Ray Dalio's 10,000-word article: The old order is dead, the world returns to the "law of the jungle," trade wars and capital wars will become the norm

On February 14, Ray Dalio, the founder of the world's largest hedge fund Bridgewater, released a significant long article, officially declaring that the world has entered the sixth stage of the "big cycle," a period characterized by chaos, a lack of rules, and power as the axiom. Dalio's core argument is that the world order established in 1945 after World War II has completely collapsed, and conflicts between major powers will no longer be constrained by international law but will revert to primitive power struggles. He warned that this stage is typically accompanied by a intertwining of internal turmoil and external wars until a new order is established through 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 bluntly stated that "the world order that has lasted for decades no longer exists," pointing out that freedom is no longer taken for granted in this new era. French President Macron echoed this assessment, warning that the old security architecture in Europe has failed and must prepare for war. U.S. Secretary of State Marco Rubio explicitly stated that the world has entered a "new geopolitical era." Dalio pointed out that in this stage, international relations will follow the "law of the jungle." Unlike countries that have police and judges, the international system lacks a supranational authority with enforcement power to adjudicate disputes. When major powers clash, they will not seek legal avenues but will resolve conflicts through threats or war. This means that trade wars, technology wars, geopolitical wars, and capital wars will become the norm and may ultimately escalate into military conflicts. For the capital markets, this marks the beginning of an extremely uncertain period. Dalio emphasized that history shows that when two opposing major powers are evenly matched in military strength and have irreconcilable survival differences, the risk of war is highest. Investors must be aware that in this stage, economic tools will be fully weaponized, traditional safe-haven logic may fail, and the transfer of wealth and power will occur in dramatic ways. Five Forms of War and Power Struggles Dalio detailed five main forms of conflict between nations in his article: trade/economic wars, technology wars, geopolitical wars, capital wars, and military wars. He noted that the first four forms of war typically serve as intense competitive means, existing and escalating long before hot wars break out. Currently, the world is in a typical dilemma of great power competition—the "prisoner's dilemma." Both opposing sides cannot be sure that the other will not launch an attack, leading to a cycle of escalating tensions. Dalio analyzed that while most competition aims to seize wealth and power, once this competition escalates into military war, conflicts across all dimensions will be greatly magnified. He warned in the article that the key to "winning" a war lies in achieving goals without losing core interests, but history is often filled with "stupid wars" caused by misjudgments and emotional decision-making. Historical Reflection: Economic Wars and Markets in the 1930s The article provides a reference for the current situation by thoroughly reviewing the history before World War II. Dalio pointed out that the Great Depression of the 1930s exacerbated domestic wealth conflicts in various countries, leading to the rise of populism, authoritarianism, and nationalism Whether it is the fascization of Germany and Japan or the strengthening of trade protectionism in the United States and the United Kingdom, it is an extreme response to the economic crisis. Dalio specifically mentioned that in the decade leading up to the outbreak of the hot war, economic and capital wars had already begun. For example, the United States initiated a trade war in 1930 with the Smoot-Hawley Tariff Act, and subsequently imposed a devastating oil embargo and asset freeze on Japan on the eve of World War II. This economic "strangulation" forced Japan to choose between compromise and war. From a market perspective, the German stock market initially rose due to military victories at the beginning of the war, but ultimately fell to zero with defeat; while the U.S. stock market strengthened under the stimulus of massive government spending and war demand. This indicates that market performance during wartime is highly dependent on the country's chances on the battlefield. Capital War: Asset Freezes and Market Blockades In the current "sixth phase," the tools of capital war are frequently mentioned and used. Dalio listed three classic means of capital warfare: Asset Freezing/Seizure: Preventing opponents from using or selling their foreign assets, including unilateral debt defaults or direct asset confiscation in extreme cases. Cutting Off Access to Capital Markets: Prohibiting opponents from raising funds in domestic or third-country capital markets. Embargoes and Blockades: Cutting off trade flows of critical materials (such as energy and technology). Dalio warned that since power is axiomatic, the strong often exploit the weaknesses of their opponents for plunder. During escalating conflicts, traditional financial asset security will face significant challenges under such sanctions. Wealth Logic During Wartime Dalio concluded by analyzing the economic policies and wealth protection logic in a wartime environment. He pointed out that during wartime, governments typically implement strict regulations, including rationing, price controls, capital controls, and asset