From: allin
Ray Dalio, author of “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail,” emphasizes that many current global shifts, including budget and debt problems, have historical precedents [01:13:58]. His work provides a framework for understanding the cyclical nature of social systems and nation-states [01:24:43].
Historical Cycles of Debt and Devaluation
Dalio’s understanding of economic cycles began with personal experiences that later resonated with historical patterns [02:51:56]. He recounts being surprised when the United States defaulted on its promise to deliver gold for money in 1971, expecting a market downturn, but instead, the market went up [03:06:17]. This event mirrored a similar devaluation under Roosevelt in March 1933 [03:25:21]. Studying the 1930s, including the Depression leading to wars and interest rates hitting zero, allowed his firm to profit during the 2008 financial crisis, as similar patterns emerged [03:41:51].
Three significant shifts that had not occurred in Dalio’s lifetime but are now prevalent, necessitating historical study, include:
- Massive Debt and Money Creation: The immense amounts of debt and money being created today [04:04:10].
- Internal Political Conflict: The rise of populism and political dysfunction, exemplified by events like January 6th [04:16:32].
- Great Power Conflict: The rise of China as a comparable economic and military power challenging the United States, altering the world order [04:42:07].
Additionally, two other major drivers of change are acts of nature (droughts, floods, pandemics) and technological advancements [05:11:44].
The Big Cycle of Empires and Financial Bubbles
Dalio’s research into 10 powerful empires and three reserve currencies over 500 years, and Chinese dynasties back to 600 AD, revealed recurring cycles of rise and decline, typically lasting around 250 years with 10 to 20-year transition periods marked by conflict [05:59:17].
A typical cycle begins after a major conflict establishes a new leading power, followed by a period of peace and prosperity [09:05:07]. This leads people to bet on continued prosperity, increasing borrowing and creating financial bubbles [09:24:26]. As an empire’s share of trade grows and its currency becomes a reserve currency, it leads to even more borrowing [09:34:11].
Simultaneously, this prosperity distributes wealth unevenly, causing the wealth gap between “Haves” and “Have Nots” to widen [09:47:04]. Eventually, the financial bubble bursts, leading to:
- The printing of money [09:59:36].
- Increased internal conflict between rich and poor, potentially resulting in peaceful revolution or civil war to redistribute wealth [10:02:05].
- Diminished power relative to external rivals [10:16:11].
When a rising power challenges a dominant, internally struggling power, external conflicts (wars) typically occur, leading to a new world order and the cycle repeating [10:26:01].
Modern Debt Challenges
Dalio views the current US national debt as a significant concern. Debt, particularly sovereign debt, is a critical construct to analyze, both in absolute terms and relative to GDP [24:00:23]. He notes that many countries go through the debt cycle together, as seen in the 1930s [24:20:10].
Key aspects of modern debt problems include:
- Rising Debt Service Payments: Debt rises relative to incomes, causing debt service payments to squeeze out consumption [24:28:46].
- Money Printing as a Solution: The inevitable realization that governments will “print money” in the next downturn [24:47:03].
- Risk of Bond Disinterest: The major risk arises when bondholders no longer wish to hold government bonds [24:59:44]. Currently, there are $31 trillion in bonds [25:31:40]. When bonds offer unattractive returns, buyers may opt to sell them and invest in tangible assets like equities or gold [25:40:48]. Gold is considered unique because it is “the only asset you can have that not somebody else’s liability” [25:54:33].
- Debt and Wealth Gap: The recent pattern has seen governments taking on debt and distributing money (e.g., direct checks), which improved household financial conditions while significantly increasing government debt [28:01:21]. This monetization of debt also contributes to inflation [28:47:02].
- Structural Problem: The US national debt and wealth gaps are structural problems that need to be addressed [34:12:02]. Dalio stresses that society collectively spends “a lot more money than we’re earning” [32:21:40].
China’s Perspective on Debt
Chinese leadership, with their long historical perspective spanning 5,000 years, are very conscious of cycles [18:52:03]. They believe instability is the biggest risk [19:07:44]. Xi Jinping’s warnings about “the big storm on the horizon” relate to global conflicts and China’s own debt restructuring problem [19:16:03]. Their historical learning suggests that during such periods, autocracy and strong controls are necessary to manage internal conflict [19:34:04].
Future Outlook and Solutions
Dalio predicts “radical disorder” in the next five years due to factors like elections, geopolitical conflicts, climate issues, and technological changes, alongside financial conflicts related to debt [23:28:22].
He emphasizes that while there are “pre-existing conditions” like the magnitude of debt, the decline of an empire is “not inevitable” [36:19:17]. To overcome these challenges, America needs:
- A Strong Middle: To unite the country and curb political infighting [36:42:06].
- Bipartisan Engineering Exercise: A collaborative, bipartisan effort to implement structural changes, much like the Manhattan Project [36:55:05].
- Reformed Capitalism: Dalio suggests that capitalism needs reform, as the profit system alone does not adequately direct resources to address issues like climate change costs or education gaps [34:04:13]. He cites the example of Connecticut, where significant disparities exist in educational funding and outcomes between wealthy and poorer towns [29:03:00].
Dalio believes his best role is to share his insights, allowing the public to engage with these thoughts [40:26:06].