodes die out for seemingly exogenous reasons. Nodes actua
lly fail because energy from the network, as trade, commerce, or money, is constricted. Disruption makes each node vulnerable to formerly weak exogenous factors that suddenly become fatal.
Civilization’s lost networks were as densely connected as those today. Enormous energy, in all its forms, is needed to maintain a complex system. Those energy inputs in the form of money have been synthesized using credit and derivatives in place of money representing real wealth. The new networks are nonsustainable because synthetic money is based on confidence, and what economists call money illusion, both vulnerable to sudden shifts in perception. Today’s network scale means that when collapse comes it will possess unprecedented destructive force.
Each debater had two minutes for closing arguments. Joe and Peter recapitulated their positive themes. Chrystia’s care for society’s left-behinds shone through. After my main argument on the likely dire consequences of complex system dynamics, I opted for a grittier example of real-world decline.
I asked the audience how many had walked to the theater that evening. I knew some had done so; the theater is in a vibrant neighborhood. I suggested that those who walked to the theater had arrived without incident. This was a good guess. New York is the safest major city in the world; crime rates have tumbled since the 1990s.
I said that if the theater were in Brooklyn, a few miles away, and the audience walked there from the Bedford-Stuyvesant neighborhood, their walk would not have been risk free. For Bed-Stuy residents, an undisturbed walk is not a foregone conclusion. There was a chance the police would assault you, smash your face against a wall, handcuff you, and force you into a police van while a quota of other innocents were rounded up. After riding around for hours, the human cargo would be dumped at a precinct for a strip search. This is called stop-and-frisk. The reality is smash-and-strip.
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