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

by Ray Dalio

the swinging of conditions from one extreme to another in a cycle is the norm, not the exception. It was a very rare country in a very rare century that didn’t have at least one boom/harmonious/prosperous period and one depression/civil war/revolution period, so we should expect both.

Yet, most people throughout history have thought (and still think today) that the future will look like a slightly modified version of the recent past.

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.

gaps in wealth and values led to deep social and political conflicts in the 1930s that are similar to those that exist now.

1. The Long-Term Debt and Capital Markets Cycle: At no point in our lifetimes have interest rates been so low or negative on so much debt as they are as of this writing.

2. The Internal Order and Disorder Cycle: Wealth, values, and political gaps are now larger than at any other point during my lifetime.

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. How

3. The External Order and Disorder Cycle: For the first time in my life, the United States is encountering a true rival power.

If trends continue, China will be stronger than the United States in the most important ways that an empire becomes dominant.

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.

For example, over time our living standards rise because we learn more, which leads to higher productivity, but we have ups and downs in the economy because we have debt cycles that drive actual economic activity up and down around that uptrend.

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

over the long run capitalism has created wealth and opportunity gaps and overindebtedness that have led to economic downturns and revolutions and wars that

Countries with large savings, low debts, and a strong reserve currency can withstand economic and credit collapses better

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 most important factors impacting a country's success

Innovation is generally enhanced by being… … open to the best thinking in the world

Within capitalist systems, financial gains come unevenly so the wealth gap grows. Wealth gaps are self-reinforcing because rich people use their greater resources to expand their powers. They also influence the political system to their advantage and give greater privileges to their children—like better education—causing the gaps in values, politics, and opportunity to develop between the rich “haves” and the poor “have-nots.” Those who are less well-off feel the system is unfair so resentments grow.

Having a reserve currency gives it the “exorbitant privilege”9 of being able to borrow more money,

creates great domestic hardships and forces the country to choose between defaulting on its debts and printing a lot of new money. The country nearly always chooses to print a lot of new money,

This devalues the currency and raises inflation.

increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right.

For example, the Roosevelt revolution to redistribute wealth was relatively peaceful, while the revolutions that changed the domestic orders in Germany, Japan, Spain, Russia, and China, which also happened in the 1930s for the same reasons, were much more violent.

When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle.

When all of these forces line up—indebtedness, civil war/revolution at home, war abroad, and a loss of faith in the currency—a change in the world order is typically at hand.

world order that began in 1945 with the creation of a new global monetary system (built in 1944 in Bretton Woods, New Hampshire) and a US-dominated system of world governance (locating the United Nations in New York and the World Bank and the International Monetary Fund in Washington, DC). The new world order was the natural consequence of the US being the richest country (it then had two-thirds of the world’s gold stock and gold was then money), the dominant economic power

Openness to Global Thinking. This is a good leading indicator of strength because isolated entities tend to miss out on the world’s best practices, which weakens them,

The prisoner’s dilemma is a concept from game theory that explains why, even when the best thing for two parties to do is to cooperate, the logical thing for each to do is to kill the other first.

For example, a 2019 Gallup poll found that only 13 percent of Americans surveyed have “a great deal” of trust in the media

72 percent who trusted the media in 1976.

said, “If you have a society where people can’t agree on the basic facts, how do you have a functioning democracy?”

+ Rule-Following Fades and Raw Fighting Begins When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy.

When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution.

“strong peacemaker” who goes out of their way to bring the country together, including reaching out to the other side to involve them in the decision making and reshaping the order in a way that most people agree is fair and works well

The test of any system is simply how well it works in delivering what most of the people want,

There are five major kinds of fights between countries: trade/economic wars, technology wars, capital wars, geopolitical wars, and military wars.

1. Trade/economic wars: Conflicts over tariffs, import/export restrictions,

2. Technology wars: Conflicts over which technologies are shared and which are held as protected ...

3. Geopolitical wars: Conflicts over territory and alliances that are resolved through negotiations and explicit or i...

4. Capital wars: Conflicts imposed through financial tools such as sanctions (e.g., cu...

the two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined.

Hitler refused to pay any further reparation debts, left the League of Nations, and took autocratic control of Germany in 1934. Holding the dual roles of chancellor and president, he became the country’s supreme leader. In democracies there are always some laws that allow leaders to grab special powers; Hitler seized them all. He invoked Article 48 of the Weimar Constitution to put an end to many civil rights and suppress political opposition from the communists, and forced the passage of the Enabling Act, which allowed him to pass laws without the approval of the Reichstag and the president.

How Hitler came to power. Need to learn more.

He financed this substantially increased government spending by forcing banks to buy government bonds. The debts that were produced were paid back by the earnings of companies and the central bank (the Reichsbank) monetizing debt.

As for the economic effects of these policies, when Hitler came to power in 1933 the unemployment rate was 25 percent. By 1938 it was nil.

big choices that a country has to make when selecting its approach to governance: 1) bottom-up (democratic) or top-down (autocratic) decision making, 2) capitalist or communist (with socialist in the middle) ownership of production, and 3) individualistic (which treats the well-being of the individual with paramount importance) or collectivist (which treats the well-being of the whole with paramount importance).

Fascism is autocratic, capitalist, and collectivist. Fascists believe that top-down autocratic leadership, in which the government directs the production of privately held companies such that individual gratification is subordinated to national success, is the best way to make the country and its people wealthier and more powerful.

In Roosevelt’s first 100 days in office, he created several massive government spending programs that were paid for by big tax increases and big budget deficits financed by debt that the Federal Reserve monetized. He instituted jobs programs, unemployment insurance, Social Security supports, and labor- and union-friendly programs.

In 1936, the Federal Reserve tightened money and credit to fight inflation and slow an overheating economy, which caused the fragile US economy to fall back into recession and the other major economies to weaken with it, further raising tensions within and between countries.

Believing that they did not need anything else, the emperors put an end to China’s exploration of the world, closed its doors, and retired to lives of pleasure, and turned over the running of government to their ministers and eunuchs, which led to dysfunctional infighting, corruption, weakness, and vulnerability to attack. There was a shift away from pragmatic scientific study and innovation toward pedantic scholarship.

Why China fell into the Century of Humiliation

The Age of Exploration and Colonialism (1400s–1700s)