Dalio declared that the world has entered the sixth phase of the 'Great Cycle': the post-1945 world order has collapsed, might makes right, and conflicts between major powers will revert to primitive power struggles. Trade wars, technology wars, and capital wars will become normalized and could escalate into military conflicts. The consensus at the Munich Security Conference corroborates this assessment: the old order no longer exists, and Europe's security architecture has failed. Dalio warns that economic tools will be weaponized, traditional safe-haven logic may fail, and gold will become the most reliable store of wealth.
Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, published a significant article on February 14, formally declaring that the world has entered the sixth phase of the 'Great Cycle,' characterized by a period without rules, full of chaos, and where might makes right.
Dalio's core argument is that the world order established after World War II in 1945 has completely disintegrated, and conflicts between major powers will no longer be constrained by international law but will revert to primitive power struggles. He warns that this phase is typically accompanied by internal turmoil intertwined with external wars until a new order emerges from the conflict.
According to the latest developments cited by Dalio, at the Munich Security Conference held on February 14, 2026, global leaders reached a rare consensus on the 'end of the old order.' German Chancellor Merz frankly stated that 'the world order maintained for decades no longer exists' and pointed out that freedom is no longer a given in this new era. French President Macron echoed this assessment, warning that Europe’s outdated security architecture has failed and must prepare for war. US Secretary of State Rubio explicitly stated that the world has entered a 'new geopolitical era.'
Dalio noted that during this phase, international relations will follow the 'law of the jungle.' Unlike within nations where there are police and judges, the international system lacks supranational institutions with enforcement power to adjudicate disputes. When major powers clash, they will not seek legal avenues but resolve issues through threats or war. This means trade wars, technology wars, geopolitical conflicts, and capital wars will become normalized and could eventually escalate into military conflicts.
For capital markets, this marks the beginning of an extremely uncertain period. Dalio emphasized that history shows when two opposing major powers are evenly matched in military strength and have irreconcilable existential differences, the risk of war is highest. Investors must recognize that during this phase, economic tools will be fully weaponized, traditional safe-haven logic may fail, and the transfer of wealth and power will occur in drastic ways.
Five Forms of Warfare and Power Struggles
In his article, Dalio meticulously breaks down five main forms of conflict between nations: trade/economic wars, technology wars, geopolitical conflicts, capital wars, and military wars. He pointed out that the first four types of warfare often serve as intense competitive means and will persist and continuously escalate before the outbreak of hot wars.
Currently, the world is in the typical dilemma of great power competition—namely, the 'prisoner’s dilemma.' Neither side can be certain that the other will not initiate an attack, leading to a tit-for-tat escalation cycle. Dalio analyzed that while most competitions aim to seize wealth and power, once such competition escalates into military warfare, all dimensions of conflict will be maximized.
He warned in the article that the key to 'winning' wars lies in achieving objectives without losing core interests. However, history is often filled with 'foolish wars' caused by misjudgments and emotional decision-making.
Historical Reflection: The Economic War and Markets of the 1930s
The article provides a detailed review of the history prior to World War II, offering a reference point for the current situation. Dalio pointed out that the Great Depression of the 1930s intensified wealth conflicts within nations, leading to the rise of populism, authoritarianism, and nationalism. Whether it was the fascist transformation of Germany and Japan or the strengthening of trade protectionism in the United States and the United Kingdom, these were all extreme reactions to the economic crisis.
Dalio specifically mentioned that, in the decade before the outbreak of the hot war, economic and capital wars had already been launched. For instance, the United States triggered a trade war by passing the Smoot-Hawley Tariff Act in 1930, followed by the implementation of a devastating oil embargo and asset freeze on Japan just before the outbreak of World War II. This economic 'strangulation' forced Japan to choose between compromise and initiating conflict.
From a market perspective, the German stock market initially rose due to military victories at the beginning of the war but eventually fell to zero with defeat; meanwhile, the U.S. stock market strengthened under the stimulation of massive government spending and wartime demand. This indicates that market performance during wartime heavily depends on a nation’s likelihood of success on the battlefield.
Capital War: Asset Freezes and Market Blockades
In the current 'sixth phase,' tools of capital warfare are being frequently discussed and employed. Dalio listed three classic methods of capital warfare:
Asset Freezing/Seizure: Preventing opponents from using or selling foreign assets they rely on, including unilateral debt defaults or direct asset confiscation in extreme cases.
Cutting Off Access to Capital Markets: Banning opponents from accessing domestic or third-country capital markets for financing.
Embargoes and Blockades: Disrupting the flow of critical materials (such as energy or technology).