confiscation. To finance the war, governments will issue large amounts of debt and monetize it, leading to currency devaluation. Therefore, Dalio advises investors to be extremely cautious about debt assets during this phase. Historical experience shows that the best means of wealth storage during wartime is often gold, as credit is usually not accepted or significantly devalued during war. He summarized that although the rise and fall of great powers is an inevitability of history, if power is used wisely and productivity is maintained, the trauma of cyclical evolution can be managed. However, in the present, the world must prepare for the impending turmoil and the painful adjustments of a new order. The original text is as follows: 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 the underlying picture presented in the report titled "Deconstructing" in the 2026 Security Report. More specifically, German Chancellor Friedrich Merz stated, "The world order that has lasted for decades no longer exists," and we are in a period of "power politics." He made it clear that in this new era, freedom is "no longer taken for granted." French President Emmanuel Macron echoed Merz's assessment, stating that the old security architecture linked 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," as the "old world" has disappeared In my words, we are in the sixth phase of a major cycle, characterized by immense disorder stemming from a period without rules, where power is axiomatic, and great power conflicts are prevalent. The workings of the sixth phase are detailed in Chapter Six of my book "Principles: Navigating the Changing World Order," titled "The Major Cycle of External Order and Disorder." Given that it is almost universally acknowledged that the world order established after 1945 has collapsed, and we are entering a new world order, I believe it is worth your time to read. Chapter Six: The Major Cycle of External Order and Disorder The relationships between people and the orders governing them, whether internal or external, operate in fundamentally the same way and are intertwined. In fact, not long ago, there was no distinction between internal and external order, as there were no clearly defined and mutually recognized boundaries between nations. Therefore, the six phases of the cycle from order to disorder within a nation that I described in the previous chapter also apply between nations, with one important exception: international relations are more constrained by 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 that are commensurate with crimes and enforced (e.g., fines and imprisonment). These elements are either absent or less effective in guiding inter-state relations than they are in guiding domestic relations. Although efforts have been made to make external order more rule-based (e.g., through the League of Nations and the United Nations), they have generally failed because these organizations do not possess more wealth and power than the strongest nations. When a single nation holds more power than the collective of nations, the more powerful nation will dominate. This is because power prevails, and equal wealth and power are rarely relinquished without struggle. When great powers have disputes, they do not allow lawyers to present cases to judges. Instead, they threaten each other, either reaching an agreement or going to war. The international order follows the law of the jungle, not international law. There are primarily five 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 and export restrictions, and other means of economically harming competitors. Technology wars involve conflicts over which technologies can be shared and which are protected for national security. Geopolitical wars refer to conflicts over territory and alliances, which are typically resolved through negotiation and explicit or implicit commitments rather than combat. Capital wars are conflicts imposed through financial instruments, such as sanctions that cut off funding and credit from institutions and governments that provide penalties, or restrictions on foreign access to domestic capital markets. Military wars involve conflicts that entail actual shooting and troop deployments. Most struggles between nations fall into one or more of the categories mentioned above (e.g., cyber warfare has a place in all categories). These struggles concern wealth and power, as well as the ideologies associated with them Although most of these wars do not involve shooting and killing, they are all power struggles. In most cases, the first four types of wars evolve over time into fierce competition between rival nations until military warfare begins. These struggles and wars, whether involving shooting and killing or not, are acts of one party exerting power over another. They can be total or restrained, depending on the significance of the issues and the relative strength of the opponents. But once military warfare begins, the other four dimensions will be maximally weaponized. As discussed in previous chapters, all factors driving internal and external cycles tend to improve or deteriorate simultaneously. When situations worsen, the number of debatable issues increases, leading to a stronger tendency for struggle. This is human nature and the reason we have large cycles that swing between good and bad times. Total wars typically occur when there are survival issues (critical to the existence of the nation, to the extent that people are willing to fight and sacrifice for them) that cannot be resolved through peaceful means. The wars triggered by this will clearly determine which side prevails and holds hegemony