Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

by Ray Dalio

If you want to read the concise version, read what is in bold, and if you want more, it’s all available to you.

I learned that to anticipate and handle situations that I had never faced before I needed to study as many analogous historical cases as possible to understand the mechanics of how they transpired. That gave me principles for dealing with them well.

I knew that I couldn’t really understand what was happening and deal with what would be coming at me unless I studied past analogous periods, which led to this study of the rises and declines of empires, their reserve currencies, and their markets. In other words, to develop an understanding of what is happening now and might happen over the next few years, I needed to study the mechanics behind similar cases in history—e.g., the 1930–45 period, the rise and fall of the Dutch and British empires, the rise and fall of Chinese dynasties, and others.

Past pandemics became a part of this study and showed me that surprising acts of nature—e.g., diseases, famines, and floods—need to be considered as possibilities because those surprising big acts of nature that rarely come along were by any measure even more impactful than the biggest depressions and wars.

history and the future of humanity can be seen as just the aggregate of all the individual life stories evolving through time.

By seeing many interlinking cases evolve together, I could see the patterns and cause/effect relationships that govern them and could imagine the future based on what I learned. These events happened many times throughout history and were parts of a cycle of rises and declines of empires and most aspects of empires—e.g., of their education levels, their levels of productivity, their levels of trade with other countries, their militaries, their currencies and other markets, etc.

a very successful empire or dynasty could have its cycle last 200 or 300 years. All the empires and dynasties I studied rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it.

This Big Cycle produces swings between 1) peaceful and prosperous periods of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish.

I saw that the peaceful/creative periods lasted much longer than the depression/revolution/war periods, typically by a ratio of about 5:1, so one could say that the depression/revolution/war periods were transitio...

the swinging of conditions from one extreme to another in a cycle is the norm, not the exception.

the really big boom periods and the really big bust periods, like many things, come along about once in a lifetime and so they are surprising unless one has studied the patterns of history over many generations. Because the swings between great and terrible times tend to be far apart the future we encounter is likely to be very different from what most people expect.

Because my professional responsibility is to preserve wealth regardless of the environment, I needed to develop an understanding and strategy that would have worked throughout history, including through these sorts of devastating times.

While it might seem odd that an investment manager who is required to make investment decisions on short time frames would pay so much attention to long-term history, through my experiences I have learned that I need this perspective. My approach isn’t an academic one created for scholarly purposes; it is a very practical one that I follow in order to do my job well. The game I play requires me to understand what is likely to happen to economies better than the competition does, so I have spent roughly 50 years closely observing most major economies and their markets—as well as their political conditions, since those affect both—trying to understand what is happening well enough to bet on it.

one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past.

I was engrossed in this game of watching the big developments in the world and betting on how they would drive the markets.

Through my research I saw that there were many cases of the same types of things happening (e.g., depressions) and that by studying them just like a doctor studies many cases of a particular type of disease, I could gain a deeper understanding of how they work. I studied these qualitatively and quantitatively through my experiences, by speaking with preeminent experts, reading great books, and digging into statistics and archives with my great research team.

From that learning came a visualization of an archetypical sequence of how rises and declines in wealth and power typically happen. The archetype helps me see the cause/effect relationships that drive how these cases typically progress.

With that archetypical template specified, I can study deviations from it to try to explain them. Then I put these mental models into algorithms both to monitor conditions relative to my arc...

This process helps me refine my understanding of the cause/effect relationships to the point where I can create decision-making rules—i.e., principles for dealing with my realities—in the form of “if/then” statements—i.e., if X happens, then make Y bet. Then I watch actu...

If events are on track, we continue to bet on what typically comes next; if events start to deviate from our template, we try t...

This process has helped me both understand the big cause/effect sequences that typically drive their progressions and gain a lot of humility. I do this continuously and will continue to do it until...

I believe that the reason people typically miss the big moments of evolution coming at them in life is because they experience only tiny pieces of what’s happening. We are like ants preoccupied with our jobs of carrying crumbs in our very brief lifetimes instead of having a broader perspective of the big-picture patterns and cycles, the important interrelated things driving them, where we are within the cycles, and what’s likely to transpire.

there are only a limited number of personality types4 going down a limited number of paths, which lead them to encounter a limited number of situations to produce a limited number of stories that repeat over time. The only things that change are the clothes the characters are wearing, the languages they are speaking, and the technologies they’re using.

by seeing these timeless and universal cause/effect relationships, they could know that if they changed X, it would have Y effect in the future.

when wealth and values gaps are large and there is an economic downturn, it is likely that there will be a lot of conflict about how to divide the pie.

