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

by Ray Dalio

inventing new technologies raises all of humanity’s living standards, but it puts the countries that are better at inventing in a superior position. Rising levels of military strength are clearly less beneficial for humanity, as they benefit some countries at the expense of others.

Progress unfolds in big and steady ways to shape the future but does so through specific breakthroughs that we can’t imagine. That is what evolution in technologies and techniques looks like. Evolution in most everything else—approaches to life, domestic and international politics, etc.—happens in a similar way.

I believe that humanity’s evolution through its inventiveness is accelerating and that most people will benefit from it. That is because the most significant inventions we are now seeing, and that we know we will see many more of, improve the quality and quantity of all thinking.

Because they can be applied to many domains of human activity and decision making, it seems obvious to me that the rate of invention and improvement in most areas will accelerate at an even faster pace, rapidly raising productivity and living standards.

This collaboration between humans and computers will increase both the quantity and quality of thinking,2 portending radical improvements in almost every area of life. I know this because I have experienced it, and I can already see some of these improvements on the horizon.

computing with AI will lead to unimaginable advances in rates of learning and improvement and changes in global wealth and power.

A few inventions that are already on the horizon are AI and robotics in healthcare, health monitoring, and advice-providing wearables; advances in and the practical use of genome sequencing and gene editing; mRNA improvements in vaccines; and breakthroughs in nutrition and drugs. And if the past is any guide (and it is) there will be many more inventions that we can’t yet fathom.

The next chart shows our latest reading on the inventiveness, technological advancement, and entrepreneurship we see in major countries. The arrows on the top of the bars show whether the trend in each country’s standing has been up, sideways, or down. This gauge gives about half its weight to 1) a combination of external rankings and measures of innovation per capita (to help capture how widespread innovation is in the economy) and half to 2) the country’s absolute share of key innovation metrics (e.g., researchers, R&D spending, patents, Nobel Prizes, and venture capital funding). Like all my gauges, it is approximately right but not perfectly right, so it’s meant to be broadly indicative. As shown, the US is at the top of these measures with a marginal lead over China, which ranks second (primarily due to the US’s share of global research spending, researchers, and its lead in other areas such as venture capital funding). But the US’s position is steady, while China’s position in the standings is rising fast. Remember that whoever wins the technology war usually wins the economic and military wars.

the biggest risk in the long run is the “currency value of money” risk, which most people don’t pay enough attention to.

To be clear, because the reserve currency countries that are running big deficits have their deficits and debts denominated in their own currencies, their ability to print the money to service the debts transfers the risks from them as debtors to those who are holding the debt as creditors. So, the big risk is not that those big debtors will default; it is that creditors will hold assets that will be devalued—i.e., that the returns from holding debt assets will be less than the inflation rate.

Reserve currencies tend to live on long after their fundamentals cease to justify their prominence because they become deeply entrenched in the ways things are done and there is a strong inclination to keep them. Then they abruptly plunge when it becomes clear that the fundamentals behind the currency make holding debt in it a bad deal.

Luo Guanzhong’s classic book Romance of the Three Kingdoms begins: “The empire long divided must unite and long united must divide. Thus it has ever been.” That has been true of China and most other places, and it is likely to continue, so it’s a good principle. I explained the big cycle of internal order and disorder in Chapter 5, so I won’t reiterate it here other than to remind you of a key principle: peace is profitable and war is costly.

power rules and tests of power are the ways one learns who rules. Sometimes that happens within a framework of rules that are respected. In those cases, fights for power occur in a mutually agreed-upon and productive way that supports the internal order. But they can also happen in unproductive, no-holds-barred ways that can lead to the violent disruption of both the leadership and the internal order.

When power is fought over and grabbed, that clearly signals the significant risk of a revolutionary change with all its attendant disorder.

The most reliable signs of an escalation to civil war are 1) the rules being disregarded, 2) both sides emotionally attacking each other, and 3) blood being spilled.

there will be a battle between humanity’s inventiveness and these other challenges.

Very different conditions exist within and between countries, which will determine which countries will rise and decline and in what ways.

Big swings up occur when lots of determinants are strengthening and big swings down occur when lots of determinants are weakening.

