“The Great Reckoning” by Davidson and Rees-Mogg – Donal’s notes

Short Summary

The economy is bad and getting worse. Put money in diverse assets (including 5-10% in gold and silver) and insurance in multiple countries. Be prepared for government services to be provided privately (e.g., water, education, security). Divest yourself of investment real estate, especially in large cities. For maximum safety move to small, rural or semi-rural, rich towns out of normal commuting range (recommended counties in Appendix 4). Consider hedging against economic slump (e.g., Ted spread). Avoid troubled banks (list in Appendix 2) and use sound banks (Appendix 3), purchase distressed properties, use bullet proof glass in your cars (Appendix 6), act for political reform (Appendix 7), use their investment services (Appendix 8).

A Slightly Longer Summary

Davidson and Rees-Mogg process events through the lens of a “megapolitical” principle — power comes from the ability to wield violence to enforce your voice and rights. Major historical shifts occur when events or inventions conspire to shift who can wield violence more effectively than others. These shifts (like the information age) create economic change, ranging from euphoric booms to empire-dissolving busts. As costs of offensive violence decrease relative to defensive violence, consolidation occurs (Europe went from 500 governments to 25 from 1500 to WWI); as costs of offense increase relative to defense, balkanization occurs. The latter is bad for peace and prosperity (think Somalia war lords or the Dark Ages).

  • “The stability of democratic systems has always rested upon an underlying military equality of the electors” (p. 68).
  • Peace depends on developing superior force and using it to “suppress predatory violence and curtail the incentives to use it” (p 53).
  • Major historical shifts in societies (including empire collapse) have occurred around inventions (e.g., stirrups, gun powder) that shift who has the ability to wield violence.
  • Sometimes there is a long lag between the introduction of a technology and its impacts (e.g., gunpowder was known in Europe as early as 1242 but it wasn’t until about 1490 that its impact hit Europe).
  • As costs of offense decrease relative to defense, consolidation occurs (Europe went from 500 governments to 25 from 1500 to WWI); as costs of offense increase relative to defense, balkanization occurs.
  • The information age is the latest shift with implications still unfolding. Technology is increasing the number of groups who can employ violence and thus de-stabilizing the current power equation. This is bad because too much balkanization is bad: think Somalian Civil War (1991) with roving war lords, a process that occurs repeatedly throughout history (e.g., China in 1920s, Soviet Union, Yugoslavia). Stable government “that reliably provides law and order, impartially protects private property, and enforces contracts” (p. 102) is critical for prosperity.
  • Providing the necessary law and order is becoming more difficult world-wide. For example, with a military budget of 75 million pounds in 1912 (equivalent to $6.4 billion in 2016 U.S. dollars), the British were able to secure greater world-wide safety for their citizens and trade that the U.S. currently can with 87 times their spending (2015 military budget was $559 billion).
  • In hunter-gatherer cultures (like those of New Guinea) everyone has about equal power. So, it becomes impossible to amass more of life’s goods that an individual and their family can protect from others


  • We were right about a lot of things we predicted
  • Debt has been growing faster than output since WWII & can’t continue
  • Thus, we are vulnerable to economic, political, and financial collapse, perhaps physical violence
  • Empires fall (recent examples are the Spanish, Dutch, and British empires). When they do, upheaval results.
  • Power (through violence) is more important than we realize
  • Technological change will make it more costly to project power and cheaper to resist it. As a result, governments ability to maintain order will decrease. The fall of neighborhoods and increased military effectiveness of smaller and smaller groups (e.g., Lebanon – each neighborhood or valley controlled by a different militia)
  • People don’t want to hear warnings of events as frightening as depression

Chapter 1: The Megapolitics of Progress and Decline – violence as a catalyst and consequence of change