Looking at what happened in the past from this mega-macro perspective will radically alter how you see things. For example, because the span of time covered is so large, many of the most fundamental things that we take for granted and many of the terms we use to describe them do not exist over the full period of time. As a result, I will be imprecise in my wording so that I can convey the big picture without getting tripped up on what might seem to be big things but, in the scope of what we are looking at, are relative details.

we actively consume about a hundred million data series that are run through our logic frameworks that systematically convert this information into trades in every market we can trade within every major country in the world. I believe that our ability to see and process information about all major countries and all major markets is unparalleled.

if I wait to learn enough to be satisfied with what I know before acting or sharing, I’d never be able to use or convey what I have learned.

Keep in mind that even with all of this, I have been wrong more times than I can remember, which is why I value diversification of my bets above all else. So please realize that I’m just doing the best I can to openly convey my thinking to you.

While what you’re reading here are my own views, you should know that the ideas I express in this book have been well-triangulated with other experts.

so my process is iterative. I do my research, write it up, show it to the world’s best scholars and practitioners to stress test it, explore potential improvements, write it up again, stress test it again, and so on, until I get to the point of diminishing returns. This study is the product of that exercise. While I can’t be sure that I have the formula for what makes the world’s greatest empires and their markets rise and fall exactly right, I’m pretty confident that I got it by and large right.

The most important three cycles are the ones I mentioned in the introduction: the long-term debt and capital markets cycle, the internal order and disorder cycle, and the external order and disorder cycle.

While it is true that no two people’s life cycles are exactly the same and the typical life cycle has changed over the millennia, the archetype of the human life cycle—of children being raised by parents until they are independent, at which point they raise their own children and work, which they do until they get old, retire, and die—remains essentially the same.

Evolution is the biggest and only permanent force in the universe, yet we struggle to notice it. While we see what exists and what happens, we don’t see evolution and the evolutionary forces that make things exist and happen. Look around you. Do you see evolutionary change? Of course not. Yet you know that what you are looking at is changing—albeit slowly from your perspective—and you know that in time it won’t exist and other things will exist in its place.

To see this change, we have to devise ways to measure things and watch the measurements change. Then, once we can see the change, we can study why it happens.

Evolution is the upward movement toward improvement that occurs because of adaptation and learning. Around it are cycles. To me, most everything transpires as an ascending trajectory of improvement with cycles around it, like an upward-pointing corkscrew:

Evolution is a relatively smooth and steady improvement because the gaining of knowledge is greater than the losing of knowledge.

Human productivity is the most important force in causing the world’s total wealth, power, and living standards to rise over time.

Productivity—i.e., the output per person, driven by learning, building, and inventiveness—has steadily improved over time. However, it has risen at different rates for different people, though always for the same reasons—because of the quality of people’s education, inventiveness, work ethic, and economic systems to turn ideas into output. These reasons are important for policy makers to understand in order to achieve the best possible outcomes for their countries, and for investors and companies to understand in order to determine where the best long-term investments are.

the Industrial Revolution also shifted wealth and power away from an agriculture-based economy in which landownership was the principal source of power, and monarchs, nobles, and the clergy worked together to maintain their grip on it.

For example, while ages ago agricultural land and agricultural production were worth the most and that evolved into machines and what they produced being worth the most, digital things that have no apparent physical existence (data and information processing) are now evolving to become worth the most.5 This is creating a fight over who obtains the data and how they use it to gain wealth and power.

One rarely gets all three of these types of big crises—economic, revolution/war, and natural disaster—at the same time.

I believe that humanity will become smarter and stronger in very practical ways that will lead us to overcome these challenging times and go on to new and higher levels of prosperity.

interestingly, there was little correlation between the wealth and power of a nation and the happiness of its people, which is a subject for another time.)

Second, this group of countries excludes what I will call the “boutique countries” (like Switzerland and Singapore) that score very high in wealth and living standards but aren’t large enough to become one of the biggest empires.

The single measure of wealth and power that I showed you for each country in the prior charts is a roughly equal average of 18 measures of strength. While we will explore the full list of determinants later, let’s begin by focusing on the key eight shown in the next chart: 1) education, 2) competitiveness, 3) innovation and technology, 4) economic output, 5) share of world trade, 6) military strength, 7) financial center strength, and 8) reserve currency status.

The common reserve currency, just like the world’s common language, tends to stick around after an empire has begun its decline because the habit of usage lasts longer than the strengths that made it so commonly used.

The Rise: The rise is the prosperous period of building that comes after a new order. It is when the country is fundamentally strong because there are a) relatively low levels of indebtedness, b) relatively small wealth, values, and political gaps between people, c) people working effectively together to produce prosperity, d) good education and infrastructure, e) strong and capable leadership, and f) a peaceful world order that is guided by one or more dominant world powers, which leads to…

The Top: This period is characterized by excesses in the form of a) high levels of indebtedness, b) large wealth, values, and political gaps, c) declining education and infrastructure, d) conflicts between different classes of people within countries, and e) struggles between countries as overextended empires are challenged by emerging rivals, which leads to…

The Decline: This is the painful period of fighting and restructuring that leads to great conflicts and great changes and the establishment of new internal and external orders. It sets the stage for the ...