in subsequent affairs. This clarity about who sets the rules then becomes the foundation of a new international order. The following chart shows the cycles of internal and external peace and conflict in Europe since 1500, reflected in the death tolls they caused. As you can see, there are three large cycles of conflict fluctuations, averaging about 150 years each. Although major civil wars and foreign wars last only a short time, they are often the peaks of long-term conflicts that lead to their occurrence. While World War I and World War II were driven by classic cycles, they are also interconnected. As you can see, each cycle consists of a relatively long period of peace and prosperity (such as the Renaissance, the Enlightenment, and the Industrial Revolution), which sows the seeds for terrible and violent foreign wars (such as the Thirty Years' War, the Napoleonic Wars, and the two World Wars). The upward phase (peace and prosperity period) and the downward phase (depression and war period) affect the entire world. Not all countries will prosper during the dominance of great power, as the gains of some countries come at the expense of others. As you continue reading, keep in mind: the two most certain things about war are: 1) It will not go as planned, and 2) It will be far worse than imagined. For these reasons, many of the subsequent principles involve methods to avoid hot wars. Nevertheless, for good or bad reasons, hot wars will still occur. It is important to clarify that while I believe most wars are tragic and fought for absurd reasons, some wars are worth fighting because the consequences of not fighting (such as losing freedom) are unacceptable. Eternal Universal Forces Leading to Changes in External Order As I explained in Chapter Two, the pursuit of wealth and power, after self-interest and survival, is the most motivating factor for individuals, families, companies, countries, and nations. Because wealth is equivalent to power—namely, the ability to build military strength, control trade, and influence other countries—domestic strength and military power complement each other. Purchasing guns (military power) requires money, and purchasing butter (domestic social spending needs) also requires money. When a country fails to provide enough of either, it becomes vulnerable to opposition both domestically and internationally. Through studying the dynasties and European empires throughout history, I have learned that the financial strength to outspend competitors is one of the most important strengths a country can possess. This is how the United States defeated the Soviet Union in the Cold War. Spend enough money in the right way, and you won't have to engage in hot wars. Long-term success depends on maintaining "guns" and "butter" without engaging in excessive behaviors that lead to one's own decline. In other words, a country must be financially strong enough to provide a good standard of living for its people and protection against external enemies. Truly successful countries can achieve this for 200 to 300 years. No country can do this forever. Conflict arises when a dominant power begins to weaken, or when an emerging power starts to approach it in strength—or both. The greatest risk of military war is when both sides possess: 1) roughly equivalent military strength, and 2) irreconcilable and existential differences. The choice faced by opposing nations—either to fight or to back down—is extremely difficult to make. Both options come at a high cost—fighting costs lives and money, while backing down costs loss of status, as it shows weakness and leads to diminished support. When two competing entities each have the ability to destroy the other, both must have a very high level of trust, believing that they will not suffer unacceptable harm or slaughter from the other. However, situations that can properly handle the prisoner's dilemma are extremely rare. Although there are no rules in international relations other than those imposed by the strongest, certain methods do indeed yield better results than others. Specifically, those methods that are more likely to produce win-win outcomes are superior to those that lead to lose-lose outcomes. Therefore, the crucial principle is: to achieve more win-win outcomes, it is necessary to consider the most important matters for both parties in negotiations and know how to exchange them. Skilled cooperation to create win-win relationships not only increases wealth and power but also distributes them well, which is far more rewarding and involves much less pain than wars that lead to one side conquering the other. Viewing issues through the eyes of the opponent and clearly identifying and communicating your red lines (i.e., non-negotiable matters) to them is key to doing this well. Victory means obtaining the most important things without losing the most important things, so wars that expend far more in lives and money than they gain are foolish. Yet "foolish" wars still occur, and I will explain the reasons for this later. People easily slip into foolish wars for the following reasons: a) the prisoner's dilemma, b) tit-for-tat escalation, c) the declining party perceives the cost of backing down as too high, and d) misunderstandings that arise in the need for quick decision-making. ** Competitors in major powers often find themselves in a prisoner's dilemma; they need ways to convince each other that they will not attempt to harm the other, lest the other strike first. Escalation in response is dangerous, as it requires each party to either escalate or lose what the opponent has gained in the previous move; it is like a game of "chicken"—pushing