Our computers use this data to generate written reports, which are available to read at economicprinciples.org. They project real GDP growth rates for the next 10 years, along with the gauge readings for each factor that leads to those estimates.

While the total power index at the top of the current readings tables is intended to indicate that and is arrived at via a weighted average of the indices below it, the truth is that the type of power that is most important to have at any one time varies according to circumstances. For example, military power is expensive and it typically sits around doing nothing until it is the most important power to have.

As far as the internal order/disorder cycle is concerned, it typically lags the debt/economic cycle because people are less confrontational in good times than in bad ones.

Know all the possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones.

Identifying and eliminating the intolerable worst-case scenarios comes first. That’s because the most important thing in playing the game (of life or the markets) is to not get knocked out of it.

While you might think that my paying so much attention to eliminating worst-case scenarios is depressing and prevents me from making the most of opportunities, the opposite is true. It’s liberating and exciting to operate this way because knowing that the worst-case scenarios are covered gives me the safety, freedom, and ability to go for great results.

Put deferred gratification ahead of immediate gratification so you will be better off in the future.

Triangulate among the smartest people possible.

I tag along with the smartest people I can find, so I can stress test my think...

Use the gauges I gave you, or take the stats and make your own, to 1) measure the health of your country and other countries you’re interested in, 2) see if it is improving or worsening and in what ways, and 3) make changes in the determinants of the future to get a better future.

May the Force of Evolution be with you,

As I described earlier, I feed data into a computer that can create an output summarizing the conditions of, and long-term prospects for, the world’s leading countries.

Looking in more detail at the eight key measures of power, the United States has the largest capital markets and the strongest financial center among major countries.

addition, the United States has the strongest reading on our measures of technology and innovation among major countries.

The United States also has the strongest position in education among major countries.

Germany appears to be a middle-of-the-pack power (No. 4 among major countries today) on a flat trajectory. As shown in the table, the key strengths of Germany are its strong economic and financial position and its high internal order.

To understand a country, we start by looking at the big cycles, as well as measures of power that both reflect and drive the rise and fall of a country. While we refer to these factors individually, they are not separate; they interact with and reinforce one another to move a country along its cycle.

India is in a highly favorable position in its economic and financial cycles, with a moderately low debt burden and high expected real growth over the next 10 years (6.3 percent per year). India has slightly more foreign debts than foreign assets (net IIP is -12 percent of GDP). Non-financial debt levels are low (125 percent of GDP), though government debt levels are typical for major countries today (75 percent of GDP). The bulk of these debts (91 percent) are in its own currency, which mitigates its debt risks.

Regarding inequality, the top 1 percent and top 10 percent in India capture 21 percent and 56 percent of income (both the highest shares across major countries). However, a wide wealth gap is less concerning in a fast growing country like India because the fast growth can create rising prosperity for all.

India has the cheapest labor among major countries. Adjusted for worker quality, labor is significantly cheaper than the global average.

the key strength of the United Kingdom is its strong rule of law/low corruption. Its weaknesses are its unfavorable economic/financial position and its relative lack of natural resources.

France appears to be a modest power (in the bottom half of major countries today) on a flat trajectory.

the key strengths of the Netherlands are its high internal order and its strong rule of law/low corruption. Its weaknesses are its relatively weak military and its relatively expensive labor (on a quality-adjusted basis).

A small share of global military spending (less than 1 percent) is by the Netherlands, and it has a small share of the world’s military personnel (less than 1 percent). With labor cost, once we adjust for worker quality, labor is somewhat more expensive than the global average.

Russia appears to be a modest power (in the bottom half of major countries today) on a flat trajectory. As shown in the table, the key strengths of Russia are its strong economic and financial position, its wealth of natural resources, and its relatively strong military. Its weaknesses are its relatively small economy, its corruption and inconsistent rule of law, and its relative unimportance as a global financial center.

Spain appears to be a modest power (in the bottom half of major countries today) on a flat trajectory. As shown in the table, the key weaknesses of Spain that put it in this position are its unfavorable economic/financial position, its relatively poor allocation of labor and capital, its relative unimportance to global trade, and its bad reading on innovation and technology.