Dalio warned that, since power determines justice, the strong will often exploit their opponents’ weaknesses for plunder. As conflicts escalate, traditional financial assets will face significant challenges under such sanctions.
The Logic of Wealth During Wartime
Dalio ultimately analyzed the economic policies and wealth preservation logic under wartime conditions. He pointed out that during wartime, governments typically impose strict controls, including rationing systems, price controls, capital restrictions, and asset confiscation. To fund the war, governments issue large amounts of debt and monetize it, leading to currency depreciation.
Therefore, Dalio advises investors to be extremely cautious about debt assets during this phase. Historical experience shows that the best store of wealth during wartime is usually gold, as credit tends to be either rejected or significantly devalued during conflicts.
He concluded that although the rise and fall of great powers is an inevitable part of history, the degree of trauma from cyclical changes can be managed if power is used wisely and productivity is maintained. However, at present, the world must prepare for the upcoming turbulence and the painful adjustment period of a new order.
Below is the original text:
Official Announcement: The World Order Has Collapsed
Ray Dalio
At the Munich Security Conference, the post-1945 world order was declared dead by most leaders, with its underlying picture presented in the 2026 Security Report titled 'In Deconstruction.' More specifically, German Chancellor Friedrich Merz stated, 'The decades-long world order no longer exists,' and we are now in a period of 'power politics.' He made it clear that in this new era, freedom is 'no longer a given.' French President Emmanuel Macron echoed Merz’s assessment, stating that Europe's old security architecture tied to the previous world order no longer exists, and Europe must prepare for war. U.S. Secretary of State Marco Rubio stated that we are in a 'new geopolitical era' because the 'old world' has disappeared.
In my words, we are now in the sixth phase of the grand cycle, characterized by significant disorder arising from a period where there are no rules, might makes right, and major powers clash. How the sixth phase operates is explained in detail in Chapter Six of my book 'Principles: Navigating a Changing World Order,' titled 'The Grand Cycle of External Order and Disorder.' Given the almost universal consensus that the post-1945 world order has collapsed, we are entering a new world order, and I believe it is worth your time to read it.
Chapter Six: The Grand Cycle of External Order and Disorder
The relationships between people and the orders governing them, whether internal or external, operate in fundamentally similar ways and are intertwined. In fact, until not long ago, there was no distinction between internal and external order because nations did not have clearly defined and mutually recognized boundaries. Therefore, the six stages of the cycle from order to disorder within nations that I described in the previous chapter also apply to relations between nations, with one important exception: international relations are more subject to raw power dynamics. This is because all governance systems require effective and agreed-upon 1) laws and legislative capacity, 2) enforcement capacity (e.g., police), 3) adjudication methods (e.g., judges), and 4) clear and specific consequences aligned with offenses and enforced (e.g., fines and imprisonment). These elements either do not exist or are less effective in guiding inter-state relations than in domestic ones.
Although attempts have been made to make the external order more rule-based (e.g., through the League of Nations and the United Nations), they have largely failed because these organizations do not possess more wealth and power than the strongest nations. When individual states hold more power than collective nations, the stronger individual states dominate. This is because power prevails, and equal wealth and power are rarely relinquished without a struggle.
When powerful nations are in dispute, they do not send lawyers to present their case to a judge. Instead, they threaten each other, either reaching an agreement or going to war. International order follows the law of the jungle rather than international law.
There are five main types of struggles between nations: trade/economic wars, technology wars, capital wars, geopolitical wars, and military wars. Trade/economic wars mainly refer to conflicts over tariffs, import/export restrictions, and other economically damaging methods against competitors. Technology wars involve disputes over which technologies can be shared and which are protected as matters of national security. Geopolitical wars refer to conflicts over territory and alliances, often resolved through negotiations and explicit or implicit commitments rather than combat. Capital wars are conflicts waged through financial instruments, such as imposing sanctions, cutting off funding and credit by punishing institutions and governments that provide them, or restricting foreign access to domestic capital markets. Military wars involve actual shooting and troop deployments.
Most struggles between nations fall into one or more of the above categories (e.g., cyber warfare has a place in all categories). These struggles concern wealth and power and the ideologies associated with them.
Although most of these wars do not involve shooting and killing, they are all struggles for power. In most cases, the first four types of war evolve over time into intense competition between rival nations until military war begins. These struggles and wars, whether involving shooting and killing or not, are acts of one party exerting power over another. They may be total or restrained, depending on the importance of the issue and the relative strength of the opponents. However, once military war begins, the other four dimensions will be weaponized to the maximum extent.
