"New world order", a term that was first coined by former US President Woodrow Wilson in reference to the notion of how nations would function by the Axis Powers in pursuit of their common interests through a system of international administration (the League of Nations), a goal that was swiftly realized to be unrealistic. A world order is a manner in which the universe functions.
Ray Dalio, the co-chairman of the world’s largest hedge fund, suggests in his book “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail” that the world is changing its order due to the ongoing fight over wealth and power. Indeed, the world has seen empires prospering at points and then falling at some other points in history leaving space for another great power, and this is how life goes in everything; everything has a life span. Ray has mentioned in his book eight types of power: 1) education, 2) competitiveness, 3) technology, 4) economic output, 5) share of world trade, 6) military strength, 7) financial center strength, and 8) reserve currency. Those eight powers were the major factors of the change.
A rough assessment of the relative status of powers throughout history can be seen in the graph below. This article will let you dive into history in a couple of minutes to witness how “word order’’ is changing.
.png)
Figure 1: Rough Estimate of the relative standing of powers (1500-2000) based on Ray, D (2020). Chapter 5: The Big Cycles of the United States and the Dollar, Part 1.
As seen in the chart above, in the early 1500s, the Spanish Empire was the dominant economic power in the Western side of the world, and the Ming Dynasty (China) was the most dominant in the Eastern side of the world. Afterwards, the Dutch dominated in the mid-1600s till the mid-1700s amid the rise of globalization and high trading power. The Dutch were leading all pillars; military, education, trade, etc. and they had the lead in imposing the first reserve currency in the world, the Dutch guilder. Following the Dutch, the British emerged on both the economic and political global scene, and while the British were enjoying their capitalistic peak, other European countries and the US were building up their empires, and a world war began in 1914 with the US, Britain, France, Japan, and Italy having a lead. The United States decided to become even more isolated after World War I, while Britain grew and oversaw its vast colonial empire.
In the immediate post-war period, the monetary system was in transition. Even while the majority of nations worked to reestablish the convertibility of their currencies to gold, this didn't happen until after a period of significant devaluations and inflation. Then in the mid-1920s, economic bubbles burst , leading to financial depressions, eventually leading to another world war in the 1940s. The United States was the major victor in 1945. The United States acquired around 80% of the world's gold showing both a military and economic victory. And since gold was used as currency at the time, this means that the US controlled about half of the global economy, 80% of the world's gold, and a powerful military. Hence, the world was governed by American law. In 1971, the US defaulted on its promise to deliver gold in exchange for paper dollars. This marked the end of Type 2 gold-backed monetary system and the transition to a fiat system.
This fiat system caused three cycles starting with the 1982 and 2000 dotcom bubble, 2002-2007 real estate bubble and the 2009-2019 investment bubble in which we are currently living its percussions. Each of these episodes caused debt and non-debt commitments to rise to ever larger levels, which in turn prompted governments of the post-war allies to lower interest rates and print record quantities of money. Inequalities increased among nations, which exacerbated internal strife during recessions.
Now we had a global perspective of the past, we can have an educated guess towards the future. The US is witnessing a downward trend, while China is moving toward its peak. History has demonstrated that economic competition is inevitable. Power is changing, and China's strength in its manifestations is becoming as powerful as the United States. China has a population that is over four times larger than that of the United States. It will be twice as big if it increases per capita income to the level of the United States, and in terms of economics, being twice as big means having more power. Also, the alliance of powers between the Chinese and the Russians is apparent nowadays to challenge the preeminent powers. However, this does not necessarily mean that it is predestined.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.