Comparing what is now happening with what has happened in analogous historical situations and triangulating my thinking with smart, well-informed leaders and experts has always helped me make better decisions. I have found that most wars are filled with big disagreements about what is likely to happen and big surprises. However, in the case of this Iran war, it is obvious, and there is near-universal agreement, that it all comes down to who controls the Strait of Hormuz. I hear from those who run governments, geopolitical experts, and people all over the world that if Iran is left with control over who can pass through the Strait of Hormuz, or is even left with the power to negotiate:
1. The United States will be judged to have lost the war, and Iran will be judged to have won. That is because Iran controlling the Strait of Hormuz to use as a weapon would be a clear demonstration that the U.S. does not have the power to fix this situation. The consequences of allowing Iran to shut down the most important strait in the world, through which the right of passage must be ensured at all costs, would be hugely damaging to the United States, its allies in the region (especially its Gulf allies), countries that depend most on its oil flow, the world economy, and the world order. If Donald Trump and the U.S. don’t win this war—with victory being easily measured by whether they can ensure safe passage through the Strait of Hormuz—they also will be perceived to have caused a disastrous situation they could not fix. Whatever the reason that the United States doesn’t win control of Hormuz—whether it is because anti-war politics threaten President Trump’s political control ahead of the upcoming mid-term elections and he is afraid of that, because of his and the American electorate’s lack of willingness to suffer the losses of lives and money required to win this war, because the U.S. doesn’t have the military power to get and maintain control, or because he cannot bring together other countries in a consortium to keep this strait open —it doesn’t matter. President Trump and the U.S. will have lost.
My reading of history and sense of what is now happening leads me to believe that if the U.S. were to lose in this way, there would be a significant risk that losing control of Hormuz would be for the United States what the Suez Canal Crisis was for Great Britain (in 1956) and analogous defeats were for the Dutch Empire in the 18th century and the Spanish empire in the 17th century. The pattern of events that leads to the breakdown of empires is almost always the same. While it is covered much more comprehensively in my book Principles for Dealing with the Changing World Order, I can tell you here that there are innumerable cases in which a perceived lesser power challenges the leading world power over the control of a critical trade route (e.g., Great Britain’s control of the Suez Canal being challenged by Egypt). In these cases, the dominant power (e.g., Great Britain) threatens the lesser power (e.g., Egypt) to open the route, and everyone watches and shifts their approaches to these countries and where their money goes based on what happens. This decisive “final battle” that determines the winners and the losers and whether the empire survives or falls reshapes history because people and financial flows quickly and naturally run from the losers. These shifts affect markets, especially the debt, currency, and gold markets, and geopolitical power. Seeing so many analogous cases led me to the following principle: * When the world’s dominant power that has the world’s reserve currency is overextended financially, and it reveals its weakness by losing both military and financial control, watch out for allies and creditors losing confidence, the loss of its reserve currency status, the selling of its debt assets, and the weakening of its currency, especially relative to gold.
Because people, countries, and financial flows quickly and naturally flock to the winner, if the U.S and President Trump don’t get control of the flow of traffic through Hormuz, it will threaten American power in the world and the existing world order. While it was always assumed that the U.S. would be the dominant power and could win militarily and financially over its opponents (and certainly over its middling-power opponents), the cumulative effect of the military, financial, and geopolitical consequences of the wars in Vietnam, Afghanistan, Iraq, and perhaps this war with Iran, are not good for the United States and the sustainability of the post-1945, American-led world order.
Conversely, *when the world’s dominant power demonstrates its military and financial strength, that bolsters confidence in it and the willingness to hold its debt and currency. When President Reagan got the hostages in Iran released immediately after his election and then, when Iran attacked Gulf shipping during the Iran-Iraq War, President Reagan ordered U.S. Navy escorts for oil tankers, he demonstrated his and the United States’ power over Iran. If President Trump demonstrates his and the U.S.’s power to do what he said he would do, which is win this war by having free passage through the Strait of Hormuz and eliminating Iran as a threat to its neighbors and the world, it will greatly bolster confidence in his and the U.S.’s power.
2. If, on the other hand, the Strait of Hormuz is left in the hands of the Iranians to use as a weapon to threaten American allies in the Gulf and the world economy more broadly, everyone will be hostage to the Iranians, and Donald Trump will be perceived to have picked a fight and lost. He will have left U.S. allies in the region with a huge problem, and he will lose credibility, especially given what he has said. For example, Trump has said: “If for any reason mines were placed, and they are not removed forthwith, the military consequences to Iran will be at a level never seen before,” “we will take out easily destroyable targets that will make it virtually impossible for Iran to ever be built back, as a nation, again — Death, Fire, and Fury will reign upon them,” “the new leader in Iran will have to obtain our approval; otherwise, he will not last long.” I often hear senior policymakers in other countries say in private things like, “He talks a good game, but can he fight and win when the going gets tough?” Some observers are anticipating this fight like the Romans in the Colosseum or sports fans awaiting the final and greatest contests. President Trump is now calling on other countries to join the U.S. in ensuring the free passage through the Strait; his ability to get them to do so will be indicative of his ability to form alliances and muster power, so that would be a big win.