too hard will lead to a head-on collision. Unrealistic and emotionally charged inflammatory rhetoric increases the danger of foolish wars, so it is best for leaders to be genuine and thoughtful when explaining the situation and their responses (this is especially important in democratic countries, where public opinion is crucial). The worst-case scenario is when leaders are disingenuous and emotional in dealing with their populace, and worse still, they take over the media. Overall, the tendency to shift between win-win and lose-lose relationships occurs in a cyclical manner. People and empires are more likely to cooperate in good times and struggle in bad times. When existing major powers decline relative to rising powers, they naturally tend to maintain the status quo or existing rules, while rising powers wish to change them to align with the constantly changing realities on the ground. While I do not know the part about love in the saying "all is fair in love and war," I know that the part about war is correct. For example, during the American Revolutionary War, when the British lined up to fight, and American revolutionaries shot at them from behind trees, the British considered it unfair and complained. The revolutionaries won, believing the British to be foolish, and the cause of independence and freedom proved that changing the rules of war was justified. That’s just how it is. This leads to my final principle: Hold power, respect power, and use power wisely. Having power is good because power can always overcome agreements, rules, and laws. When things come to a head, those who can enforce their interpretation of the rules and laws, or who can overturn them, will get what they want. Respecting power is important because waging a war that one will lose is unwise; it is preferable to negotiate the best possible solution (unless you want to be a martyr, which is often for foolish self-reasons rather than wise strategic ones). Using power wisely is also important. 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 creating win-win relationships, which are far more beneficial than lose-lose relationships. In other words, many times, using "hard power" is not the best approach, while using "soft power" is more desirable. When considering how to use power wisely, it is also important to decide when to reach an agreement and when to go to war. For this, one side must envision how its power will change over time. When one's power is at its peak, it is advisable to use that power to negotiate an agreement, enforce the agreement, or wage war. This means that if one's relative power is declining, it is advantageous to strike early; if one's power is rising, it is advantageous to strike late. If in a lose-lose relationship, one must find a way out, preferably through separation, although it may also be through war. To handle one's power wisely, it is often best not to reveal it, as this can make others feel threatened and build their own threatening power, leading to mutual escalation that endangers both sides Power is often best thought of as a hidden knife, ready to be drawn in times of battle. However, sometimes, demonstrating power and threatening to use it can be the most effective way to improve negotiation positions and prevent conflict. Understanding what is most and least important to the other party, especially what they are willing to fight for and what they are not, can help you find a fair balance point that both sides see as a resolution to the dispute. While having power is generally desirable, not having power that you do not need is also advantageous. This is because maintaining power consumes resources, most importantly your time and money. Moreover, power comes with the heavy burden of responsibility. I am often surprised that those with less power may be much happier than those with more. Case Study: World War II Now that we have covered the dynamics and principles driving cycles of external order and disorder (derived from studying many cases), I would like to briefly revisit the case of World War II, as it provides a contemporary example of the typical dynamics of moving from peace to war. While this is just one case, it clearly illustrates how the intersection of three major cycles—namely, monetary and credit cycles, internal order/disorder cycles, and external order/disorder cycles—created the conditions for catastrophic war and laid the groundwork for a new world order. The stories from this period are fascinating in themselves, but they are particularly important because they offer 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 over the war itself and the beginning of the new world order when the United States was at the peak of its power in 1945. The global depression following the 1929 stock market crash led to significant internal conflicts over wealth in almost every country. This caused them to turn to more populist, authoritarian, nationalist, and militaristic leaders and policies. These shifts leaned either to the right or to the left, with the degree varying based on each country's circumstances and the strength of its democratic or authoritarian traditions. In Germany, Japan, Italy, and Spain, extremely poor economic conditions and less established democratic traditions led to extreme internal conflict, resulting in a turn towards right-wing populist/authoritarian leaders (i.e., fascists). In the Soviet Union, which also experienced extreme conditions and lacked democratic experience, there was a turn towards left-wing populist/authoritarian leaders (i.e., communists) at different times. The United States and the United Kingdom, having