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

by Ray Dalio

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. I saw that the peaceful/creative periods lasted much longer than the depression/revolution/war periods, typically by a ratio of about 5:1, so one could say that the depression/revolution/war periods were transition periods between the normally peaceful/creative periods. While the peaceful/creative periods are certainly more enjoyable for most people, all these realities have their purposes for advancing evolution, so in the broader sense they are neither good nor bad. The depression/revolution/war periods produce a lot of destruction, but like cleansing storms, they also get rid of weaknesses and excesses (such as too much debt) and produce a new beginning in the form of a return to fundamentals on a sounder footing (albeit painfully). After the conflict is resolved, it is clear who has what power, and because most people desperately want peace, there is a resolution that produces new monetary, economic, and political systems—together, a new world order—and fosters the next peaceful/creative period. Within this Big Cycle are other cycles. For example, there are long-term debt cycles that last about 100 years and short-term debt cycles that last about eight years...

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. That is because 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.

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.

From gaining this perspective, I’ve come to believe that throughout history there are only a limited number of personality types4 going down a limited number of paths, which lead them to encounter a limited number of situations to produce a limited number of stories that repeat over time. The only things that change are the clothes the characters are wearing, the languages they are speaking, and the technologies they’re using.

You might be wondering why I wrote this book. In the past, I would have been silent about what I’ve learned. However, I am now in the phase of my life that silently achieving more isn’t as important to me as passing along what I have learned in the hope that it can be of use to others. My main objectives are to convey to you my model for how the world works—to share with you a single digestible story of the last 500 years that shows how and why history “rhymes” with what is happening today—and to help you and others make better decisions so we all might have a better future.

For example, through my research, I learned that the biggest thing affecting most people in most countries through time is the struggle to make, take, and distribute wealth and power, though they also have struggled over other things too, most importantly ideology and religion. These struggles happened in timeless and universal ways and had huge implications for all aspects of people’s lives, unfolding in cycles like the tide coming in and out.

I saw how, over time, this dynamic leads to a very small percentage of the population gaining and controlling exceptionally large percentages of the total wealth and power, then becoming overextended, and then encountering bad times, which hurt those least wealthy and least powerful the hardest, which then leads to conflicts that produce revolutions and/or civil wars. When these conflicts are over, a new world order is created, and the cycle begins again.

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.

While it is true that no two people’s life cycles are exactly the same and the typical life cycle has changed over the millennia, the archetype of the human life cycle—of children being raised by parents until they are independent, at which point they raise their own children and work, which they do until they get old, retire, and die—remains essentially the same. Similarly the big money/credit/capital markets cycle, which builds up too much debt and debt assets (e.g., bonds) until the debts can’t be serviced with hard money, remains essentially the same. As always, this leads to people trying to sell their debt assets to make purchases and finding out they can’t because there are far too many debt assets relative to the amount of money and the value of stuff there is to buy. Once this happens, defaults prompt those who manufacture money to make more. That cycle has been essentially the same for thousands of years.

Evolution is a relatively smooth and steady improvement because the gaining of knowledge is greater than the losing of knowledge. Cycles on the other hand move back and forth, producing excesses in one direction that lead to reversals and excesses in the other, like the swinging of a pendulum. 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. These evolutionary and sometimes revolutionary changes around the trend are not always smooth and painless. Sometimes they are very abrupt and painful as mistakes are made, learning occurs, and better adaptations result. Together evolution and cycles make the upward corkscrew-type movements that we see in everything—wealth, politics, biology, technology, sociology, philosophy, etc. 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 steadily improved over time.

How this evolution with big cycles around it happens also continues to evolve. For example, while ages ago agricultural land and agricultural production were worth the most and that evolved into machines and what they produced being worth the most, digital things that have no apparent physical existence (data and information processing) are now evolving to become worth the most.5 This is creating a fight over who obtains the data and how they use it to gain wealth and power.

There are always arguments or fights between those who want to make big redistributions of wealth and those who don’t.

Some people who struggled through them have even described these very difficult times as bringing about important, good things like drawing people closer together, building strength of character, learning to appreciate the basics, etc. For example, Tom Brokaw called the people who went through the 1930–45 period “the Greatest Generation” because of the strength of character it gave them. My parents and aunts and uncles who went through the Great Depression and World War II, as well as others of their era whom I’ve spoken to in other countries who went through their own versions of this destruction period, saw it that way too. Keep in mind that economic destruction periods and war periods typically don’t last very long—roughly two or three years. And the lengths and severities of natural disasters (like droughts, floods, and epidemics) vary, though they typically lessen in painfulness as adaptations are made. One rarely gets all three of these types of big crises—economic, revolution/war, and natural disaster—at the same time.

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 way I see it, at any moment in time there are both 1) the existing set of conditions that include the existing domestic and world orders and 2) timeless and universal forces that cause changes in these conditions.

My process is to look at many cases to observe how their determinants created the effects that define them. To give a simple example, a lot of debt (a determinant) together with tight money (another determinant) will typically produce a debt crisis (the effect). Similarly, when the three big cycles that I described in the last chapter come together in a bad way (heavy indebtedness with the central bank printing a lot of money; internal conflict stemming from gaps in wealth, values, and politics; and the rise of one or more competing powers), that typically leads to the decline of an incumbent empire.

