In his book, Principles for Dealing with The Changing World Order, Ray Dalio points out that long-term debt/capital cycles last 50-100 years. He said that "a lot of money and credit 90 years ago pushed financial asset prices up, which widened the wealth gap, and led to an era of populism and conflict. We are now seeing the same forces at play in the post-2008 era."
The next decade is likely going to be shaped by high public debt, transformative technologies and conflict between the haves and have-nots. Consider the facts already in evidence as early indicators of the change ahead:
The new world order promotes two global economies
China and the U.S. are embroiled in technological, geopolitical, economic and military competition. By almost every measure, U.S. influence on the world order is being diminished in direct proportion to China's rise.
Military experts point out that the U.S. still holds a global military advantage. But the U.S. has not been dominant in wars fought in Asia, such as in Korea, Vietnam and Afghanistan. It's highly likely that there will be military skirmishes in the years ahead, as China tests America's resolve in Taiwan and the South China Sea.
This will then translate into economic competition that will fall across similar lines. Given the U.S. stance on tariffs, the world is bifurcating into two economies--east and west.
Magnified by the pandemic and supply chain shocks, companies are seeking partners closer to home, managed through just-in-time, vertically integrated solutions. In the Americas, Mexico and South America will be the preferred sources of supply.
Redistribution of wealth
There are, as Dalio points out, two U.S. economies split between the bottom 60% and top 40% of U.S. wage earners. While there has been stimulus provided by the U.S. government for those in need, the pandemic only magnified income inequality. The actions of the Federal Reserve to boost liquidity have disproportionally benefited investors in public markets. The U.S. stock market tracks with the size of the Federal Reserve balance sheet.
Much of the nationalism that defined European and U.S. politics over the last six or seven years is a function of shifts in wealth and power. Just as there is a business cycle, there is also a "disorder cycle." In the U.S., there is a level of disorder not seen since the end of the Vietnam war. It has come in the form of protests, crime, the attack on the U.S. Capitol and controversy over vaccines.
An element of the disorder cycle will be the pitting of old against young and rich against poor. Calls for higher tax rates on wealthier Americans are certain to continue, with civil unrest only to become more prominent.
The end of a business cycle
Throughout history, central banks have stimulated sputtering economies by lowering interest rates and providing liquidity. They then reverse course once inflation becomes evident. Business cycles are tied directly to monetary policy cycles.
By 2026, national debt is expected to reach $38 trillion. In about 10 years the U.S. will reach a tipping point, where annual tax receipts will be roughly equal to entitlements (such as Medicare and social security) and mounting interest payments. All other government spending such as military spending, Homeland Security, the Department of Energy and Department of Education will be unfunded without expanding deficits. Undoubtedly, bonds sold by the U.S. government in the future will be at a higher rate, as the government's debt-worthiness will decline. The U.S. government will be forced into a corner where it will have to print more money, which drives devaluation of the dollar and higher inflation.
The war for AI supremacy
Digital technologies will soon be the hub for advanced analytics that boost economic value, agility and speed. According to McKinsey, AI will drive $13 trillion of economic output by 2030, increasing global GDP by about 1.2% annually.
AI will become a dominant technology, facilitating everything from energy grids, smart cities, autonomous driving, disease detection and diagnosis to genome protocols. Google, Amazon and others are duking it out on who can deliver AI as a service en masse.
Perhaps AI's most nebulous consequence will be a shift in the world order. Military experts point out China's gain in AI research and graduating engineers as a threat, but suggest current AI military spending is about even. AI will be at the center of the U.S.-China conflict. And advantage in AI will deliver economic and military supremacy.
Shifts in U.S. demographics
The U.S. is experiencing a significant shift in demographics from boomers to millennials. With this shift comes a fundamental split between older Americans who tend to be more affluent and conservative, and younger Americans who tend to be more liberal.
In each year between now and 2036, the electorate will get younger and will tilt control to candidates they favor. If recent history is an indicator, they will support candidates who support higher social spending.
These facts offer a scenario where the U.S. will be in a less dominant position in terms of technological, economic and military prowess. China will pressure the U.S., and mounting U.S. debt will limit the government's ability to manipulate the economy with lower interest rates.
Business owners and investors will need to recalibrate their expectations and thinking. Talk to your advisor about inflation-resistant investments that are safe harbors of value. If you run a business, look for ways to reduce risk, such as currency hedges and a tighter supply chain that you control.
Be wary of the changes ahead.