Author: Kim Scott
Author: Ray Dalio
- Measures of archetypical empire's rise and decline: education, innovation and technology, competitiveness, military, trade, output, financial center, reserve status
- Education is the most leading indicator, reserve status is the most lagging indicator
- Each aspect compounds the other, either upwards or downwards (e.g. education leads to competitiveness, which ultimately leads to financial center and reserve status, but it also means eventual uncompetitiveness and demise)
- Empires are defined by forces of economic (production), political (governance), and military (protection)
- "Debt eats equity, money feeds the hunger of debt, and central banks can produce money"
- Also read as: "central banks produce money [in bad times] to whet the appetite of debt, which would otherwise eat equity [to politically dangerous degrees]"
- Having a reserve currency allows the country exceptional power to borrow, but this borrowing sets the currency's eventual demise due to natural over-extension
- Eventual credit collapse as the reserve currency spirals through devaluation and undesirability as debt instrument
- Both the real and financial economies can cause inflation:
- Real: not enough goods produced relative to demand, price go up
- Financial: too much credit, price go up
- Important to note that you can experience financial inflation (lots of credit) while experiencing real deflation (little demand)
- Central banks can only influence the financial economy, not the real economy. At one point they will run out of the ability to stimulate the real economy through the financial economy.
- Currency devaluation can be either systematically beneficial and destructive
- Beneficial if it raises real productivity by relaxing burdens on production
- Destructive if it stimulates the migration to inflation-hedged assets
- Currency devaluation usually happens in episodic periods of stability followed by a large devaluation
- Three types of monetary policy (in progressing desperation):
- MP1: change interest rates
- MP2: print money to buoy and buy financial assets (e.g. QE)
- QE is meant to be temporary, but usually becomes mandatory to continue
- May not result in inflation; depends on where QE is injected (e.g. 2009-2014 QE was directed at re-capitalizing banks with base money rather than Main street with broad money, so little inflation)
- MP3: central government and central bank working together to distribute targeted money (e.g. helicopter money and debt monetization)
- In debt monetization the central bank just prints away the government's debt
- Usually results in broad money going up, as fiscal policies can directly inject broad money
- Note that monetary policy can only affect base money (banks control broad money via loans), and so only in MP3 is broad money directly injected
- Triffin dilemma: the country with the reserve currency has difficulty balancing domestic vs. international currency needs as the currency's value is propped up by international demand (e.g. petrodollars for oil purchases)
- Affected both Bretton Woods (not enough gold for guns and butter) as well as Petrodollar (unbalanced trade, large external demand propping dollar)
- Wars
- Trade/economic
- Most dangerous part of trade/economic war is when countries cut others off from essential imports
- Technology
- Whoever wins the technology war will likely win the economic and military wars
- Geopolitical
- Dominant power eventually retreats from being geopolitcally overstretched, with emerging powers filling the gap created
- Capital
- Cutting off from capital and its movements (i.e. sanctions); no money = no power
- Holder of reserve currency has the strongest ability to sanction to control capital flows
- However, abusing the ability to sanction causes loss in confidence and usefulness of the reserve currency
- USD currently testing the limits of:
- Enormous amounts of dollar-denominated money and debt
- Falling and negative real returns
- Dollar being used as a weapon
- Fiat monetary system
- Whenever currencies are not desired, they are sold off and devalued with capital moving to other areas. There is no need to have an alternative reserve currency to go into.
- Military
- Culture
- Failing to understand and empathize with the other's values and not allowing others to do what they think is best
- Worst thing is to have a leader be untruthful and emotional in dealing with their populations; this becomes blinding and leads to stupidly excessive wars
- Trade/economic
- Only rule in international relations is that there is no rule. Show up and fight with power.
- Internal disputes and order
- Human nature and the inevitable struggles to make, take, and distribute wealth lead to instability and re-establishment of prosperity
- When the struggles are in healthy competition, productivity rises and prosperity ensues. When it becomes destructive, internal disorder and difficult times ensue.
- Because the big swings happen once in a lifetime, what we know to be true is unlikely to be true next. It is more likely going to be the opposite of what we know.
- Forces shaping internal order:
- Wealth and power class struggle
- Eventually the lower classes reform and then revolt
- Instead of establishing a just or popular government in victory, political supremacy is regarded as the prize
- Peace and prosperity leads to large wealth inequality, who then become overextended, and bad times hit worst for those with little
- Those who have wealth are those who own the means of wealth production, and to maintain it, they work with those who have the power to set and enforce the rules
- Balance of power
- The odds of peace rather than war depend on the willingness to abide by the rules, be mutually agreeable in adapting when necessary to avoid war, and threat of mutually assured destruction
- Cycle of power:
- Formation of alliances, creating factions of roughly equal power
- Without balanced power, little or no fights occur because destruction is assured
- Struggle to determine winner and losers
- Fights among winners and losers (the "purge"), to decide who will lead each side
- Peace and prosperity leading to future power and wealth imbalances
- Increasing conflict as sides are picked
- Formation of alliances, creating factions of roughly equal power
- Favoring short term over long term
- Failure to learn from history
- Wealth and power class struggle
- To have an accurate picture, we have to keep in mind the existing system as well as the changes of the people in the system. If the people change, we should expect outcomes to be different than the past.
