Back To The Decentralized Future
Traders in Tashkent, Uzbekistan at the peak of the Silk Road, the ancient superhighway of centralized intercontinental trade, before the last major disruption to global commerce 500 years ago.
Somewhere off the coast of Portugal, early 15th century
The ship pitched up under his feet, as if he was Neptune himself astride two mighty dolphins leaping skywards, the creak of oak audible over the roar of wind whipping past his face right before the sky became white as lightning raced down from heaven and the peel of thunder reverberated in his chest.
Squinting as he blinked away spots dancing in his vision, the ship tipped and raced down the backside of the swell to the waiting embrace of the sea as rain drove like needles into his face above his beard and his crew moved expertly about him in the dying rays of western light.
He smirked and knuckles going white on the helm, thought time to see if this works, and changed course with a glance up into the rigging before his gaze settled intently on the new invention, willing it to move.
As the needle started to dance in the device, appearing to defy gravity as if guided by the hand of God himself, the captain laughed, at first in relief and then with the confidence that only a man who has risked much and finally succeeded knows.
Grinning as endorphins and sea spray washed over him, he called to his crew they were headed home and pointed back towards the coast.
Their return marked the beginning of a new epoch for mankind. The new invention shifting the destiny of the world by such a magnitude, it has only happened a handful of times since Prometheus defied the Gods and brought fire down from Olympus to light the path of mankind’s march into the future.
Like computers solving the Byzantine General’s problem for the first time in history earlier this century, this invention would set the tectonic plates of global power shifting slowly, but inevitably in motion to a new, decentralized future.
The invention?
A magnetic compass.
The Captain was the first to successfully mount a magnetized needle on a pivot pin which rotated freely on liquid, and now deep water navigation between two points on different continents was finally possible, starting the first age of decentralized global trade across oceans.
No longer would long distance trade flow by land as it had for 2,000 years along the Silk Road, the ancient superhighway of trade, war, and ideas between Asia and Europe where the richest and most powerful empires, from Alexander the Great to the Ottomans, had always existed.
Kingdoms on the far reaches of the known world would now compete across oceans for the first time against the Ottoman empire which sat at the heart of the centralized 15th century economy.
Leaders in western Europe, under constant pressure from hordes thundering down off the steppes and continuous waves of Ottoman armies pressing deeper into the continent, seized on this new technology which gave them mastery of deep water navigation.
As the Age of Discovery began, sea monsters lurking in the mist on edges of world maps slowly yielded to the pens of Venetian cartographers as they carefully drew the coastlines of new continents being explored.
The kingdoms along the Silk Road, not positioned to take advantage of this new leap forward in technology saw their tax revenues diminish as trade shifted to the maritime route between Europe and Asia. Once thriving centers of trade and grand palaces with their mosaics of marble, built on what had been the heartbeat of global trade and power for 2,000 years were slowly reclaimed by the shifting sands of passing centuries as the names of great cities like Merv, Samarkand, and Xi’an, important to global trade for thousands of years, slowly faded into the mists of time.
This has all happened before.
But now the world is a closed system. Every country is industrialized to some extent and the entire world is more connected than ever before.
During this transition to a decentralized future, volatility will ripple around the world with no new shores to dissipate on, instead ricocheting off the continents of this now hyper-connected, centralized, and industrialized world in ways none of us can predict.
Most don’t understand why decentralization is our normal state historically and why the last seventy years under US hegemony has been the anomaly, and if people do not understand, they cannot manage for the risk of it happening again.
The 16th to 20th Century
For the next five centuries after the Age of Discovery, mankind’s march into the future was much like the previous ones had been, filled with the ingenuity of humanity, but slick with blood and the unquenchable thirst for glory and power as the mighty battled over the oceans and the weak suffered as the Fates demanded.
The new maritime kingdoms of western Europe were locked in lifetimes of conflict with the entrenched and powerful Ottoman empire. Both European kingdoms and the Ottomans battled, enslaved, raped, and killed each other in waves across the Mediterranean.
Fast forward through the centuries as continents were conquered and colonized until the kingdoms of western Europe were wealthy and the former powerful eastern empires were shells of their former selves.
