Changing world order

From: allin

Ray Dalio’s book, “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail,” encapsulates the social, economic, and political shifts observed in the US and globally today [00:00:57]. These include increasing civil unrest, divisive politics, a desire for external conflict, and inflation, budget, and debt problems, all of which have historically occurred as nations have risen and fallen [00:01:07]. Dalio’s work analyzes the cycles that happen within social systems, which he refers to as nation-states [00:01:23].

The Big Cycle

Dalio’s understanding of the “big cycle” of empires and currencies stems from realizing that many surprising events in his lifetime had happened many times in history [00:02:52]. For example, the US defaulting on its promise to deliver gold for money in 1971 mirrored events in March 1933 under Roosevelt [00:03:06]. Similarly, interest rates hitting zero in 2008 had a historical parallel in the 1930s depression [00:03:42].

Dalio studied the 10 most powerful empires over the last 500 years and the last three reserve currencies: the Dutch Empire and the Guilder, the British Empire and the Pound, the United States Empire and the Dollar, and the Chinese Empire and its currencies [00:05:59]. He also examined Chinese dynasties back to the year 600 [00:06:42].

These empires typically transpired in overlapping cycles lasting about 250 years, with 10 to 20-year transition periods often marked by significant conflict [00:07:08]. Leading powers do not decline without a struggle [00:07:24].

Measuring Empire Power

An empire’s power in Dalio’s study is measured using eight metrics [00:07:31]:

• Education [00:07:41]
• Inventiveness and Technology development [00:07:41]
• Competitiveness in global markets [00:07:44]
• Economic output [00:07:47]
• Share of World Trade [00:07:51]
• Military strength [00:07:51]
• Power of their financial center for Capital markets [00:07:55]
• Strength of their currency as a reserve currency [00:07:59]

Better education typically leads to increased innovation and technology development, which, with a lag, leads to the establishment of the currency as a reserve currency [00:08:33]. These forces then decline in a similar, reinforcing order [00:08:50].

Typical Sequence of Events

The big cycle generally begins after a major conflict, often a war, which establishes a new leading power and a new world order [00:09:03]. This is followed by a period of peace and prosperity, during which people increasingly take it for granted and borrow money, leading to financial bubbles [00:09:16]. As trade grows and the currency becomes a reserve currency, borrowing increases further [00:09:34]. However, this prosperity distributes wealth unevenly, leading to a growing wealth gap between “Haves” and “Have Nots” [00:09:47].

Eventually, financial bubbles burst, leading to money printing and increased internal conflict between rich and poor, which can result in revolution (peaceful or civil war) to redistribute wealth [00:09:56]. As the dominant empire struggles with internal conflict, its power diminishes relative to rising external rivals [00:10:16]. When a new rising power becomes strong enough to challenge the dominant power, external conflicts, typically wars, erupt, leading to new winners and losers who then establish a new world order, and the cycle repeats [00:10:26].

Five Great Drivers of Change

Dalio identifies five major forces that were not evident in his lifetime but have historically affected world orders [00:03:53]:

1. Debt and Money Creation: Huge amounts of debt and money creation and their impact on the rise and decline of reserve currencies [00:04:04].
2. Internal Political Conflict: The rise of populism of the left and right, characterized by a lack of willingness to accept losing and a fight for one’s contingency, leading to dysfunction [00:04:16].
3. Great Power Conflict: The rise of a comparable economic and military power, such as China, competing with the United States and changing the world order [00:04:42].
4. Acts of Nature: Events like droughts, floods, and pandemics, which historically have killed more people, toppled more empires, and changed more world orders than anything else [00:05:15].
5. Technological Changes: How technological innovations evolve and impact society [00:05:34].

Current Global Dynamics

Dalio believes China will remain a major power for the foreseeable future, and the world order will change profoundly with the emergence of countries like India [00:12:02]. This conflict is expected to continue changing the world order [00:12:26].