  • Peace depends on developing superior force and using it to “suppress predatory violence and curtail the incentives to use it.” (p 53)
  • Review of historical significance of this principle. Example: development of annual grain production allowed surplus, hierarchies, civilization, and provided many incentives for the organization and use of force. Surplus made both taxes and crime paying propositions. Farming made slavery and serfdom profitable for the first time. Crowded cities produced the diseases of civilization (e.g., small pox)
  • Equality of power was more a feature of pre-civilization than civilization. The Greeks developed democracy because power was less centralized — a 10 acre plot could support a farmer and proximity to the sea gave them the power to trade easily and the money to buy weapons with which to assert their voice and liberty.
  • In Rome, the poor could be ignored unless they formed a mob. As wealth was concentrated into fewer hands, those folks paid for the military and society changed to suit them.
  • “The stability of democratic systems has always rested upon an underlying military equality of the electors” (p. 68)
  • The invention of the stirrup effectively welded horse and rider together, partly giving rise to cavalry. But, since only a few could afford horses, this shifted power to smaller numbers of people could carve out fiefdoms for themselves and intercept resources meant for central government — feudalism was the result. Ultimately, the devolution of central authority resulted in the Dark Ages.
  • Mountain (e.g., Switzerland) people were more successful at retaining their freedom — mountains nullify to a large extent the military significance of numbers.
  • 1494 – Gun powder shifted military balance from defense to offense and political entities became bigger. 500 political bodies in Europe in 1500 fell to less than 25 prior to WWI. Money began to rival land ownership and the Protestant Revolution provided a theological rationale for saving $ and charging interest. As guns became cheaper, the poor gained power: until the 19th century, democracy “was almost always stabilized by the exclusion of a larger percentage of the population from the vote.” (p. 79)

Chapter 2: The Information Revolution — The Megapolitics of the Future and the Constitutions of the Past

  • Information revolution is the third revolution of human life
  • Microchips will end nation-states because small groups will have the power to employ violence effectively to overturn large organizations and governments
  • Decentralizing manufacture possible (genetically modified grass seeds instead of lawn mower factories; digital designs manufactured with 3-D printing or similar technologies)
  • Conventional weapons can be “improved” to target specific people or used more effectively with computers
  • Biological weapons can be made more deadly, e.g., gene manipulation, nanotechnology.
  • Nanotechnology: atoms can be programmed to assemble themselves; people can be controlled through those who have that power?
  • What value does human labor have after “…self-replicating molecular machines provide material goods in virtually unlimited quantity at almost zero cost?” (p. 88)
  • They think one person will control this technology and potentially act have the powers of a god.
  • The roman army — the greatest in existence at one time — could be defeated easily with today’s technology. Same will be true of future technology to present power
  • Gains of social and economic cooperation disappear as power gets balkanized, where power is fleeting and very local and there are many groups of similar power (e.g., Somalia). [But, what about the idea that democracy has to involve people with equal power?]
  • Fall of monarchy in China in 1920s resulted in widespread violence under armies (84 separate armies + 18 independent divisions and 21 brigades existed by 1928), bandits, and war lords.
  • Technology is increasing the number of groups that can employ violence. Some trends: (1) Military balance between offense and defense is shifting in favor of the defense — Is it cheaper to consolidate territory or split it into pieces? As power gets harder and more expensive to project relative to defense, it becomes too expensive to consolidate and enforce and encourages balkanization. (2) Scale of technologies is falling so size of operations needed to handle tasks decreases (so go from big to small)
  • As public order breaks down and even “good neighborhoods” experience safety concerns, there will be (1) an increase in vigilante justice as private citizens try to protect their stuff, and (2) wealthy with retreat further from cities into the countryside (p 105)

Chapter 3: America Follows in Britain’s Footsteps

After money from U.S. ceased at the end of WWII, Britain’s economy went south until Thatcher. There are similarities with America today and America is suffering many symptoms of a nation in decline: high taxes, high prices, wealth inequities widening, strong special-interest groups, decline in education and everyday competence, high tendency to import, high budget deficits

