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

by Ray Dalio

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.

On a Sunday night—August 15, 1971—President Richard Nixon announced that the US would renege on its promise to allow paper dollars to be turned in for gold. As I listened to Nixon speak, I realized that the US government had defaulted on a promise and that money as we knew it had ceased to exist.

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.

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.,

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. Likewise those that have strong and capable

Briefly, a credit collapse happens because there is too much debt. Typically, the central government has to spend a lot of money it doesn’t have and make it easier for debtors to pay their debts and the central bank always has to print money and liberally provide credit—like they did in response to the economic plunge driven by the COVID pandemic and a lot of debt. The 1930s debt bust was the natural extension of the Roaring ’20s boom that became a debt-financed bubble that popped in 1929. That produced a depression that led to big central government spending and borrowing financed by big money and credit creation by the central bank.

Franklin D. Roosevelt, announced that he would default on the government’s promise to let people turn in their money for gold, and that the government would create enough money and credit so that people could get their money out of the banks and others could get money and credit to buy things and invest. That took three-and-a-half years from the initial stock market crash in October 1929.6

Era in Great Britain) becoming a debt-financed bubble that led to economic and market declines. These declines also happened when there were large wealth gaps that led to big wealth redistributions and contributed to a world war. The wealth redistributions, like those in the 1930–45 period, came about through large increases in taxes and government spending, big deficits, and big changes in monetary policies that monetized the deficits. Then the Spanish flu

My point is that while these revolution/war periods typically lead to a lot of human suffering, we should never, especially in the worst of times, lose sight of the fact that one can navigate them well—and that humanity’s power to adapt and quickly get to new and higher levels of well-being is much greater than all the bad stuff that can be thrown at us.

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 common language, tends to stick around after an empire has begun its decline because the habit of usage lasts longer than the strengths that made it so commonly used.

As people in the country, which is now rich and powerful, earn more, that makes them more expensive and less competitive relative to people in other countries

Also, 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. Values change from generation to generation during the rise to the top—from those who had to fight to achieve wealth and power to those who inherited it. The new generation is less battle-hardened, steeped in luxuries, and accustomed to the easy life, which makes them more vulnerable to challenges.

as people get used to doing well, they increasingly bet on the good times continuing—and borrow money to do that—which leads to financial bubbles.

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, which gets it deeper into debt. This boosts the leading empire’s spending power over the short term and weakens it over the longer run.

it weakens the country’s financial health—and weakens the currency—over the longer term. In other words, 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.

United States in the 1980s when it had a per capita income 40 times that of China’s and started borrowing from the Chinese who wanted to save in dollars because the dollar was the world’s reserve currency. If the empire begins to run out of new lenders, those holding their currency begin to look to sell and get out rather than buy, save, lend, and get in—and the strength of the empire begins to fall.

The country nearly always chooses to print a lot of new money, at first gradually and eventually massively. This devalues the currency and raises inflation.

the price of your house up. But it’s still the same house; your actual wealth hasn’t increased, just your calculated wealth.

This is what has been happening during

There are systemically beneficial devaluations (though they are always costly to holders of money and debt), and there are systemically destructive ones that damage the credit/capital allocation system but are needed to wipe out debt in order to create a new monetary order. It’s important to be able to tell the difference.

geopolitical and economic position. Because in 1971 it was especially clear that it was in the interests of China and the United States to build a relationship, they both made overtures to establish relations. 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.