As discussed in previous chapters, all factors driving internal and external cycles tend to improve or deteriorate simultaneously. When conditions worsen, disputable issues increase, leading to a stronger tendency toward conflict. This is human nature, and it is why we have large cycles that swing between good and bad times.
Total war typically occurs when existential issues—critical to the survival of a nation and so significant that people are willing to fight and sacrifice for them—cannot be resolved through peaceful means. The resulting war will determine which side prevails and holds hegemony in subsequent affairs. This clarity regarding who sets the rules then becomes the foundation of a new international order.
The following chart shows the cycles of peace and conflict within and outside Europe since 1500, reflected in the number of deaths they caused. As you can see, there are three major cycles of conflict, each averaging about 150 years. While large civil wars and external wars last only a short time, they are usually the culmination of long-term conflicts that led to them. Although the First and Second World Wars were each driven by classic cycles, they were also interconnected.
As you can see, each cycle consists of a relatively long period of peace and prosperity (e.g., the Renaissance, the Enlightenment, and the Industrial Revolution), which sowed the seeds for terrible and violent external wars (e.g., the Thirty Years' War, the Napoleonic Wars, and the two World Wars). The upward phase (periods of peace and prosperity) and the downward phase (periods of depression and war) affect the entire world. Not all countries prosper when the dominant powers thrive, as some gain at the expense of others.
As you continue reading, keep in mind that the two most certain things about war are: 1) it will not go according to plan, and 2) it will be far worse than imagined. For these reasons, many of the subsequent principles focus on ways to avoid hot wars. Nevertheless, hot wars do happen, for better or worse. To be clear, while I believe most wars are tragic and fought for absurd reasons, some are worth fighting because the consequences of not doing so (e.g., loss of freedom) are unacceptable.
The Timeless and Universal Forces Driving Changes in World Order
As I explained in Chapter Two, after self-interest and self-preservation, the pursuit of wealth and power is the most potent motivator for individuals, families, companies, nations, and empires. Because wealth equals power—the ability to build military strength, control trade, and influence other countries—domestic strength and military strength reinforce each other. Buying guns (military strength) requires money, as does buying butter (domestic social spending needs). When a country fails to provide enough of either, it becomes vulnerable to opposition both domestically and internationally. By studying dynasties and European empires throughout history, I have learned that fiscal strength, which enables outspending rivals, is one of the most critical strengths a nation can possess. This is how the United States defeated the Soviet Union during the Cold War. Spend enough money in the right way, and you may avoid a hot war altogether. Long-term success depends on maintaining both “guns” and “butter” without indulging in excesses that lead to one’s own decline. In other words, a nation must be fiscally strong enough to provide its people with a good standard of living and protection from external threats. Truly successful nations manage to do this for 200 to 300 years. No nation can do so forever.
Conflict arises when the dominant power begins to weaken, or when an emerging power starts to approach parity—or both. The greatest risk of military war occurs when both sides possess: 1) roughly equal military strength, and 2) irreconcilable, existential differences.
The choices faced by adversarial nations—whether to fight or back down—are extremely difficult to make. Both options come at a high cost—fighting costs lives and money, while backing down costs status, as it signals weakness and leads to a loss of support. When two competing entities each have the ability to destroy the other, both must have extraordinary trust that they will not suffer unacceptable harm or annihilation at the hands of the other. However, situations where the prisoner's dilemma is well-managed are exceedingly rare.
Although there are no rules in international relations except those imposed by the strongest, certain approaches tend to yield better outcomes than others. Specifically, methods that are more likely to produce win-win results are preferable to those leading to lose-lose outcomes. Hence, this crucial principle: to achieve more win-win outcomes, negotiations must account for the most important priorities of both sides and know how to exchange them effectively.
Skilled cooperation that generates win-win relationships, increasing both wealth and power while distributing them effectively, is far more rewarding and less painful than wars where one side conquers the other. Seeing issues through the eyes of your counterpart and clearly identifying and communicating your red lines (i.e., non-negotiable items) are key to achieving this. Victory means obtaining what matters most without losing what matters most, so wars that cost far more in lives and money than their benefits are foolish. Yet "foolish" wars still occur occasionally, for reasons I will explain later.
People slide into foolish wars too easily due to the following reasons: a) the prisoner's dilemma, b) tit-for-tat escalation processes, c) the declining power perceiving the cost of concession as too high, and d) misunderstandings arising during times when quick decisions are required. Competing great powers often find themselves in a prisoner's dilemma; they need ways to assure each other that they will not attempt mutual destruction, lest one side strike preemptively. Tit-for-tat escalation is dangerous because it forces each side to either escalate or concede losses inflicted by the opponent in the previous move; it resembles a "game of chicken," where pushing too hard results in a head-on collision.