Eventually, Japan alone stayed closed to foreigners until in 1853, Captain Perry steamed into the harbor near Edo, the black clouds from his ironclad’s boilers hanging over Japan as a foretelling of their fate nearly a century later when a mushroom cloud over Nagasaki would signal the end of the last empire to fall to American global hegemony and mark the only time in Japan’s over a millennia of history it had ever been defeated.
These five centuries, from the beginning of the 15th to the mid 20th century was the age of maritime empires, where the strong wielded spheres of influence on the high seas and everyone battled for more power, influence, trade, and tax revenue.
This is the true face of a decentralized world.
But then something unexpected happened in the mid 20th century.
Near the end of the worst war in the history of mankind, at Bretton Woods in 1944, the allies assembled at a hotel in the rolling mountains of New Hampshire and agreed to America defending their global trade in exchange for using the US dollar for trade settlement, at the time backed by gold since US had nearly 2/3 of world supply by war’s end. The allies signed away their military bases from the age of empires to the US for dollar loans to rebuild after the war and agreed to the terms:
They would use the dollar for world trade and stand against the Soviets, America would patrol the oceans of the world and protect global trade.
Then in 1945, with the stroke of a pen under the boiling sun as sailors in starched white stood at attention on the teak deck of the battleship Missouri, the last five hundred years of maritime empires disappeared from the earth, replaced by a global hegemon, the United States of America, and world history has stood frozen ever since for over seventy years.
Entire generations have grown up thinking their world, under the protection of a global hegemon is normal, but it is not, and now here we stand, on the brink of another decentralized age.
Most are oblivious, but the shift is already underway towards a New Old World.
I’ve lived in decentralized societies and think the world will make a lot more sense on the other side, where actions have consequences and honor matters again.
It is the volatility from this hyper-connected centralized global order transitioning to a decentralized future with spheres of regional influence once again reemerging as empires in all but name return from their seven decade slumber that most will not expect.
Dust storm one morning in Khartoum, Sudan
Peak Civilization After US Hegemony
The Sudanese were good to me when I was a stranger in their country, even with their lives being hard, sometimes heartbreakingly hard.
Hungry orphans, either barefoot or wearing blown out flip flops would jump on the running boards of my land cruiser at stop lights, begging for 1 sudanese pound, which thanks to the inflation in the country I didn’t even keep. The exchange rate was like 50 sudanese pounds to 1 US dollar. I’d usually have a wad of cash so big in my pocket of 50s I could hardly fold them in half. If I went out to eat, I’d just leave 50’s for tips. The locals thought we were incredibly generous, I always felt embarrassed.
In some ways, seeing what the people of Sudan suffered through because of their dictator at the time, Omar al-Bashir, was like seeing the future for these far off places of what life will be like without US hegemony.
A world cut off from the majority of trade and foreign investment, with poor geography, where one lonely, dangerous road to the coast linked the Port of Sudan with Khartoum.
In a decentralized world where the US dollar is no longer the world reserve currency, if we move to an SDR or hard currency, I don’t think people understand that a lot of the world could revert back to an almost steampunk reality of how places looked at the dawn of the 20th century.
There was a reason a lot of places in the world were not industrialized or projects undertaken when investors had to be repaid in gold for their construction bonds before 1914.
I am a civil engineer by trade, there is just some geography on the planet that is too expensive to build the infrastructure to get resources. The desert, jungle, and the mountains are some of the most expensive places in the world to do construction, and that is before you consider the social consequences of those projects. The hardest people with AKs decorated like jingle trucks live in the harshest geographies. Hope you got their buy in.
The dollar standard has allowed these countries with poor geography to industrialize with loans that are constantly restructured or forgiven through the IMF and since 2008, increasingly through Chinese infrastructure banks.
Sudan is the fate that likely awaits a lot of countries with poor geography even if they do have resources because infrastructure development is a very risky endeavor. In a world of near free capital where loans can be endlessly restructured or forgiven, taking that risk to industrialize the world was one thing. In a decentralized future where investors will once again demand a real return on investments, I think, will be quite another.
What happens to these marginal areas where people have grown accustomed to near free money and the convenience of cheap, centralized global trade to subsidize industrialization and centralization that never would have taken place without a global hegemon making all geographies equal as the world transitions to this new decentralized future?
Perhaps they will have a chance with central bank digital currencies.