Because I systematize as much as I can, I push to quantify whatever possible into a decision-making system. So, with the help of my team, I have developed gauges that look at things like internal and external conflict, political gaps, etc., to help me better understand where countries are in their cycles. Some of the less key determinants are aggregated as subcomponents of the key determinants. While I measure and describe

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. By that I mean whether they hold themselves to high standards of behavior, whether they are self-disciplined, and whether they are civil with others in order to be productive members of their societies is most important. These qualities plus flexibility and resilience (i.e., the capacity to adapt to both “bad” and “good” things) allows people to minimize setbacks and maximize opportunities. Character, common sense, creativity, and consideration in most people make for a productive society.

financially. The likelihood of having good human capital and being “self-sufficient plus” is improved through quality education, a culture of hard work and cooperation, training, etc. Societies that don’t have good human capital are either drawing down their resources or getting deeper into debt they won’t be able to pay back (i.e., they’re headed for trouble).

8. The Ability to Learn from History. Most people don’t have this, which is an impediment, though it varies by society. For example, the Chinese are excellent at this. Learning from one’s own experiences is not adequate because, as explained earlier, many of the most important lessons don’t come in one’s lifetime. In fact, many encounters in the future will be more opposite than similar to what one encountered before in life. Since the peace/boom period at the beginning of the cycle is opposite to the war/bust period at its end, the periods people face later in their lives are more likely to be more opposite than similar to the ones they encountered earlier in their lives. More specifically, in my opinion, if you don’t understand what happened since at least 1900 and how that rhymes with what is happening now, there is a high likelihood that you will find yourself in trouble.

Values Gaps. While wealth matters, it is not the only thing that people fight over. Values (e.g., in religions and ideologies) matter a lot too. History shows us that widening values gaps, especially during periods of economic stress, have tended to lead to periods of greater conflict, while shrinking values gaps tend to lead to periods of greater harmony. This dynamic is driven by the fact that people tend to coalesce into tribes that are bound together (often informally) by the magnetism of their members’ commonalities. Naturally, such tribes operate with each other in ways that are consistent with their shared values. When under stress, people with greater values gaps also prove to have greater conflict. They frequently demonize members of other tribes rather than recognizing that those other tribes, like themselves, are simply doing what is in their self-interest in the best ways they know how.

The Prisoner’s Dilemma Must Be Solved for Peace to Exist. 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. That is because survival is of paramount importance, and while you don’t know for certain if your opponent will attack you, you do know that it is in their interest to defeat you before you defeat them. It’s for this reason that deadly wars are best avoided by both sides establishing mutually assured protections against existential harms. Exchanging benefits and creating interdependencies that would be intolerable to lose further reduces the risk of conflict.

All that’s required is that they know and respect each other’s existential red lines. Parties in win-win relationships can have tough negotiations, competing like two friendly merchants in a bazaar or two teams at the Olympics. Having win-win relationships is obviously better than having lose-lose relationships, but sometimes there are irreconcilable differences that must be fought over because they can’t be negotiated away.

Countries in this stage experience rapidly rising income growth and rapidly rising productivity growth at the same time. The productivity growth means two things: 1) inflation is not a problem and 2) the country can become more competitive. During this stage, debts typically do not rise significantly relative to incomes and sometimes they decline. This is a very healthy period and a terrific time to invest in a country if it has adequate property rights protections.

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. Without innovation, productivity growth would grind to a halt. Innovations that allow a country’s workers to produce more relative to the rest of the world feed into their cost competitiveness, making them more attractive places to do business.

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.”

For example, there is now a big movement in the United States to be much more inclusive of members of different classes in both the capitalist money-making world and in the political world. These shifts can be good or bad depending on whether they are handled peacefully or violently and smartly or stupidly. One timeless and universal truth that I saw go back as far as I studied history, since before Confucius, who lived around 500 BCE, is that 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.

I’ve had exposure to all kinds of economic systems all over the world and have seen why 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.

The central bankers who control money and credit (i.e., central banks) vary the costs and availability of money and credit to control markets and the economy. When the economy is growing too quickly and they want to slow it down, central bankers make less money and credit available, causing both to become more expensive. This encourages people to lend rather than borrow and spend. When there is too little growth and central bankers want to stimulate the economy, they make money and credit cheap and plentiful, which encourages people to borrow and invest and/or spend. These variations in the cost and availability of money and credit also cause the prices and quantities of goods, services, and investment assets to rise and fall. But banks can only control the economy within their capacities to produce money and credit growth, and their capacities to do that are limited.

strong, it gives them less or no stimulant. These moves lead to cyclical rises and declines in the amounts and prices of money and credit, and of goods, services, and financial assets. These moves typically come in the form of short-term debt cycles and long-term debt cycles. The short-term debt cycles of ups and downs typically last about eight years, give or take a few.

forever. I distinguish them from the long-term debt cycle, which typically plays out over 50 to 75 years (and so contains about six to 10 short-term debt cycles).4 Because the crises that occur as these long-term debt cycles play out happen only once in a lifetime, most people don’t expect them.

out. Governments aren’t rich entities with piles of money lying around. They are just their people collectively, who will ultimately have to pay for the creation and giving out of money. Now imagine what those same citizens would say if government officials cut expenses to balance their budgets and asked them to do the same, making lots of them go broke, and/or if they sought to redistribute wealth from those who have more to those who have less by raising taxes. The money and credit producing path is much more acceptable politically than either of those options. It’s as if you changed the rules of Monopoly to allow the banker to make more money and redistribute it whenever too many players are going broke and getting angry.

