Reaching the peak probably includes a double-digit number of short debt cycles and usually at least one long debt cycle. I will discuss the peak and fall in more detail later, in a long debt cycle. The road to the top leads to the sowing of the seeds of the fall. Prosperous times increase people’s incomes which makes the cost of labor more expensive. The competitiveness of labor is declining. The smartest, disadvantaged nations know how to select the ways that work best for them from the ways produced by the top nation, which further reduces its competitiveness. Copying is easier and faster than developing anything new which improves their competitiveness at a lower cost.
Newer generations will replace those who have raised the nation to
the top of the world. They are accustomed to wealth without as much
effort as previous generations. They have not experienced time
without wealth. They demand more of their free time which reduces
work ethic. More money and less work will lower the nation’s
productivity compared to its competitors. If it lasts long enough,
the country's relative situation will deteriorate too much.
The reserve currency position of a leading economic country allows
for a high debt burden. Consumption and borrowing capacities are
growing first, leading management and citizens to believe in a strong
economy. The country is growing its army and fighting to maintain its
leading position in the world more than is necessary. In the end, the
former consumes more government resources than brings benefits. At
the same time, citizens are spending more on borrowed money. The
former will improve the chances of the country and its citizens to
borrow abroad as the reserve currency strengthens. They increase
wealth disparities. Citizens' ability to cooperate deteriorates as
the wealthy safeguards its interests at the expense of others.
The decline begins as the peak surpluses turn into declines and
the interests of the rival nation strengthen. The central bank’s
ability to increase debt and economic growth will be lost and at the
same time the nation is hit by a recession or depression. This leads
to the printing of money which leads to an excessive depreciation of
the reserve currency. The relative position of the poor is
deteriorating more than the prosperous, increasing the popularity of
political extremism. The former require the latter to take action to
reduce wealth disparities, i.e. they want income transfers by raising
taxes. The wealthiest transfer their wealth to safety with a lower
tax rate, which further weakens the position of the poor.
These factors reduce productivity and the wealth distribution is
reduced. In the worst case, the result is totalitarianism like
Hitler's Germany. At the same time, a rival nation can challenge a
leading economic country, which increases the potential for military
conflict, which in turn increases the number one country’s spending
that it cannot afford. It has to choose between either military
conflict or avoiding it. The decline is further in the long debt
cycle.
Brief description of the progress of the cycle
The cycle of a leading economic country follows the same formula.
It begins with a new world order and ends with the birth of a new
one. In the beginning, the leading economic country will determine
the creation of new rules. It has the most power. Now such actors are
e.g. The IMF and the World Bank. In the end, power is gone. The next
leader contributes to the renewal of the rules or orders the creation
of new ones. If a new world order emerges through military conflict,
then the most likely new leader is its winner.
The economic situation of the leading country is the best at the
beginning of the new world order. The country probably doesn’t have
much debt. The debts of others to it are much greater. In the coming
decades, the country will prosper. It develops as short-term debt
cycles fluctuate, so does the economic growth. During fluctuations,
economic agents become slightly more indebted on average until a
large-scale debt bubble is created, for which the country's main
economic operator, usually the central bank, will have to lower
interest rates to zero. At the same time, it will have to grow its
money supply, otherwise it would result in massive bankruptcies and /
or long-term deflation. Excessive monetary pressure leads to
hyperinflation and / or other economic catastrophe. A suitable amount
of printing is difficult to accomplish in the long run.
Debt bubble management tends to weaken the financial position of
taxpayers in relative terms the most because they have been used by
the smart money. The latter usually has so much power that it does
not have to pay as high a price as it should. Taxpayers become bitter
towards the rich which adds to internal contradictions. The
bitterness is also compounded by the fact that money supply is
increased until its benefits to the national economy go to zero. The
purchasing power of the people is declining as the prices of various
asset classes rise despite non-existent economic growth. At the same
time, income disparities are widening.
Too much bitterness can lead to the division of the people which can lead to a civil war. Another option is for the people to find a common enemy and fight against it. Whatever the conflict, it will eventually lead to debt restructuring and a renewal of the political system. After these, a new world order is born. Although the above-mentioned course of events present themselves mainly as separate events, many take place at the same time as possible wars and political reorganizations.