Untruthful and emotionally charged inflammatory rhetoric increases the danger of foolish wars, so leaders should strive to explain situations and responses truthfully and thoughtfully (this is especially critical in democracies, where public opinion matters). The worst-case scenario is when leaders engage with their citizens untruthfully and emotionally, and even worse, take over the media.
Overall, the tendency to shift between win-win and lose-lose relationships occurs cyclically. People and empires are more likely to cooperate during good times and compete during bad ones. When a dominant power declines relative to a rising power, it naturally seeks to preserve the status quo or existing rules, while the rising power wants to change them to reflect evolving realities on the ground.
Although I do not know about the part concerning love in the saying 'All is fair in love and war,' I do know that the part concerning war is true. For example, during the American Revolutionary War, when the British lined up to prepare for battle and the American revolutionaries shot at them from behind trees, the British thought it was unfair and complained. The revolutionaries won and considered the British foolish, and the cause of independence and freedom justified the change in the rules of warfare. That is how things are.
This leads me to my final principle: possess power, respect power, and use power wisely. Possessing power is good because power always trumps agreements, rules, and laws. When situations reach a critical juncture, those capable of enforcing their interpretation of rules and laws or overturning them will get what they want. Respecting power is important because it is unwise to fight a losing battle; it is more preferable to negotiate the best possible solution (unless you wish to become a martyr, which is usually due to foolish egoistic reasons rather than wise strategic ones). Using power wisely is also crucial. Using power wisely does not necessarily mean forcing others to give you what you want—i.e., bullying them. It includes recognizing that generosity and trust are powerful factors in generating win-win relationships, which are far more advantageous than lose-lose relationships. In other words, using 'hard power' is often not the best approach, while employing 'soft power' is more desirable.
When considering how to use power wisely, deciding when to make an agreement and when to go to war is also important. To this end, one must envision how their power will evolve over time. It is advisable to utilize power to negotiate agreements, enforce agreements, or wage war when one's power is at its peak. This means that if one’s relative power is declining, it is better to act sooner; if one’s power is rising, it is better to act later.
If trapped in a lose-lose relationship, one must find a way out of it, preferably through separation, though war may also be an option. To handle one's power wisely, it is generally better not to display it openly, as this can make others feel threatened and prompt them to build their own threatening forces, leading to mutual escalation and endangering both parties. Power is often best treated as a hidden knife, ready to be drawn in case of a fight. But sometimes, displaying power and threatening to use it can be most effective in improving negotiation positions and preventing fights. Understanding what matters most and least to the other party, especially what they are willing to fight for and what they are not, allows you to find a fair balance that both sides perceive as resolving the dispute.
While possessing power is generally desirable, it is also advisable not to have more power than one needs. Maintaining power consumes resources, most importantly your time and money. Moreover, power comes with the burden of responsibility. I am often surprised by how much happier people with less power can be compared to those with more.
Case Study: World War II
Having covered the dynamics and principles driving cycles of external order and disorder (derived from studying numerous cases), I would like to briefly review the case of World War II because it provides the latest example of the classic dynamics leading from peace to war. While it is just one case, it clearly demonstrates how the convergence of the three major cycles—the monetary and credit cycle, the internal order/disorder cycle, and the external order/disorder cycle—created conditions for a catastrophic war and laid the foundation for a new world order. The story of this period is fascinating in itself, but it is particularly significant because it offers lessons that help us think about the current situation and future possibilities.
The Road to War
To help paint a picture of the 1930s, I will briefly review the geopolitical highlights that led to the official outbreak of war in Europe in 1939 and the Pearl Harbor incident in 1941. Then, I will quickly skim through the war itself and the beginning of the new world order in 1945 when the United States was at the height of its power.
The global depression following the Great Crash of 1929 led to enormous internal conflicts over wealth in almost every country. This caused them to turn toward more populist, authoritarian, nationalist, and militaristic leaders and policies. These shifts were either to the right or left, depending on the national context and the strength of their democratic or authoritarian traditions. In Germany, Japan, Italy, and Spain, extremely poor economic conditions and less robust democratic traditions resulted in extreme internal conflicts and a turn to right-wing populist/authoritarian leaders (i.e., fascists), just as in the Soviet Union, which experienced similarly dire conditions and had no experience with democracy, there were shifts at different times toward left-wing populist/authoritarian leaders (i.e., communists). The United States and the United Kingdom, with stronger democratic traditions and less severe economic conditions, became more populist and authoritarian than before, but far less so than other countries.
