The Changing World Order
“History doesn’t repeat itself, but it often rhymes.”
The only thing constant is change. In case you haven’t noticed, things are most definitely changing. More specifically, our entire world, and in ways we haven’t seen in our lifetime. This pattern, however, has repeated itself many times before.
In his latest book, “Principles for Dealing with the Changing World Order,” Ray Dalio explains that change that is affecting virtually everything in our lives, what drives the “Big Cycle” of rise and decline of nations through time and where we now are in that cycle. He looks back in history more than 500 years, delineating how the big cycle worked through that time period – and then describes what he believes the world’s current leading power, the United States, needs to do to remain strong.
Ray Dalio is an American billionaire investor and hedge fund manager. He’s served as co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, since 1985. In his new book, he takes a close look at history's most turbulent economic and political periods to show why the coming times will be entirely different from anything we've experienced in our lifetimes – but very like those that have happened many times before.
Photo Credit: principles.com
Boiled down to a mere 21 words, it goes like this:
“Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.”
Dalio's recent book is precisely about these four sentences and this cycle. Or, to be even more precise, about the rise and fall cycle of every powerhouse empire in history.
A few years ago, Dalio noticed a concurrence of political and economic circumstances he hadn’t seen before. They were:
Huge debts and zero or near-zero interest rates that led to massive printing of money in the world’s three major reserve currencies.
Big political and social conflicts within countries, especially the US, due to the largest wealth, political, and values disparities in more than 100 years.
The rising of a world power (China) to challenge the existing world power (US) and the existing world order.
The last millennia saw the confluence of these cycles several times:
1400s: Italy leads the renaissance out of the Dark Ages, centered around Venice and Florence. Productivity is boosted by international commerce, the inventions of banking (debit/credit), and the Gutenberg press.
1600s: The Dutch establish prominence following the Thirty Years' War (replacing the Habsburg Empire). Productivity is strengthened by the invention of capitalism (thank you, Dutch East India Company), innovative ship-building, and colonialism in the New World.
1800s: The UK establishes prominence following the Napoleonic Wars (outcompeting France). Productivity is bolstered by the first industrial revolution, with inventions such as the loom and the steam engine.
1900s: The US establishes prominence following WWI, outcompeting Germany and Japan. Productivity is bolstered by the second industrial revolution, with railways and the electrification of the country.
And the last time that this confluence occurred? Between 1930 and 1945. Does this give you pause? It absolutely should, because those years take us from setting the stage for World War II to the Yalta Conference, the bombings of Hiroshima and Nagasaki, and the end of the war.
This realization served as a springboard for Dalio’s research into the repeating patterns and cause-and-effect relationships basic to all major changes in wealth and power over the last 500+ years. He describes the major empires during those times –the Dutch, the British, and the American – putting into perspective the “Big Cycle” that has driven the successes and failures of all the world’s major countries throughout history. He reveals the timeless and universal forces behind these shifts and uses them to look into the future, offering practical principles for positioning us for what’s ahead.
Dalio focuses primarily on economics and politics. The book's 'grand finale' is an analysis of current empires – a fading United States and a rising China. To show their similarities to the past empires of the Netherlands and Britain, he provides quick overviews of their history. He approaches the topic carefully and does not demonize China, instead choosing to illustrate the cultural differences behind certain occurrences in their history.
Countries, especially empires, go through cycles. Dalio’s enormous research project takes two distinct points of view. From 30,000 feet, the chart of human progress looks like it's increasing in a fairly monotonous manner. When viewed from this distance, also visible are bumps along the way – revolutions, wars, pandemics, and insolvencies – all of which coincided with dramatic shifts in who has power in the world.He also gives us a close-up view, allowing us to see the factors and cycles that led recorded history's leading empires to become globally dominant and, subsequently, relinquish that dominance. He draws an archetypical "big cycle" of a country's rise and fall, which can be judged by a country's health – education, competitiveness, innovation, economic output, share of world trade, military strength, financial center strength, and reserve currency status. Then he applies it to the current U.S.-China relationship.