- Internal stability cycles:
- New order begins, leadership consolidates power
- Revolutions usually come in two parts: first deposing the old, and then firmly establishing the new via purges of everyone else
- Best leaders are "consolidators of power"
- Resource allocation systems and government bureaucracies are built and refined
- Creating and managing systems that effectively allocate resources to improve productivity
- To be successful, the system has to produce prosperity for the middle class
- Best leaders are "civil engineers"
- Peace and prosperity
- Opportunity and prosperity are abundant and everyone is excited and optimistic
- Wide, equal opportunity for education, resources allocated on merit, debt fuels productive growth
- Best leaders are "inspirational visionary" who can imagine and convey and exciting future, go build that future, and broaden inclusiveness of the prosperity and invest it into the future
- Period of excesses
- Entered via widening gaps of opportunity, wealth, and values, along with unfair conditions entrenching the poor and elites, and declining productivity financed by excessive debts
- Finances of country continue to deteriorate, supporting luxury and overstretched militaries rather than productive assets
- Best leader is "well-grounded, disciplined" who creates restraints on excesses and promotes sound fundamental behaviours and finances
- Bad financial conditions and intense conflict
- Interclass tensions along with worsening financial conditions come to a head
- Classic toxic mix:
- Bad financial shape; bad debts and fiscal obligations
- Large income, wealth, and values gaps
- Severe negative economic shock
- Financial problems occur typically first with the private sector and then into the public sector
- Collapse happens when the government runs out of buying power (e.g. no more currency or devalued currency)
- Government produces more debt than buyers other than the central bank are willing to buy
- If the country can't print more, it has to increase taxes and lower spending
- If it can print, it'll devalue its currency
- In either way, capital flight occurs and then rules are placed on capital movement
- Raising taxes and cutting spending when there are large wealth gaps and bad economic conditions is greatest leading indicator of civil wars or revolutions
- Debt and money that is created at this period can only improve the situation if they are used to produce productivity gains rather than just given away
- What matters most is what the system puts the credit and money into; ideally it is an investment that will raise productivity and real incomes for the whole
- Other rising conditions:
- Decadence
- Bureaucracy
- May make sensible and needed decisions difficult; hiding behind the established law to maintain entrenchment
- Legal and police systems may be used as political weapons
- Populism and extremism
- They are typically more confrontational and likely to lead into conflict
- Class warfare
- Increasing demonization of particular classes
- Loss of truth in the public domain
- Media distorts truth to manipulate people for the benefit of the powers that be
- Fear of speaking truth or standing out
- Rule following fades and raw fighting begins
- Reason is abandoned for passion; winning is the only thing that matters and all ethics are thrown out
- Private police systems form
- Question is how much the existing system will bend before it breaks?
- Best leader is a "strong peacemaker" who can bring together moderates to reshape the existing order in a way that's more fair to everyone
- Alternatively, a "strong revolutionary" who is capable of going through the hell of a civil war and then rebuild
- Civil wars
- All systems will encounter civil wars eventually because all systems benefit some classes at the expense of other classes
- Best leaders are "inspirational generals" who are brutal enough to do whatever is necessary to win
Author: Ken Kocienda
Author: Camila Russo
Author: Steve Anderson
Lessons:
- Master of risk; take thoughtful risk and learn
- Four parts of the growth cycle:
- Test
- Encourage successful failure
- Bet on big ideas
- Practice dynamic invention and innovation
- Build
- Obsess over customers
- Apply long-term thinking
- Understand your flywheel
- See Jim Collins
- Accelerate
- Generate high-velocity decisions
- 6 pagers
- Two types of decisions; categorize decisions you can walk back from and optimize for speed
- Make complexity simple
- Accelerate time with technology
- Promote ownership
- Generate high-velocity decisions
- Scale
- Maintain your culture
- Focus on high standards
- Measure what matters, question what's measured, and trust your gut
- 2004 on free cash flow as most important metric
- Believe it's always day 1
- 2016 on staving off from day 2
- A risk and growth mindset
- Test
- Leadership principles (everyone is a leader)
- Customer obsession
- Ownership
- Invent and simplify
- Are right, a lot
- Learn and be curious
- Hire and develop the best
- Insist on the highest standards
- Think big
- Bias for action
- Frugality
- Earn trust
- Dive deep
- Have backbone; disagree and commit
- Deliver results