Germany and Japan
Although Germany was saddled with enormous reparations debt after World War I, by 1929 it had begun to break free of its shackles through the Young Plan (which provided significant debt relief and required foreign troops to leave Germany by 1930). However, the global depression hit Germany hard, leading to nearly 25% unemployment, widespread bankruptcies, and pervasive poverty. Typically, this resulted in a struggle between left-wing populists (communists) and right-wing populists (fascists). Adolf Hitler, the main populist/fascist leader, capitalized on national humiliation, fomenting nationalist fervor and targeting the Treaty of Versailles and its enforcers as enemies. He formulated a 25-point nationalist program and rallied support around it. In response to internal struggles and the desire to restore order, Hitler was appointed Chancellor in January 1933, with his Nazi Party receiving substantial backing from industrialists who feared communism. Two months later, the Nazi Party gained the largest share of support and seats in the Reichstag.
Hitler refused to pay any further reparations debt, withdrew from the League of Nations, and established authoritarian control over Germany in 1934. Holding both the offices of Chancellor and President, he became the supreme leader of the nation. In democratic countries, there are often laws that allow leaders to seize extraordinary powers; Hitler seized all such powers. He invoked Article 48 of the Weimar Constitution to suspend many civil liberties, suppress political opposition from communists, and force through the Enabling Act, which allowed him to enact laws without the approval of the Reichstag or the President. He showed no mercy to any opposition—he censored or controlled newspapers and broadcasters, established a secret police (the Gestapo) to root out and repress dissent, stripped Jews of their citizenship, confiscated funds from Protestant churches, and arrested church officials who opposed him. He proclaimed the superiority of the Aryan race and banned non-Aryans from government positions.
Hitler employed the same authoritarian/fascist methods to rebuild the German economy while implementing large-scale fiscal and monetary stimulus programs. He privatized state-owned enterprises, encouraged corporate investment, and actively worked to improve living standards for ethnic Germans. For instance, he founded Volkswagen to make cars affordable and accessible, and directed the construction of highways. He financed these significantly increased government expenditures by forcing banks to purchase government bonds. The resulting debt was repaid using corporate revenues and by the central bank (Reichsbank) monetizing the debt. These fiscal policies were largely effective in achieving Hitler's objectives. This serves as another example demonstrating that borrowing in one's own currency, increasing domestic debt, and running deficits can be highly productive if the borrowed funds are invested in projects that enhance productivity and generate sufficient cash flow to service the debt. Even if it does not fully cover 100% of the debt servicing costs, it can still be extremely cost-effective in achieving national economic goals.
As for the economic effects of these policies, when Hitler came to power in 1933, the unemployment rate stood at 25%. By 1938, unemployment had fallen to zero. Per capita income grew by 22% within five years of Hitler assuming power, and real growth averaged over 8% per year between 1934 and 1938. As shown in the chart below, the German stock market steadily rose by nearly 70% from 1933 to 1938, until the outbreak of full-scale war.
In 1935, Hitler began building up the military, mandating military service for Aryans. Germany’s defense spending grew faster than that of any other country, as its economy required more resources to fuel its growth and it intended to use its military strength to seize those resources.
Like Germany, Japan was severely affected by the Great Depression, prompting it to become increasingly authoritarian. Japan was particularly vulnerable to the depression because, as an island nation lacking sufficient natural resources, it depended on exports for income to import necessities. When Japanese exports fell by approximately 50% between 1929 and 1931, its economy suffered greatly. In 1931, Japan effectively went bankrupt—forced to deplete its gold reserves, abandon the gold standard, and devalue its currency, leading to the collapse of its purchasing power. These dire conditions, coupled with stark wealth disparities, led to a struggle between the left and right. By 1932, right-wing nationalism and militarism surged massively in hopes of forcibly restoring order and economic stability. Japan began seizing the natural resources (e.g., oil, iron, coal, and rubber) and human resources (i.e., slave labor) it needed from other countries, invading Manchuria in 1931 and expanding across Asia. Like Germany, Japan found that acquiring resources through military aggression proved more cost-effective than relying on traditional trade and economic practices. Severe famines occurred in parts of Japan in 1934, leading to further political instability and strengthening right-wing, militaristic, nationalist, and expansionist movements.
In the following years, Japan’s top-down fascist command economy grew increasingly powerful, establishing a military-industrial complex to protect its existing bases in East Asia and the North while supporting its encroachments on other nations. As in Germany, while most Japanese companies remained privately owned, their production was controlled by the government.