Chapter 4: Japan Follows in American’s Footsteps

  • It will become the new supreme power in the world instead of America
  • Can the world be organized cooperatively (e.g., United Nations)? They suspect not. Historically, cooperation declines as economies decline.
  • Evidence of disorder. British empire was safe almost anywhere in the world because their offense was so much more powerful than others’ defense (e.g., a small group of British soldiers, armed with Maxim guns, could wipe out almost any number of Mongolian horseman who otherwise might steal trade goods, etc.). Their military budget was only 75 million pounds in 1912 (equivalent to about about 5 billion pounds in 2016 or $6.4 U.S. dollars). This compares to the 2015 U.S. military budget of $599 billion which achieves nothing like the safety the British were able to achieve.
  • Japan will ascend as the premier world power.
  • During transitions between the decline of an old  power (e.g., America) and the rise of the new power (e.g., Japan), there is lots of instability and trade restrictions. Stages as a new power emerges: (1) property-rights shock (e.g., OPEC in 1973) that leads to 10 or so years of inflation; New power starts to outperform the old one. (2) Optimism feeds booms. (3) Bust occurs 9-10 years after peak commodity prices and 15-20 years after the property-rights shock. (4) Followed by long-period of wind down with “sucker” rallies. Ultimately asset values decrease 90%.
  • Historic examples: (1) Commodity prices peak in London in 1711. South Sea Bubble burst in 1720. Depression. (2) Commodity prices peaked in Tokyo in 1980, stock market peaked in 1989. Crash in 1990. (3) Others: p. 146.
  • Economic decline does not “engender collapses of historic proportions” (p. 147) b/c they are widely recognized and imperial decline presents many buying opportunities when pessimism is overdone (provided the system survives).
  • The optimism present in a new emerging power, however, does have abundance of optimism and many of history’s epic busts have occurred in the markets of rising powers. e.g., Holland achieved independence from Spain, became world’s principal power a few decades later, and tulip market collapse (1636) occurred. e.g., South Sea Bubble is almost identical to 1929 crash.
  • All long term credit cycles end in asset crashes in the markets of the leading economy (p. 152): 1720-1772 (52 years); 1772-1825 (53 years); 1825-1873 (48 years); 1873-1929 (56 years); 1929-1990 (61 years) with crashes less severe if they don’t also correspond with a shift in world economic predominance
  • 1929 was greatest crash in history and marked America’s emergence as primary economic power
  • They’re watching Japan. Japanese problems particularly bad for California (p. 162)

Chapter 5: The New Germany & Europe in the 1990s

  • Eastern and Western Europe need each other
  • Gun powder revolution came late to land-locked East and thus feudalism was preserved
  • EU is a good thing. Reducing trade barriers is result of long secular boom. Will it survive in a slump?

Chapter 6: Latin America Takes Over Communism & Other Ironies of the End of the Cold War

  • Communism was brought down more quickly by the microchip bc it helped spread information and undermine totalitarian control. For example, the soviet army was defeated in Afghanistan in 1989, largely because of microchip-dependent stinger missiles (cost of defense rose relative to offense) and everyone soon heard about it.
  • Marxism was a post-hoc ideology to justify a megapolitical shift. The shift was the combination of cheap guns and factors for mass employment that gave workers a rare opportunity to seize wealth (p. 186). 
  • Class conflict explains little. Rarely do these create historic transformations.
  • Marxist is right when he says that social revolution occurs when “the material forces of production in society come into conflict with the existing relations of production” (p. 187).
  • Communism was ok when staple mass production industries operated most efficiently at giant scales, but the microchip changed that.
  • Decay of union power has been similarly affected and their special legal status will continue to decline.
  • Implications of communism decline (p. 193-6)
  • End of cold war means Germany and Japan no longer have to support the U.S. dollar through thick and thin or supporting deficits

Chapter 7: Muhammad Replaces Marx – The New North-South Division of World Politics

