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by
Ray Dalio
Read between
December 11, 2021 - January 22, 2022
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.
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.
most people at the moment of my writing this book believe that they should borrow more, even though borrowing and debt-financed booms have historically led to depressions and internal and external conflicts.
no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.
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.
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.
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.
From examining all these cases across empires and across time, I saw that the great empires typically lasted roughly 250 years, give or take 150 years, with big economic, debt, and political cycles within them lasting about 50 to 100 years.
to see the big picture, you can’t focus on the details.
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.
Human productivity is the most important force in causing the world’s total wealth, power, and living standards to rise over time.
Throughout time, the formula for success has been a system in which well-educated people, operating civilly with each other, come up with innovations, receive funding through capital markets, and own the means by which their innovations are turned into the production and allocation of resources, allowing them to be rewarded by profit making.
Countries with large savings, low debts, and a strong reserve currency can withstand economic and credit collapses better than countries that don’t have much savings, have a lot of debt, and don’t have a strong reserve currency.
There are always arguments or fights between those who want to make big redistributions of wealth and those who don’t.
The lines in the chart do a pretty good job of telling the story of why and how the rises and declines took place. You can see how rising education leads to increased innovation and technology, which leads to an increased share of world trade and military strength, stronger economic output, the building of the world’s leading financial center, and, with a lag, the establishment of the currency as a reserve currency. And you can see how for an extended period most of these factors stayed strong together and then declined in a similar order. The common reserve currency, just like the world’s
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To summarize, around the upward trend of productivity gains that produce rising wealth and better living standards, there are cycles that produce prosperous periods of building in which the country is fundamentally strong because there are relatively low levels of indebtedness, relatively small wealth, values, and political gaps, people working effectively together to produce prosperity, good education and infrastructure, strong and capable leadership, and a peaceful world order that is guided by one or more dominant world powers. These are the prosperous and enjoyable periods. When they are
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All peoples throughout history have had systems or orders for governing how they deal with each other. I call the systems within countries “internal orders,” those between countries “external orders,” and those that apply to the whole world “world orders.” These orders affect each other and are always changing.
While the inherited assets and liabilities of a country are very important, history has shown that the way people are with themselves and others is the most important determinant.
When humans have the capacity to produce more revenue than they expend, there is good human capital and self-sufficiency.
While many countries have natural resources that they are able to draw upon, human capital is the most sustainable capital because inherited assets that are drawn down eventually disappear, whereas human capital can exist forever.
In all countries throughout time, though to varying degrees, people are sorted into “classes,” either because they choose to be with people like themselves or because others assign them to a class.
Like everything else, internal orders and world orders are constantly evolving and moving circumstances forward through time, as existing circumstances interact with each other and the forces that act on them to produce new circumstances.
Wealth = Buying Power. Without getting too nuanced, let’s call wealth buying power to distinguish it from money and credit.
Real Wealth ≠ Financial Wealth. Real wealth is what people buy because they want to have and use it, such as a house, car, streaming video service, etc. Real wealth has intrinsic value. Financial wealth consists of financial assets that are held to a) receive an ongoing income in the future and/or b) be sold in the future to get money to buy the real assets people will want.
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.
Wealth = Power. That is because if one has enough wealth one can buy most anything—physical property, the work and loyalty of others, education, healthcare, influential powers of all sorts (political, military, etc.), and so on.
Wealth Decline = Power Decline. There isn’t an individual, organization, country, or empire that hasn’t failed when it lost its buying power.
To be successful one must earn an amount that is at least equal to the amount one spends.
Stage 1: People and Their Countries Are Poor and They Think of Themselves as Poor.
Stage 2: People and Their Countries Are Rich but Still Think of Themselves as Poor.
Stage 3: People and Their Countries Are Rich and Think of Themselves as Rich.
I call countries in this stage “peak health countries.” The United States was in this stage from 1950 to 1965. China is now moving into it.
Stage 4: People and Their Countries Are Poorer and Still Think of Themselves as Rich.
Stage 5: People and Their Countries Are Poor and They Think of Themselves as Poor.
Humanity’s capacity to invent solutions to its problems and to identify how to make things better has proven to be far more powerful than all of its problems combined.
The degree of inventiveness and innovation in a society is the main driver of its productivity. An innovative and commercial spirit is the lifeblood of a thriving economy.
Innovation + Commercial Spirit + Thriving Capital Markets = Great Productivity Gains = Increases in Wealth and Power
As Aristotle said a long time ago: “The poor and the rich quarrel with one another, and whichever side gets the better, instead of establishing a just or popular government, regards political supremacy as the prize of victory.”
Throughout time and in all countries the people who have the wealth are the people who own the means of wealth production and, in order to maintain it, they work with the people who have the power to set and enforce the rules.
In all countries throughout time (though in varying degrees) people find themselves within “classes” either because they choose to be with people like them or because others stereotype them as part of certain groups.
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.
What most people and their countries want most is wealth and power, and money and credit are the biggest influences on how wealth and power rise and decline. If you don’t understand how money and credit work, you can’t understand how the system works, and if you don’t understand how the system works, you can’t understand what’s coming at you.
All entities—people, companies, nonprofit organizations, and governments—deal with the same basic financial realities, and always have.
The way entities collectively handle their finances as reflected in their income statements and balance sheets is the biggest driver of changes in internal and world orders.
debt eats equity but central banks can feed debt by printing money instead.
Having a reserve currency is great while it lasts because it gives a country exceptional borrowing and spending power and significant power over who else in the world gets the money and credit needed to buy and sell internationally.
having a reserve currency is one of the greatest powers a country can have because it gives the country enormous buying power and geopolitical power.