To understand what fascism entails, we can examine three critical choices a country typically makes regarding its governance model. The first is the decision-making approach: whether to adopt a bottom-up democratic model or a top-down authoritarian model. The second concerns the ownership of production: whether to follow capitalism, communism, or socialism as an intermediate option. Finally, there is the orientation of values: prioritizing individual well-being as in individualism, or prioritizing the collective good as in collectivism. Fascism is clear in its stance on these three dimensions: it embraces an authoritarian decision-making process, adheres to capitalist ownership of the means of production, and emphasizes the supremacy of the collective interest.
Fascists believe that top-down authoritarian leadership—where the government directs private companies’ production and subordinates personal satisfaction to national success—is the best path to making the nation and its people wealthier and stronger.
The United States and its allies
In the United States, the debt problem after 1929 was devastating for American banks, restricting their ability to lend globally and harming international borrowers. At the same time, the Great Depression caused weak demand, leading to a collapse in U.S. imports and other countries' sales to America. As incomes fell and demand declined, more credit issues arose, creating a self-reinforcing downward economic spiral. The U.S. responded by turning to trade protectionism to safeguard jobs, raising tariffs through the 1930 Smoot-Hawley Tariff Act, which further worsened the economic conditions of other nations.
Raising tariffs during economic downturns to protect domestic businesses and jobs is a common practice, but it leads to inefficiencies as production does not occur in the most efficient locations. Ultimately, tariffs result in a weaker global economy because tariff wars cause the imposing countries to lose exports. However, tariffs do benefit the entities they protect and can create political support for leaders who impose them.
The Soviet Union had not yet recovered from its devastating revolution and civil war between 1917-22, suffering from a lost war against Germany, a costly conflict with Poland, and a famine in 1921, along with political purges and economic hardships throughout the 1930s. Thus, when conditions worsened in 1930 and tariffs were implemented, these already dire circumstances turned into desperate ones.
To make matters worse, both the United States and the Soviet Union experienced droughts during the 1930s. Natural disasters (e.g., droughts, floods, and epidemics) often lead to severe economic hardships, and when combined with other adverse conditions, trigger periods of intense conflict. Coupled with extreme government policies, millions died in the Soviet Union. Meanwhile, internal political struggles and fear of Nazi Germany led to the purge of hundreds of thousands, accused of espionage and executed without trial.
Deflationary depressions are triggered by debt crises where debtors lack sufficient funds to repay debts. They inevitably lead to money printing, debt restructuring, and government spending programs that increase the supply of money and credit while reducing their value. The only question is how long it takes government officials to adopt such measures.
In the case of the United States, it took three and a half years from the stock market crash in October 1929 to President Franklin D. Roosevelt's actions in March 1933. During the first hundred days of Roosevelt’s administration, he created several large-scale government spending programs, financed by significant budget deficits funded through sharply increased taxes and debt monetized by the Federal Reserve. He implemented employment programs, unemployment insurance, social security support, and initiatives favorable to labor and unions. After his 1935 tax bill (commonly known as "soak the rich"), the top personal income tax rate rose to 75% (compared to a low of 25% in 1930). By 1941, the top personal income tax rate reached 81%, and the corporate tax rate peaked at 31%, compared to 12% in 1930. Roosevelt also introduced various other taxes. Despite all these tax increases and higher revenues due to economic recovery, budget deficits grew from around 1% of GDP to approximately 4% due to the massive rise in spending. From 1933 to the end of 1936, stock market returns exceeded 200%, and the economy expanded at an astonishing average real growth rate of about 9%.
In 1936, the Federal Reserve tightened monetary and credit policies to combat inflation and cool an overheating economy, causing the fragile U.S. economy to fall back into recession. Other major economies weakened as well, further exacerbating tensions within and between nations.
Meanwhile, in Europe, conflicts between left-wing populists (communists) and right-wing populists (fascists) erupted into the brutal Spanish Civil War. With Hitler's support, Franco’s right-wing forces successfully eliminated leftist opposition in Spain.
During times of severe economic hardship and significant wealth disparities, revolutionary large-scale wealth redistribution typically occurs. When conducted peacefully, this is achieved through substantial tax increases on the wealthy and devaluation of creditors’ claims via increased money supply; when carried out violently, it involves forced asset confiscation. In the United States and the United Kingdom, although redistribution of wealth and political power occurred, capitalism and democracy were preserved. This was not the case in Germany, Japan, Italy, and Spain.
Before the outbreak of a hot war, there is typically an economic war. It is also typical that about a decade of economic, technological, geopolitical, and capital warfare precedes the declaration of total war during which the great powers involved in the conflict deter each other and test the limits of their opponents' strength. While 1939 and 1941 are considered the formal starts of the wars in Europe and the Pacific respectively, the conflicts had actually begun roughly a decade earlier. In addition to economically motivated conflicts within nations and the political shifts they triggered, all these countries faced increasing external economic conflicts as they competed for a larger share of a shrinking economic pie. Since international relations are governed by power rather than law, Germany and Japan became more expansionist and began increasingly testing Britain, the United States, and France in their competition for resources and territorial influence.