It will be very difficult for the United States and Israel alone to ensure the safe passage of ships without prying Hormuz loose from Iranian control, and it will likely require a great battle to do so. The outcome is existential for the Iranian leaders and the largest and most powerful segment of Iran’s population. To the Iranians, this war is very much about revenge and commitment to what matters more than life. They are willing to die as a demonstrated willingness to die is essential for one’s self-respect and showing the devotion that brings about the greatest reward—while Americans are worrying about high gas prices and America’s leaders are worrying about midterm elections. * In war, one’s ability to withstand pain is even more important than one’s ability to inflict pain. The Iranians’ plan is to try to drag the war out and steadily intensify it because it is widely known that the American public, and therefore American leaders, have very limited capacities for pain and wars that drag on. So, if this war is made painful enough and long enough, the Americans will abandon the fight and their Gulf “allies,” and other “allies” around the world, will see that the United States will not be there to protect them. This will undermine the relationships with aligned countries in analogous situations.
3. While there is talk of ending this war with an agreement, everyone knows that no agreement will resolve this war because agreements are worthless. Whatever happens next—i.e., leaving Hormuz in Iranian hands or taking control away from them—is likely to be the worst phase of the conflict. This “final battle,” which will make crystal clear which side won and which side lost control, is likely to be a very big one.
To quote Iran’s military command, “All oil, economic, and energy facilities belonging to oil companies in the region that are partly owned by the United States or that cooperate with the United States will be immediately destroyed and reduced to ashes.” That will be what they attempt. If the Trump Administration is successful in its efforts to get other countries to join it in sending warships to provide safe escorts—and hasn’t already been mined—we will see if that becomes a solution. Both sides know that the final battle, which will make clear which side won and which side lost, still lies ahead. And they know that if President Trump and the United States don’t deliver on reopening the strait, it will be terrible for them. If, on the other hand, President Trump wins this final battle and eliminates the Iranian threat for at least the next several years, it will greatly impress everyone, empower President Trump, and demonstrate American power.
4. The direct and indirect effects of this “final battle” will ripple around the world, affecting trade flows, capital flows, and geopolitical developments with China, Russia, North Korea, Cuba, Ukraine, Europe, India, Japan, etc. The current war, along with other recent wars, is part of the far bigger classic Big Cycle progression that has financial, political, and technological implications. These implications can be best understood by studying past analogous wars and applying the lessons learned to current circumstances. For example, * a country’s financial and military capacities to fight wars are affected by the number and severity of the wars it is fighting, its internal politics, and its relationships with countries that have shared interests (e.g., between Iran, Russia, China, and North Korea). The United States doesn’t have the capacity to fight multiple wars (no country does), and in a world that is so interconnected, wars, like pandemics, spread quickly in unimaginable ways. At the same time, within countries, especially within democracies that have great wealth and values differences, there is always fighting over what should be done and who should pay how much and in what form (i.e., money, lives lost, etc.). There will almost certainly be these sorts of direct and indirect relationships and consequences that are very difficult to anticipate but won’t be good.
To bring this note to an end, I want to emphasize that I am not political; I am just a practical person who has to bet on what will happen and has studied history to draw lessons that help me do that well, and I am now passing along my principles and thoughts that might help others navigate these tumultuous times. As I have explained before, from studying the rises and declines of empires and their reserve currencies over the last 500 years of history, which I did to help me make my global macro bets (and which I shared in my book and YouTube video The Changing World Order), there are five big, interrelated forces that drive how monetary orders, political orders, and geopolitical orders come and go. They are: 1) the long-term debt cycle (comprehensively explained in my book How Countries Go Broke: the Big Cycle), 2) the related political cycle of order and disorder (that progresses in clearly identifiable stages and at its worst causes civil wars), 3) the related international geopolitical cycle of order and disorder (that also progresses in clearly identifiable stages and at its worst leads to devastating world wars), 4) the advancements of technologies (that can improve or destroy lives), and 5) acts of nature. What is now happening in the Middle East is just a small part of this Big Cycle at this current moment in time.
While it is impossible to anticipate and get all the details and specifics exactly right, it is quite easy to measure the health and the progressions of these five forces and the overall Big Cycle. The important thing for you to do is to ask yourself, is that Big Cycle progression true and are these indicators indicative of where we are in the Big Cycle—and if so, what should I do about it? I remain ready, willing, and able to explore these things with you if you’d like to ask me questions in the comments.
Im a big fan of your work Mr Dalio, I would like to extend the discussion by proposing the following:
For most of human history the global system has been multipolar, with several large civilizations existing at roughly comparable levels of technological sophistication, economic output, and living standards. In antiquity, the Roman Empire and the Han Dynasty developed in parallel with similar levels of engineering, administration, and urbanization; in the medieval world, centers such as the Abbasid Caliphate, Byzantine Empire, and Tang Dynasty were all major hubs of trade, scholarship, and production at the same time. Even on the eve of European expansion, the Ming Dynasty, Mughal Empire, and Ottoman Empire were among the largest and richest states in the world simultaneously. The pattern of a single dominant global power passing a baton between states—from the Dutch Republic to the British Empire and then to the United States—is therefore historically unusual and largely a product of the technological asymmetry created by the Industrial Revolution. Because of that precedent, many people assume the next step is simply another baton pass—from the United States to China—but it’s equally plausible that the baton itself disappears. If industrial and technological capability becomes widely distributed again, the system may revert to its longer historical pattern: several large powers operating at broadly similar levels of development rather than one clearly dominant hegemon.
Thank you for articulating such a clear and unsensationalised perspective (if that’s a word). When GB had its Suez crisis, what defeated it was not the Egyptians, but the US threatening to destroy its economy if it didn’t stop. There is no bigger power that can threaten to do the same to the US. In fact the US is relatively shielded to the effects of this crisis compared to its “allies”. Morally you might expect that someone who breaks something pays the price for it to be fixed. More realistically, what’s to stop the US cutting and running if the electoral pain gets too great, leaving the rest of the world to starve?