But my fear is the upheaval will cause additional failed states, continued migration, war, and famines as countries with weak geography once again lose access to cheap global trade and realize they no longer have the ability to feed themselves locally since they industrialized for the last seven decades.
Life was extremely hard for the locals in Khartoum. One of my guys, a massive bearded dude at 6’ 4” came in one day holding back tears. His sixteen year old daughter had died because the hospital wasn’t able to afford the medicine she needed. I tried to send him home and he just shook his head no, shuddered and said this was life and he needed to accept it, besides, his wife wouldn’t stop crying at home and he couldn’t bear to hear it. I let him stay.
My housekeeper couldn’t afford to even buy boxes of raisins and had low iron because the exchange rate kept getting worse. I’d buy boxes of raisins for her. She was an Eritrean refuge, had walked across the eastern Sahara, dodged slave traders, Islamists, regular criminals, just walked out of Eritrea which I thought must be like the North Korea of Africa if she thought life was good cleaning houses in Khartoum. First time I tipped her $20 American she cried and tried to give it back. You feel terrible in those situations.
The one refinery in the country, the government was so corrupt they couldn’t or wouldn’t repair it. Resulted in massive fuel shortages and power outages. For days at a time. People would be out of gas to cook with at home. I’d look for my guys, and they would be taking a turn sleeping in their car waiting in line for gasoline. Lines lasting three to four days were common. Locals would lose power, they’d sleep on their roofs in the desert heat which didn’t even dissipate at night in the summers.
Khartoum was ok if you were strong and hell if you were weak. The government would regularly turn off the cell towers, internet, power, whenever they wanted. Anyone caught exchanging Sudanese pounds for dollars was viciously beaten.
Through all of this, the Sudanese people were incredible.
I had a flat tire one time on my land cruiser, and laying under the vehicle, trying to stack rocks in the sand to put the jack on in almost pitch black because none of the street lights worked, a set of headlights pulled up behind me and three Sudanese dudes got out.
One of them asks me in english if I needed a hand.
They were from a tire repair shop down the road, had seen me broke down, stopped cooking their dinner and brought one of their floor jacks to help me.
They wouldn’t even take any money with life being that hard there. I caught one of the Sudanese guys calling the one talking to me in english “Foreigner” in Arabic and asked him why. He laughed and said he was from Philadelphia, but had moved back to Khartoum to take care of his family.
Dude was a good son.
Every day life there was a weird hybrid of totalitarianism and decentralization which will likely mirror what life will be like for a lot of people around the world as nations which industrialized on dollar loans with free access to global trade and are not naturally in strong positions geographically adapt to the change brought by a new decentralized future.
The Pillars Holding Up The Modern World
US hegemony, the global centralizing power that makes our current modern world possible is made up of two pillars, the US dollar and the US military.
The US dollar, as the world trade currency, and US carrier strike groups, which centralizes the oceans of the world into one network allowing for any country to ship goods anywhere in the world as cheaply as possible.
Removing one of those pillars results in the world becoming unfrozen in time, empires in all but name reemerging, with spheres of influence and resources again being competed for in the decentralized future.
We can already see old maritime powers getting ready, both England and France are sailing brand new aircraft carriers to further their global interests.
The Byzantine General’s problem being solved for the first time in history will likely cause the tectonic plates to shift faster this time as decentralized payments become a reality. Whether that is central bank digital currencies, an SDR (special drawing rights), or as some people hope, bitcoin becoming Keynes’ reimagined Bancor from Bretton Woods.
I have no interest in guessing which one wins, my only concern is the fundamental underweighted risk during the transition:
Entire nations think they can stop using the dollar and the US military will continue to keep global trade safe, for free, so they continue to have access to the cheap maritime trade their current standard of living depends on while they use a different currency for trade settlement.
This is not grounded in history or current events on US trade policy.
The US has always had a very transactional foreign policy with the world. Read about World War I war debts and more deeply on Bretton Woods. The British delegates thought Bretton Woods was the worst defeat of the entire war for them, and President Coolidge’s only remark when asked his position on forgiving French and British World War I war debt was, “They hired the money, didn’t they?”
US foreign policy IS the US dollar. Always has been.
President Biden has nominated Ms. Katherine Tai to be the new US Trade Rep. Ms. Tai is a Taiwanese American who specializes in Chinese trade enforcement, worked closely on the new NAFTA deal, and has publicly stated she wants to reshore jobs from overseas to America.