stronger democratic traditions and less severe economic conditions, became more populist and authoritarian than in the past, but far less so than other countries. Germany and Japan Although Germany bore enormous reparations debt after World War I, by 1929, through the Young Plan (which provided substantial debt relief and required foreign troops to withdraw from Germany by 1930), it began to shake off its shackles. However, the global depression severely impacted Germany, leading to an unemployment rate of nearly 25%, widespread bankruptcies, and general poverty. A typical situation was the struggle between left-wing populists (communists) and right-wing populists (fascists) The main populist/fascist Adolf Hitler exploited the emotions of national humiliation, inciting nationalist fervor and viewing the Treaty of Versailles and its imposing countries as enemies. He formulated a 25-point nationalist program and sought support around it. In response to internal struggles and the desire to restore order, Hitler was appointed Chancellor in January 1933, and his Nazi Party gained substantial support from industrialists who feared communists. Two months later, the Nazi Party won the most support and seats in the German parliament. Hitler refused to pay any further reparations, withdrew from the League of Nations, and implemented authoritarian control over Germany in 1934. Holding both the Chancellor and President positions, he became the supreme leader of the nation. In democratic countries, there are always some laws that allow leaders to seize special powers; Hitler seized all these powers. He invoked Article 48 of the Weimar Constitution to terminate many civil rights, suppressed political opposition from communists, and forcibly passed the Enabling Act, allowing him to enact laws without the approval of parliament and the president. He showed no mercy to any opposition—he censored or controlled newspapers and broadcasting companies, established a secret police (Gestapo) to eliminate and suppress dissent, stripped Jews of their citizenship, confiscated funds from Protestant churches, and arrested church officials who opposed him. He claimed the superiority of the Aryan race and prohibited non-Aryans from holding government positions. Hitler used the same authoritarian/fascist means 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 the living standards of Aryan Germans. For example, he founded Volkswagen to make cars affordable and accessible and oversaw the construction of highways. He financed these significant increases in government spending by forcing banks to purchase government bonds. The resulting debt was repaid through corporate profits and the central bank (Reichsbank) monetizing the debt. These fiscal policies effectively achieved Hitler's goals. This is another example of how borrowing funds to invest in productivity-enhancing projects that generate sufficient cash flow to repay debt can be very productive when borrowing in domestic currency, increasing national debt and deficits. Even if it does not cover 100% of the repayment costs, it can be highly cost-effective in achieving national economic objectives. As for the economic effects of these policies, when Hitler came to power in 1933, the unemployment rate was 25%. By 1938, the unemployment rate was zero. In the five years after Hitler took power, per capita income grew by 22%, and the average real growth rate exceeded 8% from 1934 to 1938. As shown in the figure below, the German stock market steadily rose nearly 70% from 1933 to 1938 until the onset of the hot war. In 1935, Hitler began to build the military, mandating that Aryans must serve in the military. Germany's military spending grew at a rate far exceeding any other country, as the German economy needed more resources to power itself and intended to use its military strength to seize these resources Like Germany, Japan was also hit exceptionally hard by the depression, becoming more authoritarian as a result. Japan was particularly vulnerable to the effects of the depression because, as an island nation with insufficient natural resources, it relied on exports for income to import necessities. When Japanese exports fell by about 50% between 1929 and 1931, its economy was severely damaged. In 1931, Japan went bankrupt—forced to deplete its gold reserves, abandon the gold standard, and allow its currency to devalue, leading to a depletion of its purchasing power. These dire conditions and the vast wealth gap led to a struggle between the left and the right. By 1932, right-wing nationalism and militarism surged, hoping to forcibly restore order and economic stability. Japan began to invade Manchuria in 1931 and expand throughout Asia by seizing the necessary natural resources (such as oil, iron, coal, and rubber) and human resources (i.e., slave labor). Like Germany, it can be argued that Japan's method of acquiring the resources it needed through military aggression was more cost-effective than relying on traditional trade and economic practices. In 1934, severe famine occurred in parts of Japan, leading to more political turmoil and strengthening right-wing, militaristic, nationalist, and expansionist movements. In the following years, Japan's top-down fascist control of the economy grew increasingly strong, establishing a military-industrial complex to protect its existing bases in East Asia and the North and support its incursions into other countries. Similar to the situation in Germany, while most Japanese companies remained privately owned, their production was controlled by the government. To understand what fascism is, we can examine three significant choices