Is a “New World Order” on the way?

Throughout our last few newsletters, you’ve likely noticed a common theme: although things seem alarming in the short-term, market corrections are normal and it does no good to panic. But complacency can be just as harmful as fear, and there may well be big changes on the horizon that are worth considering.

In economic terms, that might mean a reshuffling of global power; or a “new world order,” as celebrated hedge fund manager Ray Dalio puts it. If you have an extra 45 minutes, I recommend you watch his video on the topic. But if you don’t, of course, that’s what this post is for.

The video covers a lot of ground, but I’d say its main idea is this: powerful empires often self-sabotage through overspending, thus devaluing their own currency, thus allowing rival nations to take their place. And the U.S. is in the latter stages of this process.

Not the most appealing prospect, but Dalio makes a strong case for it. Still – he’s not a prophet, just a hedge fund manager. And even if he is right, I stand by my word that there’s no need to panic. Let’s take a moment to consider the possibility and put it in perspective.

Reserve Currency: the Achilles Tendon of Global Superpowers

Although people like to blame our current situation on the pandemic, you could say that it started as far back as the end of World War II, when the U.S. emerged as the leading global superpower.

This new status established the dollar as a global reserve currency – one that other nations would use in common and which would serve as the basis for their currencies. While that cemented America’s role as a world leader, it ironically also set us up for the classic double whammy of debt and inflation.

Increased money supply or decreased GDP can weaken a currency
If GDP doesn’t keep up with money supply, it could spell trouble – as we saw in 2020.

1: Debt to foreign competitors

It turns out that being head honcho is expensive, and holding the world’s reserve currency even more so. In addition to all the military and foreign aid engagements that the job entails, we have to make sure there’s enough of our cash to go around for the entire world.

This would be manageable if our domestic output kept enough money flowing back to us in the form of exports. But it’s pretty hard to be the world’s babysitter/sheriff while also keeping domestic industry in top shape.

So it’s only a matter of time before we have to print more dollars to keep up with everything. From there, it’s only a matter of time before the dollar’s value starts to dilute abroad. And then it’s only a matter of time before other nations start to notice – and pull ahead of us.

2: Widening the domestic wealth gap

Pumping out too much cash has the same effect at home as it does abroad: the dollar loses value and inflation results. But while inflation raises the price of everything, those prices don’t rise at the same rate (all else being equal). This sets up a classic story of the “haves” versus the “have-nots”:

  • Consumer goods tend to rise most quickly and noticeably – a drag for everyone.
  • Wages tend to rise more slowly than the price of goods, which makes it hard for the working class to keep up.
  • Many investable assets (real estate, gold, oil, and even stocks) tend to gain value – so those who own such things will actually make money off of inflation.

In short, inflation will usually put a disproportionate burden on the lower classes, and push the upper classes even farther ahead. It’s not hard to see how that will then lead to destabilizing internal conflict.

Should you be worried about the New World Order?

Dalio makes a strong case for the eventual decline of America’s superpower status, and the underlying concepts he uses are very important (stay tuned for next week’s blog post, where we’ll unpack those in more detail). That said, I see two big reasons why it’s not immediate cause for alarm to the individual investor.

  • FIRST, the economic crisis of the pandemic was a global event – which means there has been a lot of money printing and currency devaluation across the globe simultaneously. Some more than others, but the dollar is still quite strong relative to other currencies (as the above chart indicates).
  • SECOND, if things do start looking dire, you, as the investor, have the tools to stash your cash in other places. If I felt that an emerging foreign economy was set up to usurp the good ol’ U.S. of A, then I would consider protecting myself and my assets by investing in the usurper’s economy.

That’s the beauty of investing in today’s world; unlike a horserace, you are allowed to change your bet mid-race.

— Graham