The trade deals are negotiated, now Ms. Tai is coming in to give anyone who takes advantage of the US death by 1,000 stabs of her pen.
If countries think they can not use the dollar in the decentralized future, but a US carrier strike group will still protect Germany’s Mercedes exports sailing to China, or middle east oil sailing to China, they have not properly studied US history and are not paying close enough attention to current events.
The US will not freely sacrifice blood and treasure for other countries if the dollar pillar of US hegemony falls. Instead US Foreign Policy will become more transactional, which will be great for America and the rest of the world will absolutely hate it as volatility washes across oceans onto every continent.
All of which leads to shipping becoming more expensive and disrupted as the US becomes increasingly uncaring about what happens on the oceans so long as no one screws with US interests.
Imagine the disruption to global supply chains as we return to a decentralized future. Inflation as all of a sudden parts cannot be sourced as companies try to relocate to be under NAFTA and shorten supply chain distance and cut shipping costs. Deflation on raw materials used to produce those parts as suddenly processing facilities have no demand for processed materials so prices for raw material drop through the floor. Social instability as the volatility of these competing forces in different parts of the supply chain hit people in different areas in different ways.
This does not even take into account a real actual conflict at sea as countries again compete for spheres of influence which shouldn’t be ruled out. Would not be the first time France and Turkey fought over control of the eastern Mediterranean.
My Solution
So after talking about the global risks as the future becomes decentralized, how does this apply personally in what could be a period of worldwide long volatility?
Overseas we said “Low tech is the best tech” because whatever could go wrong at the worst possible time always went wrong.
So what appeared to be stone age simple came out on top as a solution to complex problems simply because it was rugged and durable in times when everything was going wrong.
This taught me when I was looking at massive risk, a lot of unknowns, complex different scenarios, what the enemy would likely do, and could never know when the unexpected would happen - that didn’t mean the solution needed to be complicated.
It is almost counterintuitive, but in fact, the more complex the problem, sometimes the better it is for the solution to be simple.
Hence, “Low tech is the best tech”. How low tech? As an example, I usually preferred chemlights to lights for friendly ID. Batteries die, you fall and break a lens, all at a time where you need it to work. Chemlight? Crack it on your rhodesian and good to go. Simple solution to a lot of complex problems.
So no idea if it is right, but tend to think along those lines for my investing. When looking at a complex problem as a major shift in technology that is going to reverberate around the world in unknown ways, I want to be as neutral as possible, with as simple a solution as possible for such a complex problem so no matter what unknown happens, I’m not taken out by it.
The key for me is balanced between efficiency (growing wealth) and durability (preserving wealth). I think about durability as not being vulnerable, so this definitely falls in the durability category.
The long term family businesses I study, like Beretta, currently in the hands of the 15th generation did the same thing. They kept a year’s supply of wages in the safe for their workers through World War II. They ensured their own stability in an unsure and volatile world during the worst war mankind has ever waged. Their business, because of their wise stewardship and being durable has outlived empires, World War I, World War II, and over 50 subsequent Italian governments to the present day, and I am thankful they did. I love their shotguns, they are incredible to shoot.
Their ability to ensure their own stability admist all the chaos the world threw at them with a simple solution carries a lot of weight with me. I have also been reading Mr. Deden’s letters at the Edelweiss Journal and appreciate his views on gold, which he prefers to hold as money because it is not another nation’s debt. I see the wisdom. By holding gold instead of treasuries or currency he is not relying on a government to meet their obligations for him to pay his. This is the old school of the old school and also resonates with me.
So will hold gold (inflation) and dollars (deflation) in addition to equities and crypto (growth).
This way I don’t have to guess at what kind of disruption, inflationary or deflationary happens in the transition phase between a centralized world and a decentralized future.
For almost no carry, or penalty, I don’t have to guess correctly. I can hold dollars as a base if there is deflationary shocks, and I can hold gold if there is inflationary shocks, and continue to hold growth assets in case I’m completely wrong.
Doing this will let me stay focused on the mission of building wealth and living well, by having a firm base that is long volatility in whatever form it takes.
But whatever the future holds, don’t get down, just solve problems. You just never know when a dude from Philadelphia is going to stop in the Sudan and help you change a tire in the dark.
See you out there, Radigan