that a country typically needs to make when choosing 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 is the ownership of production, whether to implement capitalism, communism, or socialism somewhere in between. Finally, there is the value orientation, whether to prioritize individual well-being as in individualism or to prioritize collective well-being as in collectivism. The choices of fascism on these three dimensions are clear: it advocates for an authoritarian decision-making approach, adheres to capitalist ownership of the means of production, and emphasizes collective interests as the highest priority. Fascists believe that top-down authoritarian leadership—where the government guides the production of private companies, making individual satisfaction subordinate to national success—is the best way to make the nation and its people wealthier and stronger. The United States and Allies In the United States, the debt issues after 1929 were devastating for American banks, limiting their ability to lend worldwide and harming international borrowers. Meanwhile, the depression caused weak demand, leading to a collapse in U.S. imports and sales to other countries. As incomes weakened and demand fell, more credit issues arose, creating a self-reinforcing downward economic spiral. The U.S. response was to turn to trade protectionism to safeguard jobs, raising tariffs through the Smoot-Hawley Tariff Act of 1930, which further exacerbated the economic situation in other countries Raising tariffs to protect domestic businesses and jobs during economic downturns is a common practice, but it leads to reduced efficiency as production does not occur in the most efficient locations. Ultimately, tariffs can make the global economy weaker, as trade wars cause countries imposing tariffs to lose exports. However, tariffs do benefit the entities they protect and can create political support for the leaders imposing them. The Soviet Union had not yet recovered from its devastating revolution and civil war from 1917 to 1922, along with a war lost to Germany, a costly war against Poland, and the famine of 1921, and it suffered throughout the 1930s from political purges and economic distress. Therefore, when conditions worsened in 1930 and tariffs began to be implemented, the dire situation in these countries turned into a desperate plight. Worse still, both the United States and the Soviet Union experienced droughts in the 1930s. Natural disasters (such as droughts, floods, and plagues) often lead to severe economic hardship, and when combined with other adverse conditions, they can result in periods of intense conflict. Coupled with extreme government policies, millions died in the Soviet Union. Meanwhile, internal political struggles and fears of Nazi Germany led to the purging of hundreds of thousands who were accused of espionage and executed without trial. A deflationary depression is triggered by a debt crisis caused by debtors lacking sufficient funds to repay their debts. They inevitably lead to money printing, debt restructuring, and government spending programs that increase the supply of money and credit while reducing its value. The only question is how long it will take government officials to take this action. Taking the United States as an example, it took three and a half years from the crash in October 1929 to President Franklin D. Roosevelt's actions in March 1933. During Roosevelt's first hundred days in office, he created several large-scale government spending programs funded by significant tax increases and massive budget deficits financed by 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 (then colloquially known as "taxing the rich"), the top personal income tax rate rose to 75% (compared to a minimum of 25% in 1930). By 1941, the top personal income tax rate was 81%, and the corporate tax rate was 31%, compared to 12% in 1930. Roosevelt also imposed several other taxes. Despite all these taxes and the increase in tax revenue from the economic recovery, the budget deficit still grew from about 1% of GDP to around 4% due to the significant increase in spending. From 1933 to the end of 1936, stock market returns exceeded 200%, and the economy grew at an astonishing average real growth rate of about 9%. In 1936, the Federal Reserve tightened money and credit to combat inflation and slow down the overheating economy, which caused the fragile U.S. economy to fall back into recession, with other major economies following suit, further exacerbating tensions both domestically and internationally. Meanwhile, in Europe, the conflict between left-wing populists (communists) and right-wing populists (fascists) in Spain erupted into the brutal Spanish Civil War Franco on the right successfully eliminated the leftist opposition in Spain with Hitler's support. During periods of severe economic hardship and significant wealth disparity, revolutionary large-scale wealth redistribution typically occurs. When done peacefully, this is achieved through substantial tax increases on the wealthy and increasing the money supply to devalue the debts of debtors; when done violently, it is achieved through forced asset confiscation. In the United States and the United Kingdom, although there was a redistribution of wealth and political power, capitalism and democracy were maintained. The situation was not the same in Germany, Japan, Italy, and Spain. Before a hot war begins, there is usually an economic war. It is also typical that before declaring a total war, there is about a decade of economic, technological, geopolitical, and capital wars, during which the major powers in conflict deter each other