  • Marx is dead and, like most secular prophets, had a short lifespan; Islam does not have a short lifespan
  • Division between rich world of materialism and market economies vs. less materialistic, heavily populated south
  • Religion can make inadequate or dysfunctional systems function
  • Incentive trap (p. 216): what seems narrowly profitable for the individual is bad for the group and possibly even bad in the long run for the individual themselves. Good bet that when people are operating in bad ways, there is an incentive trap at the bottom of it. Examples: The tragedy of the commons, prisoner’s dilemmas
  • Religion provides some solutions to some incentive traps. New Guinea pig feasts and then wars help solve the tragedy of the commons (p. 217). Prohibition against eating pork for Jews and Muslims (desert people) — they drink a lot of water. As pop grew in deserts, pigs became unsustainable.
  • Freedom of religion is prized in countries with developed markets and competent governments b/c there are other solutions to the tragedy of the commons and other incentive traps (i.e., private property rights that are enforced) and not a value in countries with underdeveloped markets and governments
  • Sudden influx of oil wealth dissolved many traditions without creating new market economies of modern states to take their place
  • They predict an upsurge in fundamentalism, the “retribalization of the world” (p. 225) and won’t be confined to Islam.
  • Islam is a good religion for the megapolitical conditions of devolution and breakdown of order (p. 226). Koranic law produces tiny levels of crime compared to American cities, for example.
  • Rise of terrorism predicted. [My thought: Cost of offense is low for small groups willing to engage in terrorism and the cost of defense is high]. Iraq war only necessary b/c Hussein didn’t think U.S. could win.
  • Taboo on usury helped stabilize societies on the edge of subsistence. “Borrowing when there are few income-producing capital assets, other than land and human labor, tended to be destabilizing and militarily dangerous.” (p. 231-2). Taboo is also way of ensuring a wider distribution of property and discouraged high taxes.
  • Hard for Islamic societies to compete with economies of large scale enterprises, but it will be less damaging to economic efficiency in the information age
  • But Islam stability depends a great deal on oil
  • 1986 Oil Price Collapse: 12% reduction in oil consumption combined with modest increase in non-OPEC output, led to prices < $10 per barrel. As much as 80% of the drop in demand occurred between 1979 and 1986 and was due to substitution of coal, nuclear power, and natural gas for oil. Point: a drop in demand of 6-7 million barrels per day over 7 years ultimately resulted in a price collapse during a boom. A depression could result in a similar drop in a much shorter time. p. 235.
  • Migration pressures will build due to underpopulation in the north and overpopulation in the south, a process that will be amplified with oil price decreases. Along with the migration will come a migration of cultures and value systems.
  • Just as with Christianity (which was a crusader faith when much of the world was converted), Islam does not see conversion as necessarily a peaceful process
  • Israel in danger

Chapter 8: Linear Expectations in a Nonlinear World: How the Telescope led us to computer; How the computer can help us to see

  • Our industrial cultural assumes the world works in more simple and mechanical ways that it actually does.
  • Post-industrial culture: Computers give us increased ability to understand complex systems, e.g., mathematics of chaos, a subset of nonlinear dynamics
  • Complexity is a characteristic of all natural systems
  • In hunter-gatherer cultures (like those of New Guinea) everyone has about equal power. So, it becomes impossible to amass more of life’s goods that an individual and their family can protect from others. One must hide it or give it away. p. 248. Authors use this and a discussion of cargo cults to illustrate how “common sense” can be remarkably resistant to new evidence — instead, the new evidence is incorporated into the old worldview, sometimes in bizarre or comical ways.
  • In short, just as it is difficult to fit modern details into a stone age mindset, it is similarly difficult to fit complexity into an industrial mindset. Often the new facts are misinterpreted or ignored. An existing paradigm is seldom dispelled only by evidence.
  • Science often follows the introduction of new technology, e.g., telescope used by Galileo
  • Enough is already known about nonlinear dynamics to thoroughly discredit many of the widely held beliefs of economists but old ideas can take a long time to change. For example, the idea that the sun rotated around the earth had been discredited as early as 400 BC but 2,000 years later, Galileo was imprisoned by the Inquisition for arguing the earth revolves around the sun. p. 260.

Chapter 9: The Remaking of the Cosmopolitan Mind (p. 261)

Complex computer models will help us acquire new knowledge. New knowledge is slow to percolate into general knowledge. They talk about waves and cycles. Depressions fit the rhythm of nature. [Losing steam chapter 9 – 14, pick up steam again for Chapter 15]

Chapter 10: Drugs, Delusions, and the Imperial Culture of the Slums (p. 291) [aka, those bad inner city, poor idiots]

Rising tide of violence will hit least developed countries first. But riots will hit U.S. cities. Divisions between segments of society will increase: “business-like classes” vs. “unbusiness-like classes”. Educational gaps. Gaps in acting rationally on information. Talk about the urban poor being bad thinkers, irrational, with “perverse” values. There are the superior people at the top with their “culture of achievement” and the “idiot occult.” The culture of crime. The race question. Drugs and violence.

