Rise and fall of nations

From: allin

Ray Dalio’s book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail, provides a framework for understanding the social, economic, and political shifts occurring globally and within the US today [00:00:51]. The book explains that phenomena such as increasing civil unrest, divisive politics, desire for external conflict, inflation, and budget and debt problems have all played out before in history as nations have risen and fallen [00:01:07]. Dalio’s work helps to understand the cycles that affect social systems and nation-states over time [00:01:24].

Historical Cycles and Observations

Dalio’s methodology involves studying historical events to identify patterns and cause-effect relationships [00:02:52]. He observed that many events that surprised him had happened numerous times in history, even if not within his lifetime [00:02:57]. For example, the US default on gold in 1971 mirrored an event in March 1933 under Roosevelt [00:03:06]. Similarly, interest rates hitting zero in 2008 had a precedent in the 1930s [00:03:42].

Three major developments that began in recent lifetimes, but occurred many times historically, include:

1. Massive Debt and Money Creation [00:04:04]
2. Internal Political Conflict (Populism): Characterized by populism of the left and right, where individuals are unwilling to accept losing, 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, thereby changing the world order [00:04:42].

Two other significant drivers of change throughout history are: 4. Acts of Nature: Droughts, floods, and pandemics, which have historically killed more people, toppled more empires, and altered more world orders than other factors [00:05:15]. 5. Technological Changes [00:05:34].

Measuring an Empire’s Power and Cycle

Dalio studied the ten most powerful empires and the last three reserve currencies over the past 500 years, including the Dutch, British, US, and Chinese empires, as well as Spanish, German, French, Indian, Japanese, Russian, and Ottoman empires [00:05:59]. He also examined Chinese dynasties back to 600 AD [00:06:42].

Empires typically operate in overlapping cycles lasting about 250 years, with 10 to 20-year transition periods characterized by significant conflict [00:07:08].

Eight Metrics of Empire Power [00:07:31]

1. Education [00:07:41]
2. Inventiveness and Technology Development [00:07:41]
3. Competitiveness in Global Markets [00:07:44]
4. Economic Output [00:07:47]
5. Share of World Trade [00:07:51]
6. Military Strength [00:07:53]
7. Power of their Financial Center for Capital Markets [00:07:55]
8. Strength of their Currency as a Reserve Currency [00:07:57]

Typical Cycle of an Empire [00:08:12]

The cycle begins after a major conflict, often a war, establishes a new leading power and world order [00:09:06]. This is followed by a period of peace and prosperity, during which people increasingly take stability for granted, leading to borrowing and financial bubbles [00:09:16]. The empire’s share of trade grows, and its currency becomes a reserve currency, leading to even more borrowing [00:09:33].

Simultaneously, this prosperity distributes wealth unevenly, causing the wealth gap between “Haves” and “Have-Nots” to grow [00:09:47]. Eventually, the financial bubble bursts, leading to money printing and increased internal conflict between the rich and poor [00:09:56]. This can result in a peaceful revolution or civil war to redistribute wealth [00:10:07]. As the empire struggles with internal conflict, its power relative to external rivals diminishes [00:10:16]. When a new rising power becomes strong enough to compete, external conflicts (most typically wars) take place [00:10:26]. New winners emerge from these wars and establish a new world order, restarting the cycle [00:10:40].

Current Global Dynamics

United States

The United States is seen as increasingly resembling a late-stage empire, similar to the Roman Empire, due to massive debt, currency debasement, far-flung military conflicts, and internal division [00:30:39]. While the US still excels at technological innovation, this alone is not enough to prevent decline if other systemic issues are broken [00:31:10].

Despite seemingly strong median incomes for Americans on a purchasing power parity basis [00:26:50], a significant wealth gap persists due to the economy’s nature and government actions like increased debt and money printing [00:27:43]. There’s also a significant opportunity gap, as evidenced by disparities in education and incarceration rates in US states [00:29:07].

China

China is expected to remain a significant power for the foreseeable future, and its rise, alongside the emergence of India, is profoundly changing the world order [00:12:02]. Chinese leadership views the world through the lens of two different systems: their autocratic approach (likened to a company with a board and executive committee) and other systems [00:17:50]. They believe in the inevitability of competition and acknowledge an inevitable conflict arising from containment versus expansion [00:18:19]. Chinese leaders are highly conscious of historical cycles, especially their 5,000-year history, and prioritize stability, viewing internal conflict as a major threat [00:19:03]. This perspective leads them to favor autocracy and strong controls, especially in the face of debt restructuring challenges [00:19:30].

India, Middle East, and ASEAN

India is considered to have the highest potential growth rate among the top 22 countries, akin to where China was in 1984 in terms of per capita income [00:15:25]. Prime Minister Modi is seen as a transformative figure, similar to Deng Xiaoping, driving massive reform and development [00:15:52]. India’s large Muslim population presents some internal issues, but these are not expected to halt its progress [00:16:13]. Historically, neutral countries have performed best during wars, suggesting India could be a net beneficiary of the conflict between the US and China/Russia [00:16:26].

Other epicenters of rapid development include:

• ASEAN countries: Indonesia, Philippines, Vietnam, etc. [00:17:01]. Singapore acts as a hub for the region [00:17:05].
• Middle East: Particularly the Gulf countries, which are accumulating wealth and attracting talent [00:17:16].

Current Challenges and Future Outlook

The world is facing radical disorder in the next five years due to several converging issues [00:23:28]:

• Elections: Impending elections will test how power is handled and if societies can come together [00:33:35].
• Geopolitical Conflict: The US-China relationship and other conflicts are changing the world order [00:23:37].
• Climate Change: A very expensive issue that requires significant investment [00:23:42].
• Technological Advancement: While offering potential miracles in productivity, technology can also be a weapon [00:23:52].

Debt and Financial Stability

Debt and money creation are critical issues [00:04:04]. When debt rises relative to incomes, Debt Service payments squeeze out consumption [00:24:26]. This often leads to governments printing money [00:24:47]. The major risk arises when buyers no longer want to hold government bonds due to unattractive returns, potentially leading to a financial crisis [00:24:59]. People may then shift to holding tangible assets like equities, real estate, or gold [00:25:39].

Internal Conflict and Values

Beyond resources and money, future conflicts could arise from differences in values, such as education approaches or social issues [00:21:38]. The wealth and opportunity gaps, coupled with differing reactions to controls, create fertile ground for internal strife [00:23:03].

Populism

A populist is a person who will not accept losing; they fight with their contingency [00:04:24].

Populism is seen as a reaction to the failure of elites in managing fiscal situations and foreign policy, leading to people rejecting their leadership [00:33:05]. The danger with populism is the “win at all costs” mentality, where compromise is rejected [00:33:38].

Strategies for a Leading Position

To maintain a leading position, countries like the United States need to focus inward, strengthen their democracy, and address internal dysfunctions [00:14:38]. This includes reforming capitalism to better direct resources towards societal needs that the profit system alone doesn’t address, such as climate change and education gaps [00:34:04].

While existing challenges are significant, decline is not inevitable [00:36:19]. What is needed is:

1. A Strong Middle: To unite the country and reduce fighting between opposing sides [00:36:42].
2. Bipartisan Engineering Exercise: Much like the Manhattan Project, to create structural changes that address fundamental issues, as continuing to fight over differences will be destructive [00:36:55]. This means a bipartisan cabinet and an effort to manage the extremes [00:37:06].

These structural changes are necessary because societies will not agree on every issue, and conflict over these differences could be destructive [00:37:47]. Ray Dalio believes his best contribution is to share his insights, allowing the population to deal with these thoughts collectively [00:40:26].