and test the limits of each other's strength. Although 1939 and 1941 are considered the official start of the European and Pacific wars, the conflict actually began about a decade earlier. In addition to conflicts driven by economic motives within the countries and the political changes they triggered, all these countries faced increasingly severe external economic conflicts as they competed for a larger share of a shrinking economic pie. As power, rather than law, dominated international relations, Germany and Japan became more expansionist and increasingly tested the limits of Britain, the United States, and France in the competition for resources and territorial influence. Before continuing to describe the hot war, I would like to elaborate on the common strategies used when economic capital tools are weaponized. These strategies were common practices in the past and are still used today. They include asset freezing or confiscation, which prevents opponents from using or selling foreign assets on which they rely for survival. The scope of such measures is broad, ranging from freezing the assets of specific groups within a country, such as the current U.S. sanctions against the Iranian Revolutionary Guard, or the freezing of Japanese assets by the U.S. at the beginning of World War II; to escalating to more severe measures, such as unilaterally refusing to repay debts or even directly confiscating a country's assets. Another strategy is to block access to capital markets, which prevents a country from entering its own or another country's capital market, such as Germany's prohibition on purchasing Russian securities and debts in 1887 to hinder Russia's military buildup. Additionally, embargoes and blockades are also commonly used means, aimed at weakening the target country or preventing it from obtaining essential supplies by blocking the trade of goods or services within the country, and in some cases, even blocking trade with neutral third parties. Typical examples in this regard include the U.S. oil embargo against Japan during World War II and cutting off Japanese ships' access to the Panama Canal. Similarly, the export flows of the target country to other countries can also be blocked, cutting off its sources of income, as was the case with France's blockade against 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, first annexing Austria and then seizing parts of Czechoslovakia that contained oil resources. Europe and the United States watched warily, not wanting to be drawn into another war so soon after the devastation of World War I Like all wars, the unknown far exceeds the known, because a) great powers only go to war when their strengths are roughly equal (otherwise it would be a foolish act of suicide for the clearly weaker side), and b) there are too many possible actions and reactions that cannot be anticipated. The only thing known when a hot war begins is that it could be extremely painful and potentially devastating. Therefore, wise leaders typically only go to war when they are pushed into a situation where they must either fight or fail due to retreat. 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, and strengthened its alliance with Japan and Italy, the latter two sharing a common enemy and ideological alignment. By rapidly seizing territory (for example, oil-rich Romania), Hitler's forces were able to preserve their existing oil resources and quickly acquire new ones. The thirst for and acquisition of natural resources remained the main driving force 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 Germany and the Soviet Union signing a non-aggression pact, Germany invaded the Soviet Union in June 1941, plunging Germany into a costly two-front war. In November 1940, Roosevelt won re-election after promising to keep America out of the war, even though the U.S. was already taking economic actions to protect its interests, particularly in the Pacific, by providing economic support to sympathetic nations and imposing economic sanctions on unsympathetic ones. As early as 1940, Secretary of War Henry Stimson initiated economic sanctions against Japan, culminating in the Export Control Act of 1940. In mid-1940, the U.S. moved its Pacific Fleet to Hawaii. In October, the U.S. intensified embargoes, restricting "the export of all steel to all destinations except Britain and countries in the Western Hemisphere." The plan aimed to cut off Japan's resources to force it to withdraw from most of the territories it occupied. In March 1941, Congress passed the Lend-Lease Act, allowing the U.S. to lend or lease war materials to countries it deemed "vital to the defense of the United States," including Britain and the Soviet Union. Helping the Allies was geopolitically and economically beneficial for the U.S. as it made a lot of money selling weapons, food, and other items to these quasi-allies struggling to maintain production during wartime. However, its motives were not purely mercenary. British funds (i.e., gold) were running out, so the U.S. allowed them to defer payments until after the war (in some cases completely waiving payments). Although not a formal declaration of war, the Lend-Lease Act effectively ended America's neutrality. When a nation is weakened, opposing nations will exploit its vulnerabilities for gain. France, the Netherlands, and Britain all had colonies in Asia. Due to the extended front lines in the European conflict, 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 poses a threat to America's own ambitions in the Pacific. In July and August 1941, Roosevelt's response was to freeze all Japanese assets in the United States, close the