Before continuing with the description of the hot war, I would like to detail the common strategies used when economic and capital tools are weaponized.
These strategies were common practices in the past and remain in use today. They include asset freezes or seizures, which prevent adversaries from using or selling foreign assets essential to their survival. The scope of such measures can vary widely, ranging from targeted asset freezes on specific groups within a country, such as the current U.S. sanctions on Iran's Revolutionary Guard Corps, or the freezing of Japanese assets by the U.S. at the onset of World War II, to more severe actions like unilateral refusal to repay debt or outright confiscation of a nation’s assets. Another strategy involves blocking access to capital markets, preventing a country from entering its own or another nation's capital market. For example, in 1887, Germany obstructed Russia’s military buildup by banning the purchase of Russian securities and debt. Additionally, embargoes and blockades are commonly used tactics aimed at weakening a target country or denying it access to essential supplies by halting trade in goods or services within one’s borders and, in some cases, even disrupting trade with neutral third parties. Notable examples include the U.S. oil embargo against Japan during World War II and the cutting off of Japanese ships’ passage through the Panama Canal. Similarly, exports from the target country to other nations can be blocked, cutting off its sources of income, as seen in France’s blockade of Britain during the Napoleonic Wars.
The Start of the Hot War
In November 1937, Hitler secretly met with his senior officials and announced his plans for German expansion to acquire resources and unify the Aryan race. He then put these plans into action by first annexing Austria and subsequently seizing an oil-rich region that was then part of Czechoslovakia. Europe and the United States watched warily, unwilling to be drawn into another war so soon after the devastation of World War I.
As in all wars, the unknown far outweighs the known because a) rival great powers only go to war when their strengths are approximately equal (otherwise, it would be suicidal folly for the obviously weaker side), and b) there are too many possible moves and reactions to anticipate. The only thing known at the start of a hot war is that it is likely to be extremely painful and possibly catastrophic. Therefore, wise leaders usually only go to war when the other side has backed them into a corner where they must either fight or concede defeat. For the Allies, that moment came on September 1, 1939, when Germany invaded Poland.
Germany appeared unstoppable; it quickly occupied Denmark, Norway, the Netherlands, Belgium, Luxembourg, and France, while strengthening its alliances with Japan and Italy, both of whom shared common enemies and ideological alignment. By rapidly seizing territories—such as oil-rich Romania—Hitler’s forces preserved their existing oil resources and quickly acquired new ones. The desire for and acquisition of natural resources remained the main driver behind the Nazi war machine pushing campaigns into Russia and the Middle East. War with the Soviet Union was inevitable; the only question was when. Despite signing a non-aggression pact with the Soviet Union, Germany invaded the USSR in June 1941, plunging itself into a costly two-front war.
In November 1940, after winning re-election on a campaign platform promising to keep America out of the war, Roosevelt nonetheless took economic actions to protect American interests, particularly in the Pacific region. These included providing economic support to sympathetic nations and imposing economic sanctions on unsympathetic ones. As early as 1940, War Secretary Henry Stimson initiated economic sanctions against Japan, culminating in the Export Control Act of 1940. Midway through 1940, the U.S. moved the U.S. Pacific Fleet to Hawaii. In October, the U.S. tightened its embargo, restricting 'all steel exports to all destinations except Britain and Western Hemisphere countries.' This plan aimed to cut off Japan’s resources, forcing it to retreat from most of its occupied territories.
In March 1941, Congress passed the Lend-Lease Act, allowing the U.S. to lend or lease war materials to countries whose actions were deemed 'vital to U.S. defense,' including Britain and the Soviet Union. Helping the Allies was geopolitically and economically advantageous for the U.S., as it made substantial profits by selling weapons, food, and other items to these quasi-allies who were struggling to maintain production during wartime. But the motivation was not purely mercenary. With British funds (i.e., gold) depleted, the U.S. allowed them to defer payment until after the war (and in some cases, payments were completely forgiven). Though not an explicit declaration of war, the Lend-Lease Act effectively ended America’s neutrality.
When nations weaken, opposing countries exploit their vulnerabilities for gain. France, the Netherlands, and Britain had colonies in Asia. Overextended in the European theater, they were unable to defend these colonies against Japan. Starting in September 1940, Japan invaded several colonies in Southeast Asia, beginning with French Indochina, incorporating its so-called 'Southern Resource Area' into its 'Greater East Asia Co-Prosperity Sphere.' In 1941, Japan seized the oil reserves of the Dutch East Indies.
