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

by Ray Dalio

However the Europeans didn’t have enough silver to trade and the Chinese weren’t interested in other goods, which eventually led to the Opium Wars and

The result of this pullback was an Age of Isolationism in China and in Japan as well, where it was called Sakoku. For the next several centuries, China and Japan broadly moved away, in fits and starts, from openness toward foreigners and toward distance and isolation.

The Invention of Capitalism (1600s) Beginning with the Dutch, the development of publicly available and popularly used equity markets allowed savers to effectively transfer their buying power to entrepreneurs who could put that buying power to productive and profitable use.

Along with the advances of the Scientific Revolution, the invention of capitalism was a key reason behind the shift from slow real GDP growth to the faster growth, as seen in the chart I showed in Chapter 1.

The new urban populations needed new types of goods and services, which required the government to get bigger and spend money on things like housing, sanitation, and education, as well as on the infrastructure for the new industrial capitalist system, such as courts, regulators, and central banks.

The Dutch created the world’s first mega-corporation, the Dutch East India Company,

The Dutch also created the world’s first reserve currency other than gold and silver, the Dutch guilder, supported by an innovative banking and currency system put

Peace of Westphalia (1648)

The Great Depression coupled with the large wealth gaps led to a rise in populism and extremism in nearly every major country.

The Bretton Woods monetary system, which established the dollar as the world’s reserve currency.

I believe that it must be the policy of the United States to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures.

The Truman Doctrine

Volcker announced that he would constrain money (M1) growth at 5.5 percent.

great shortage of money that would send interest rates through the roof,

curtailed borrowing, which drove the world economy into its worst downturn since the Great Depression.

In the 1980s there was a stock market and economic boom that was accompanied by falling inflation and falling interest rates in the United States at the same time as there were inflationary depressions in the debt-burdened emerging economies that didn’t have central banks to bail them out.

China’s being welcomed into the World Trade Organization in 2001 led to an explosion of Chinese competitiveness and exports.

The printing and buying of debt that the Fed undertook in 2020 was much like Roosevelt’s March 1933 move, Nixon’s August 1971 move, Volcker’s August 1982 move, Ben Bernanke’s November 2008 move, and Mario Draghi’s July 2012 move. It has become standard operating procedure for central banks, and it will persist until it no longer works.

The three most important markers I am watching now are: 1) the rules being disregarded, 2) both sides emotionally attacking each other, and 3) blood being spilled.

signs that US moves from Phase 5 to Phase 6.

the core difference between Americans and the Chinese is that Americans hold the individual above all else while the Chinese put the family and the collective above everything.

America is run from the bottom up (e.g., democracy) and optimized for the individual; China is run from the top down and optimized for the collective.

Culturally, being commercial was not held in high regard by China’s leaders so there was less development of the commercial legal system and the financial markets.

The test of the real value of a currency is whether it is actively used and traded at the same exchange rate internationally as domestically. When there are capital controls that prevent the free exchange of a domestic currency internationally, that currency is more susceptible to being devalued.

three big cycles—money and credit, internal order/disorder, and external order/disorder—discussed earlier in this book. All of those cycles across the leading countries were in their decline/conflict phases between 1930 and 1945, which led to revolutions and wars in China and all over the world.

“According to Marxism,” he said, “communist society is based on material abundance… Only when there is material abundance can the principle of a communist society—‘from each according to his ability, to each according to his needs’—be applied. Socialism is the first stage of communism…” Maybe that’s true and maybe it’s not. Time will tell.

1. The Mao phase, from 1949 to 1976. 2. The Deng and Deng’s successors phase, from 1978 to 2012 when Xi Jinping came to power. 3. The Xi Jinping phase from 2012 until now.

From 1958 through 1962, due to a drought, economic mismanagement from the top-down mandated attempt to become an industrial power called the Great Leap Forward, and reduced Soviet economic support, the economy contracted by 25 percent and an estimated 16–40 million people died of famine. Estimates suggest that over that period industrial output fell by 19 percent in aggregate, with a fall of around 36 percent from the 1959 peak. Historians agree that it was a terrible period,

China

The cost of Mao’s triumph was appalling. The Cultural Revolution curtailed education and damaged or cost countless lives (estimates range from hundreds of thousands to as many as 20 million dead) and dealt a huge blow to the Chinese economy.

In July 1971 Kissinger—and then in February 1972 President Richard Nixon—went to China and in October 1971 the United Nations recognized the Mao-led communist Chinese government and gave China a seat on the Security Council.

Nixon and Zhou Enlai signed an agreement—the Shanghai Communique—in which the US stated that it “acknowledges that all Chinese on either side of the Taiwan Strait maintain that there is but one China and that Taiwan is part of China.

China’s backwardness stemmed from a general lack of access to what was available in the outside world and from its demotivating system.

Demotivating because everyone got paid whether they worked or not. So counter to how we view a Chinese worker today.

Globalization, which helped China immensely, can be said to have begun in 1995 with the formation of the World Trade Organization (the epoch effectively ended with the election of Donald Trump in 2016).

It struck me as odd that the Chinese, who were earning about a 40th of Americans on average, would be lending money to Americans,

To me, it was a shocking reflection of how deeply Americans were willing to get into debt to finance their overconsumption and how much more the Chinese valued saving. It was also a reflection of how emerging countries that want to save in the bonds/debt of the leading reserve currency countries can lead those countries to become overindebted.

When he came to power, 90 percent of the population lived in extreme poverty; at the time of his death that number had fallen by more than half, and as of the most recent data is below 1 percent. From the start of his reforms in 1978 until his death in 1997, the Chinese economy grew at an average rate of 10 percent a year,

Deng Xiaoping

The “have-nots,” especially those whose jobs were being taken by the Chinese and immigrants, began to rise up against the elites who were benefiting from globalization. As is typically the case when economic bad times coincide with large wealth gaps, populism and nationalism grew around the world (as they also did in the 1930s).

In their view capitalism is a way of raising the living standards of most people and is not meant to serve capitalists.

We need to absorb this lesson.

c) eliminated term limits for the president and vice president,

e) enshrined Xi’s perspective, called “Xi Jinping Thought,” into the constitution.

Some people are concerned that Xi is becoming more autocratic than Mao.

Its total number of STEM (science, technology, engineering, and math) graduates is about three times the United States’. At the same time, there are reasons to believe that the average quality of Chinese education isn’t as high, especially at the college level.

There is nothing that I can see that stands in the way of China and the US having comparable per capita incomes over time, which would make China four times bigger. 9 The Made in China 2025 plan is for China to be largely self-sufficient in most areas and to be world leaders in high-tech fields, including artificial intelligence, robotics, semiconductors, pharmaceuticals, and aerospace.

I believe that we have pretty much seen the best trade agreement that we are going to see and that the risks of this war worsening are greater than the likelihood that they will lessen,

The technology war is much more serious than the trade/economic war because whoever wins the technology war will probably also win the military wars and all the other wars.

The United States appears now to have greater technology abilities overall, though it varies by type of technology and the US is losing its lead.

while the US is ahead in advanced AI chip development, it is behind in 5G.

Over the last few years Chinese influence over other countries has been expanding while US influence has been receding.

That is also true in multilateral organizations—e.g., the United Nations, the IMF, the World Bank, the World Trade Organization, the World

Health Organization, and the International Court of Justice—most of which were set u...

The roughly $1 trillion of US debt that China holds is a risk but not an unmanageable one

Countries being hurt by US sanctions are developing ways to get around them or undermining the United States’ power to impose them.