Panama Canal to Japanese ships, and impose an embargo on oil and gas to Japan. This cut off three-quarters of Japan's trade and 80% of its oil supply. Japan estimated that its oil would be depleted within two years. This left Japan with the choice of either retreating or attacking the United States. On December 7 and 8, 1941, Japan launched a coordinated attack on American military forces in Pearl Harbor and the Philippines. This marked the official outbreak of the Pacific War and also drew the United States into the war in Europe. Although Japan did not have a widely recognized plan for winning the war, the most optimistic Japanese leaders believed that the United States would fail due to fighting on two fronts and that its individualistic/capitalist political system was inferior to Japan and Germany's authoritarian/fascist systems and their command of the military-industrial complex. They also believed that they were more willing to endure suffering and sacrifice for their country, which was a crucial factor in determining which side would win. In war, the ability to endure suffering is even more important than the ability to inflict it. Wartime Economic Policy As is typical of international economic warfare strategies, it is also worth noting the typical wartime economic policies within a nation. These include government control over almost everything, as the state shifts its resources from profit to war—for example, the government decides: a) what items are allowed to be produced, b) what items can be bought and sold in what quantities (rationing), c) what items can be imported and exported, d) prices, wages, and profits, e) access to its own financial assets, and f) the ability to transfer personal funds abroad. Due to the high costs of war, governments typically: g) issue large amounts of monetized debt, h) rely on non-credit currencies like gold for international transactions, as their credit is not accepted, i) govern more authoritatively, j) impose various types of economic sanctions on enemies, including cutting off their access to capital markets, and k) face retaliation from enemies for imposing these sanctions. When the United States joined the European and Pacific wars after the Pearl Harbor incident, most countries implemented typical wartime economic policies, and the more authoritarian means of leaders received widespread public support. Market fluctuations during the hot war were deeply influenced by government control and the impact of changes in the probabilities of victory and defeat on the performance of countries in battles. Many countries generally closed their stock markets, trapping stock investors who could not access their capital. I should also point out that during the war, currencies and credit were generally not widely accepted among non-allied nations, as people had reasons to worry about the value of the currency. As mentioned earlier, gold—or in some cases, silver or barter—was the hard currency during wartime At such times, prices and capital flows are often controlled, making it difficult to determine the true prices of many things. Losing a war typically results in a complete loss of wealth and power, and the performance of stock markets that remain open during wartime largely depends on the performance of countries in key battles, as these outcomes alter the probabilities of victory or defeat for both sides. For example, the German stock market performed better than others at the beginning of World War II when Germany occupied territories and established military advantages, but lagged behind after the Allied forces, such as the United States and the United Kingdom, turned the tide. After the Battle of Midway in 1942, Allied stock markets almost continuously rose until the end of the war, while Axis stock markets remained flat or declined. As shown in the figure, both the German and Japanese stock markets closed at the end of the war and did not reopen for about five years, reopening with almost no value, while the U.S. stock market was extremely strong. Protecting wealth during wartime is difficult because normal economic activities are restricted, traditional safe investments are not safe, capital liquidity is limited, and high taxes are imposed as people and nations fight for survival. Protecting the wealth of existing holders is not a priority compared to the need to redistribute wealth to where it is most needed. As for investments, one should sell all debts and buy gold, as wars are financed through borrowing and printing money, which devalues debts and currencies, and people have reasons to be reluctant to accept credit. Conclusion Every world power has its glorious period, thanks to its unique environment and the essence of its character and culture (for example, they possess strong work ethics, wisdom, discipline, education, and other fundamental elements), but they ultimately decline. Some countries decline more smoothly and with less trauma than others, but they will eventually fall. Traumatic declines can lead to the worst periods in history, where the great battles over wealth and power prove to be extremely costly in both economic and human life terms. Nevertheless, if a country in a prosperous phase maintains productivity, with income exceeding expenditure, ensures that its institutions operate well for the majority of its populace, and manages to establish and maintain win-win relationships with its most important competitors, then this cycle does not have to develop in such a way. Many empires and dynasties have lasted for hundreds of years, and the United States, now 245 years old, has proven to be one of the longest-lasting countries