Japan's territorial expansion posed a threat to America's own ambitions in the Pacific. In July and August 1941, Roosevelt responded by freezing all Japanese assets in the United States, closing the Panama Canal to Japanese vessels, and imposing an embargo on oil and natural gas exports to Japan. This cut off three-quarters of Japan's trade and 80% of its oil supply. Japan estimated that its oil reserves would be depleted within two years. This left Japan with the choice of either backing down or attacking the United States.
On December 7 and 8, 1941, Japan launched coordinated attacks against U.S. military forces at Pearl Harbor and in the Philippines. This marked the official outbreak of the Pacific War and drew the United States into the European conflict as well. While Japan lacked a widely recognized plan for winning the war, its most optimistic leaders believed that the United States would fail due to fighting on two fronts, and because its individualistic/capitalist political system was inferior to the authoritarian/fascist systems of Japan and Germany, which commanded their respective military-industrial complexes. They also believed that their population was more willing to endure hardship and sacrifice for the nation—a crucial factor in determining the victor. During wartime, the ability to endure suffering often outweighs the ability to inflict it.
Wartime Economic Policies
Just as it is worth noting typical strategies of international economic warfare, it is also worth examining typical domestic wartime economic policies. These include government control over nearly all aspects of life as nations shift resources from profit-making to war efforts—for instance, governments decide: a) which goods may be produced, b) which goods can be bought and sold and in what quantities (rationing), c) which goods may be imported or exported, d) prices, wages, and profits, e) access to personal financial assets, and f) the ability to transfer personal funds abroad. Because wars are costly, governments typically: g) issue large amounts of monetized debt, h) rely on non-credit currencies like gold for international transactions when their credit is not accepted, i) adopt more authoritarian governance, j) impose various types of economic sanctions on adversaries, including cutting off their access to capital markets, and k) face similar sanctions imposed by their enemies.
When the United States entered the European and Pacific wars following the attack on Pearl Harbor, most countries implemented typical wartime economic policies, and the public widely supported leaders' more authoritarian measures.
Market volatility during periods of active warfare was heavily influenced by government controls and the changing probabilities of victory or defeat as reflected in each nation’s performance in campaigns.
Many countries shut down their stock exchanges, leaving equity investors trapped and unable to access their capital. It should also be noted that during wartime, currencies and credit were often not accepted between non-allied nations, as there were valid concerns about whether such currencies retained any value. As previously mentioned, gold—and in some cases, silver or barter—was the hard currency of wartime. During these times, prices and capital flows were typically controlled, making it difficult to determine the true price of many items.
Since losing a war usually results in the complete loss of wealth and power, the trends of stock markets that remained open during wartime largely depended on each country’s performance in key battles, as these outcomes shifted the probabilities of victory or defeat. For example, the German stock market outperformed others in the early stages of World War II when Germany occupied territories and established military superiority, but underperformed after the Allies, including the United States and Britain, turned the tide. After the Battle of Midway in 1942, Allied stock markets rose almost continuously until the end of the war, while Axis stock markets stagnated or fell. As shown in the chart, both the German and Japanese stock markets closed at the end of the war and only reopened about five years later, nearly worthless, whereas the American stock market performed exceptionally strongly.
Protecting wealth during wartime is challenging because normal economic activity is restricted, traditionally safe investments are no longer secure, capital mobility is limited, and high taxes are imposed as people and nations fight for survival. The redistribution of wealth to where it is most needed takes precedence over protecting the wealth of existing owners. Regarding investment strategy, one should sell all debt instruments and buy gold, as wars are financed through borrowing and printing money, which devalues debt and currency, and there are valid reasons for people to be unwilling to accept credit.
Conclusion
Every global power has its period of glory, enabled by its unique circumstances and the nature of its character and culture (e.g., possessing strong work ethics, intelligence, discipline, education, and other fundamental qualities). However, they all eventually decline. Some nations decline more smoothly and with less trauma than others, but decline is inevitable. Traumatic declines can lead to some of the worst periods in history, where major conflicts over wealth and power prove extraordinarily costly in terms of both economics and human lives.
Nevertheless, if countries in a prosperous and powerful phase maintain productivity, generate income exceeding expenditures, ensure their systems function well for the majority of their populations, and manage to establish and sustain win-win relationships with their most critical competitors, such cycles need not unfold in this manner. Many empires and dynasties have endured for centuries, and the United States, at 245 years old, has already proven itself to be among the longest-lasting nations.
Editor/Lambor