He is blatantly pessimistic on where the United States lies on its global power curve (pssst! hanging on by a thread). This will more than likely upset some folks, but given Dalio's unique perspective as a hedge fund giant with global interests, as well as his personal history with China's great unleashing of economic capabilities, it’s something that should be considered rather than ignored.
Dalio never adopts an "Us versus China" footing, instead taking a rather disinterested approach to each empire to help build context and understanding as to why certain flashpoints today (Ukraine-Russia, China-Taiwan) matter so greatly.
Nothing lasts forever, and that includes empires. That’s obvious when we look back across millennia, both in European empires and Chinese dynasties. The United States has dominated the global stage over the last two centuries, but has elapsed its peak. Dalio predicts a slow decline over the next few decades as wealth and power shift to China, visible in three common cycles:
1. Money, Credit, Debt, Economic Activity
The country begins with "hard money" (tangible gold/silver). Then banks arise to consolidate hard money and issue claims (banknotes, debts) on the hard money. But banks can issue more claims than actually exists hard money – in fact the creation of debt in this way is a classic way to stimulate the economy. But this creates a risk. If enough creditors withdraw their assets or declare bankruptcy, they erode trust in the debt asset and create a "run on the banks." This can occur, for example, if many debtors declare bankruptcy, eroding trust in the debt asset. A private bank would be bankrupt by such an event (and creditors would be wiped out because their assets are now worthless). But a central bank has the option to switch to a government-issued currency to avoid such an event. The United States did this in 1971. With fiat money, liquidity crises can be avoided by the central bank simply printing money to buy debt. This keeps interest rates low and stimulates the economy. On the other hand, it devalues the currency and all existing debt assets. Taken to the extreme, hyperinflation occurs when trust completely erodes. And then the country has no choice but to revert back to "hard money" as the cycle resets.
The federal funds rate (the Federal Reserve's overnight rate) was already at a historic low pre-COVID. When the pandemic hit, the Federal Reserve enacted large-scale quantitative easing by buying assets, especially Treasury securities, in exchange for crediting commercial banks. This injected money into the economy but has led to a rise in inflation. The US Dollar will continue to lose value, creating a transfer of wealth from creditors to debtors, and posing a risk to the US Dollar's status as the world's reserve currency.
2. Internal Order and Disorder
This follows those four lines from G. Michael Hopf you saw earlier in this article. The country emerges from revolution with new leaders who expel competitors within their own faction. Then a comes a period of peace and rebuilding. Debt fuels productivity but this is not concerning because the debt is invested in infrastructure, and that will pay off in real GDP growth. Merit systems reward the country's talent and competition leads to innovation. Eventually though, the country becomes decadent. Its citizens are outcompeted by foreigners and corruption becomes widespread. Debt fuels financial bubbles and vanity purchases rather than real productivity. Any capitalistic system inevitably leads to wide wealth disparities, polarization, and civil unrest. Civil war or revolution erupts, usually hastened by a natural disaster, and from there the cycle resets.
It should be apparent that the United States is currently in decline, with unprecedented levels of debt, extremism, populism, and disinformation. Ongoing de-valuation of the US Dollar will transfer wealth from the haves (creditors) to the have-nots (debtors). That may give some relief to rampant inequality, but the trends are concerning and, unfortunately, there is a better-than-zero chance of civil war in the next decade!
3. External Order and Disorder
Countries don't have the authority to enforce laws against one another, so raw power becomes extremely important in external dynamics. Dalio outlines five types of warfare – economic, technological, capital, geopolitical, and military. Typically, one country's decline coincides with another's rise, dramatically increasing the likelihood of war. This is heightened by financial crises which may occur due to debt service (Weimar Republic) or sanctions (Japan pre-WWII).
The United States and China have already begun engaging in economic wars (tariffs and decoupling), capital wars (sanctions), geopolitical wars (Belt and Road, Taiwan), and technology wars (AI, 5G, etc.). While the risk of actual military war is continually changing, time is on China's side as they inevitably become stronger relative to the United States.
After reading, and re-reading, this book, all I can say is “fasten your seat belts; it’s going to be a bumpy ride.” Have faith. What we can tell from history is that we will come out of this, and we will come out stronger, smarter, and better prepared for the future, whatever that may look like!