âBecause I covered that cycle comprehensively in Chapters 3 and 4, I wonât explain it here in detail. But to understand Stage 5, you need to know that it follows Stage 3, in which there is peace and prosperity and favorable debt and credit conditions, and Stage 4, in which excess and decadence begin to bring about worse conditions. This process culminates in the most difficult and painful stageâStage 6âwhen the country runs out of money and there is typically terrible conflict in the form of revolution or civil war. Stage 5 is the period during which the interclass tensions that go along with worsening financial conditions come to a head. How different leaders, policy makers, and groups of people deal with conflict has a major impact on whether the country will undergo the needed changes peacefully or violently.â
âThe Classic Toxic Mixâ
âThe classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and non-debt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.â âThat confluence typically brings about disorder, conflict, and sometimes civil wars.â
âTo have peace and prosperity, a society must have productivity that benefits most people.
Averages donât matter as much as the percentage of people who are suffering and their power.â In other words, when there is not broad based productivity and prosperity, risks rise.
An essential ingredient for success is that the debt and money that are created are used to produce productivity gains and favorable returns on investment, rather than just being given away without yielding productivity and income gains. If it is given away without yielding these gains, the money will be devalued to the point that it wonât leave the government or anyone else with much buying power.
History shows that lending and spending on items that produce broad-based productivity gains and returns on investment that exceed the borrowing costs result in living standards rising with debts being paid off, so these are good policies.â
âHistory shows and logic dictates that investing well in education at all levels (including job training), infrastructure, and research that yields productive discoveries works very well. For example, big education and infrastructure programs have paid off nearly all the time (e.g., in the Tang Dynasty and many other Chinese dynasties, in the Roman Empire, in the Umayyad Caliphate, in the Mughal Empire in India, in Japanâs Meiji Restoration, and in Chinaâs educational development programs over the last couple of decades), though they have long lead times. In fact, improvements in education and infrastructure, even those financed by debt, were essential ingredients behind the rises of virtually all empires, and declines in the quality of these investments were almost always ingredients behind empiresâ declines. If done well, these interventions can more than counterbalance the classic toxic mix.â In Stage 5 this doesn't happen.
All of this makes the economy more vulnerable to an economic shock. âThe economic shock can come about for many reasons, including financial bubbles that burst, acts of nature (such as pandemics, droughts, and floods), and wars. It creates a financial stress test. The financial conditions (as measured by incomes relative to expenses and assets relative to liabilities) that exist at the time of the stress test are the shock absorbers. The sizes of the gaps in incomes, wealth, and values are the best indicators of degrees of fragility of the system.â
