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

by Ray Dalio

Anyone who studies history can see that no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.

as people in the leading country become richer, they tend to not work as hard. They enjoy more leisure, pursue the finer and less productive things in life, and at the extreme become decadent.

when borrowing and spending are strong, the empire appears very strong, but its finances are in fact being weakened because the borrowing sustains the country’s power beyond its fundamentals by financing both domestic overconsumption and international military conflicts required to maintain the empire.

Making Wealth = Being Productive. Over the long run the wealth and buying power you have will be a function of how much you produce. That is because real wealth doesn’t last long and neither do inheritances. That is why being continuously productive is so important. If you look at societies that expropriated the wealth of the rich and tried to live off it and weren’t productive (e.g., Russia after the revolutions of 1917), you will see that it didn’t take them long to become poor.

those societies that draw on the widest range of people and give them responsibilities based on their merits rather than privileges are the most sustainably successful because 1) they find the best talent to do their jobs well, 2) they have diversity of perspectives, and 3) they are perceived as the fairest, which fosters social stability.

the ability to make money, save it, and put it into capital (i.e., capitalism) is an effective motivator of people and allocator of resources that raises people’s living standards. But capitalism is also a source of wealth and opportunity gaps that are unfair, can be counterproductive, are highly cyclical, and can be destabilizing. In my opinion, the greatest challenge for policy makers is to engineer a capitalist economic system that raises productivity and living standards without worsening inequities and instabilities.

When you receive gold coins from a buyer, you can melt them down and exchange the metal and still receive almost the same value as if you had spent them, unlike a debt asset like paper money, which is a promise to deliver value (which isn’t much of a promise, given how easy it is to print).

History has shown that we shouldn’t rely on governments to protect us financially. On the contrary, we should expect most governments to abuse their privileged positions as the creators and users of money and credit for the same reasons that you might commit those abuses if you were in their shoes.

When one can manufacture money and credit and pass them out to everyone to make them happy, it is very hard to resist the temptation to do so.5 It is a classic financial move. Throughout history, rulers have run up debts that won’t come due until long after their own reigns are over, leaving it to their successors to pay the bill.

Ironically, the closer most people are to the blowup, which is also when the claims outstanding are largest relative to the amount of hard money and tangible wealth there is, the riskier the situation is but the safer people tend to feel. That is because they have held the debt and enjoyed the rewards of doing so. The longer it has been since the last blowup, the more people’s memories of it have faded—even

These debt-financed purchases emerge because investors, business leaders, financial intermediaries, individuals, and policy makers tend to assume that the future will be like the past so they bet heavily on the trends continuing. They mistakenly believe that investments that have gone up a lot are good rather than expensive so they borrow money to buy them, which drives up their prices, which reinforces this bubble process.

From studying 50-plus civil wars and revolutions, it became clear that the single most reliable leading indicator of civil war or revolution is bankrupt government finances combined with big wealth gaps.

when the government runs out of money (by running a big deficit, having large debts, and not having access to adequate credit), it has limited options. It can either raise taxes and cut spending a lot or print a lot of money, which depreciates its value. Those governments that have the option to print money always do so because that is the much less painful path, but it leads investors to run out of the money and debt that is being printed. Those governments that can’t print money have to raise taxes and cut spending, which drives those with money to run out of the country (or state or city) because paying more taxes and losing services is intolerable. If these entities that can’t print money have large wealth gaps among their constituents, these moves typically lead to some form of civil war/revolution.

Averages don’t matter as much as the number of people who are suffering and their power. Those who favor policies that are good for the whole—e.g., free trade, globalization, advances in technology that replace people—without thinking about what happens if the whole is not divided in a way that benefits most people are missing the fact that the whole is at risk. To have peace and prosperity, a society must have productivity that benefits most people.

The Loss of Truth in the Public Domain Not knowing what is true because of distortions in the media and propaganda increases as people become more polarized, emotional, and politically motivated.

the US, China, or other countries have more power than the United Nations, then the US, China, or other countries will determine how things go rather than the United Nations.

The international order follows the law of the jungle much more than it follows international law. There are five major kinds of fights between countries: trade/economic wars, technology wars, capital wars, geopolitical wars, and military wars.

while I believe most are tragic and fought for nonsensical reasons, some are worth fighting because the consequences of not fighting them (e.g., the loss of freedom) would be intolerable.

Seeing things through your adversary’s eyes and clearly identifying and communicating your red lines to them (i.e., what cannot be compromised) are the keys to doing this well. Winning means getting the things that are most important without losing the things that are most important, so wars that cost much more in lives and money than they provide in benefits are stupid. But “stupid” wars still happen all the time

During periods of severe economic distress and large wealth gaps, there are typically revolutionarily large redistributions of wealth. When done peacefully these are achieved through large tax increases on the rich and big increases in the supply of money that devalue debtors’ claims, and when done violently they are achieved by forced asset confiscations.