Democracy vs. Authoritarianism

A significant vulnerability of democracies, as described by Plato, is the disorderliness and anarchy arising from conflict [00:12:48]. The risk for capitalism arises when the wealth gap and opportunity gap clash, creating a risk for democracy [00:13:20]. In the 1930s, four major democracies (Germany, Italy, Spain, and Japan) chose autocracies due to this dynamic [00:13:42]. Dalio emphasizes that while democracies offer equal opportunity, creativity, rule of law, and civility, risking these values poses a great risk to both systems [00:14:00].

Chinese leaders, from their 5,000-year historical perspective, believe there are two different systems (autocratic vs. democratic) and that competition is inevitable [00:17:50]. They see an inevitable conflict due to “containment” versus a “desire to expand,” like keeping a lid on a boiling pot [00:18:37]. The biggest risk they perceive is instability, particularly related to their debt restructuring problem [00:19:05]. Their historical learning suggests that during periods of internal conflict, strong controls and autocracy are necessary [00:19:34].

Regional Outlook

• India: India has the highest potential growth rate and is seen by Dalio as being where China was in 1984, with Modi acting as a “Deng Xiaoping” figure for massive reform and development [00:15:36]. India’s large Muslim population is an internal issue, but not one expected to halt its progress [00:16:13]. Historically, neutral countries have performed best during global conflicts, and India, being in the middle of the US-China-Russia alignment, is expected to be a net beneficiary [00:16:26].
• Middle East: Particularly the Gulf countries, are becoming talent magnets due to significant wealth accumulation [00:17:16].
• ASEAN Countries: Indonesia, Philippines, and Vietnam are also projected as areas of great growth [00:17:01].

Debt and Wealth Inequality

Dalio highlights the severity of debt problems [00:22:34]. He explains that debt rises relative to incomes, causing debt service payments to squeeze out consumption [00:24:26]. This often leads to governments printing money, a move expected in the next downturn [00:24:47]. The major risk arises when buyers no longer want to hold government bonds due to unattractive returns [00:24:59]. This can lead to a shift towards tangible assets like equities, real estate, or gold [00:25:39]. Gold is valued because it is not someone else’s liability [00:25:55].

The US economy exhibits a huge wealth gap, partly due to the government taking on debt and distributing money, which improved household financial conditions while increasing government debt [00:27:43]. This monetization also contributes to inflation [00:28:42]. Dalio gives an example from Connecticut where, despite being a wealthy state, there are significant disparities in education and incarceration rates, illustrating a “structural problem” in capitalism that needs reform [00:29:05].

Future Outlook

Dalio predicts “radical disorder” in the next five years [00:23:28]. This will be driven by:

• Upcoming elections and their impact on power dynamics [00:23:35].
• Geopolitical conflict, particularly US-China relations [00:23:37].
• Financial conflict arising from debt problems [00:23:46].
• The expensive climate issue [00:23:42].
• Radical technological changes, which offer both miracles and weapons [00:23:52].

Prescriptive Measures for the US

To maintain a leading position, America needs to focus inward on making its democracy high-functioning, which is as crucial as managing its relationship with China [00:14:38]. While the US is still strong in technological innovation, Dalio warns that this alone cannot save it if other fundamental aspects like debt, wealth gaps, and political divisions are broken [00:31:34].

Dalio believes that a decline is not inevitable, but it requires overcoming existing challenges [00:36:38]. What is needed is:

1. A Strong Middle: To unite the country and prevent continuous fighting [00:36:42].
2. Bipartisan Engineering Exercise: A collaborative effort, like the Manhattan Project, involving bipartisan individuals to engineer important structural changes [00:36:55]. These changes must be structural, as constant fighting over issues is unsustainable [00:37:51].

Dalio advocates for a reformed capitalism, emphasizing that the profit system alone does not adequately direct resources, citing issues like climate costs and education gaps [00:34:04]. He suggests that, if he were president, he would implement a bipartisan cabinet to address these structural problems [00:37:14]. Ultimately, the country must come together to pull off this reformation [00:35:17].