Chapter 11: Deflation Ahead – Financial Fallout in the Atomic Age (p. 338)

Chapter 12: Clues from the Past – A Prologue to Depression

Chapter 13: When the Music Stops – Why the Welfare State could Collapse in the 1990s

Chapter 14: The Escape from High Costs – The Private Economy in the Slump of the 1990s

Migration of the rich away from the decline of suburbia and cities where lights go off, garbage with no place to go. They will go to “exurbs”, rural or semi-rural areas beyond the normal commuting range of big cities. Think places like Aspen.

Chapter 15: Rational Living in an Age of Crisis (p. 486)

  • In the coming slump, people will have to reject secular consumerism and return to values that will stand the test of time (p. 495)
  • Britain is one cycle ahead of U.S. and Japan is one cycle behind (p. 505)
  • Religious movements will be strengthened: “Religion is the reflection in human conduct of the profound nonlinearity of nature” (p. 497)
  • 15 steps to survival and independence (p. 498). Save 25% of your income & master compound interest.
  • The following are a few of the risks they highlight:  (1) U.S. dollar-denominated assets are at risk for unprecedented inflation or deflation (p. 503); (2) Bank deposits, insurance values, and stocks could be wiped out; (3) Bank accounts frozen, terms of treasuries re-negotiated, privately held gold confiscated (as in 1933), breakdown in public infrastructure like clean water, safe roads, police protection; (4) Terrorism
  • They believe the risks of these things are higher than the risk of your house burning down. Thus, think insurance.

Their guidelines for the crisis:

(1) Build cash and cash equivalents (short-term Treasury, gold, insured deposits < $100,000 but select a bank as if it had no deposit insurance). Reserve should equal one year’s expenses.

(2) Put business on sound footing.

(3) Report income now b/c taxes are going up.

(4) Sell your home if holding it primarily as an investment, especially if equity < 50% of its appraised value and/or the home represents > 50% of total assets. Dump other real estate investments that don’t pay their way especially in large cities. Relocate to exurban county from appendix 4.

(5) Diversify assets outside home country if you have $250,000 bc dollar could fall dramatically in next slump. Purchase a safe haven abroad (especially Switzerland).

(6) Asymmetric markets have implications in a major slump: short-selling more profitable but watch out for short squeezes and use your community to know when they’re being set up, explosive upside rallies, pay attn to solvency of your broker

(7) Keep an eye on Japan

(8) Seek professional advice for short-selling

(9) 5-10% of assets in gold bullion and selected gold and silver coins. Store it wisely: bank deposit boxes may not be accessible; store away from local politicians

(10) Maintain adequate insurance and look carefully at solvency of your insurance company (esp. health)

(11) Prepare for substantial volatility in bond markets

(12) Put money abroad. Place tax-sheltered retirement funds in German and Japanese govt bonds and German mark and Swiss franc denominated zero-coupon bonds. Buy single-premium annuities denominated in Swiss francs, German marks, or Japanese yen. American deposits can be converted involuntarily into American treasury instruments with low coupon and long maturity.

(13) Government services will be taken over by private (e.g., water, security, education)

(14) Form a group of like-minded people to pick up bargains or lend each other money (micro-finance style).

(15) Beware false dawns. Park cash in U.S. Treasuries by buying directly from the Federal Reserve as even insured bank deposits may not be available. Helpful to view history as cycles and spirals.

Afterword: The Recovery

Genuine or false? They predict 2nd stage of depression and think that sustained recovery unlikely when debt is twice economic activity. Dr. Cesare Marchetti ignores prices, focuses only on physical quantities in his work — BTUs of energy consumed, miles driven, cars per capita. Good predictions.

Appendix One: Techniques for Hedging against Economic Crisis (p. 533)

  • The Ted spread (T = T-bills; “ed” = Eurodollars): During economic panic, T-bills skyrocket in value and those buyers are selling uninsured instruments such as Eurodollars. To execute a Ted spread, you buy T-bills futures and sell Eurodollars futures in equal amounts. You can buy a “whammy” to increase the power of this trading strategy.
  • Short-sell commodities, put options on Japanese stock market, and trading in sovereign debt of Third World and old Communist countries.
  • Trade CRB Index (basket of 20 commodities): goes up with strong economy and inflation and fall when economy weakens




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