A currency devaluing and a currency losing its reserve currency status aren’t necessarily the same, though both are caused by debt crises. The loss of reserve currency status is a product of chronic large devaluations. As previously explained, increasing the supply of money and credit reduces the value of money and credit. This is bad for holders of money and credit but a relief to debtors. When this debt relief allows money and credit to flow into productivity and profits for companies, real stock prices rise. But it can also damage the actual and prospective returns of cash and debt assets enough to drive people out of them and into inflation-hedge assets and other currencies. The central bank then prints money and buys cash and debt assets, which reinforces the bad returns of holding them. The later in the long-term debt cycle this happens, the greater the likelihood that there will be a breakdown in the currency and monetary system. Policy makers and investors must be able to tell the difference between systemically beneficial devaluations and systemically destructive ones.

How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or “orders” for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce consequences. In this chapter, we will explore the timeless and universal cause/effect relationships that shape the internal orders and the behaviors that drive the shifts between periods of order and periods of disorder.

The biggest thing affecting most people in most countries through time is how people struggle to make, take, and distribute wealth and power, though they also struggle over other things, most importantly ideology and religion. I saw how these struggles happened in timeless and universal ways, and how these struggles had huge implications for all aspects of people’s lives, starting with what happened with taxes, the economy, and how people were with each other through periods of boom and bust and peace and war, and how they unfolded in cyclical ways, like the tide coming in and out. I saw that when these struggles took the form of healthy competition that encouraged human energy to be put into productive activities, they produced productive internal orders and prosperous times, and when those energies took the form of destructive internal fighting, they produced internal disorder and painfully difficult times. I saw why the swings between productive order and destructive disorder typically evolved in cycles driven by logical cause/effect relationships and how they happened in all countries for mostly the same reasons. I saw that those that rose to achieve greatness did so because of a confluence of key forces coming together to produce that greatness and those that declined did so because these forces dissipated. At the time of this writing, there is growing disorder in a number of leading countries around the world, most importantly in the United States. I wanted to put th...

Every country is now going through them, and many of them are in different stages. For example, China and India are in very different stages than the United States and most European countries. Which stages countries are in versus other countries affects the relations between countries and is the primary determinant of the world order.

As an example, we made an index of the number of economic red flags that have existed at different times in history, including measures of high inequality, high debt and deficits, inflation, and bad growth, to show how indicative they are of subsequent civil wars and revolutions. The following chart shows the estimated likelihood of a civil-war-type conflict based on the number of red flags. Based on what we have seen in the past, we estimate that when there are 60–80 percent of the red flags present, there is around a 1-in-6 chance of severe internal conflict. When lots of these conditions are in place (greater than 80 percent) there is around a 1-in-3 chance of a civil war or revolution—so not very probable but still too probable for comfort. The US is in the 60–80 percent bucket today.

This is the stage when system and institution building are of paramount importance. What is required is designing and creating a system (order) that leads to people rowing in the same direction in pursuit of similar goals, with respect for rules and laws, and putting together an effective resource-allocation system that leads to rapidly improving productivity that benefits most people.

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. That is because when the government lacks financial power, it can’t financially save those entities in the private sector that the government needs to save to keep the system running (as most governments, led by the United States, did at the end of 2008), it can’t buy what it needs, and it can’t pay people to do what it needs them to do. It is out of power.

At the time of this writing, this late-cycle debt dynamic is now playing out in the United States at both the state and federal levels, with the main difference between them being that state governments can’t print money to pay their debts while the federal government can. The federal government and many state and city governments have large deficits, large debts, and large wealth gaps, and the central bank (the Federal Reserve) has the power to print money. So, at the time of this writing, the central bank is printing a lot of money and buying a lot of federal government debt, which finances the government spending that is much bigger than the federal government’s intake. That has helped the federal government and those it is trying to help, though it has also cost those who are holding dollars and dollar debt a lot in real purchasing power.

History shows and logic dictates that investing well in education at all levels (including job training), infrastructure, and research that yields productive discoveries works very well. For example, big education and infrastructure programs have paid off nearly all the time (e.g., in the Tang Dynasty and many other Chinese dynasties, in the Roman Empire, in the Umayyad Caliphate, in the Mughal Empire in India, in Japan’s Meiji Restoration, and in China’s educational development programs over the last couple of decades), though they have long lead times. In fact, improvements in education and infrastructure, even those financed by debt, were essential ingredients behind the rises of virtually all empires, and declines in the quality of these investments were almost always ingredients behind empires’ declines. If done well, these interventions can more than counterbalance the classic toxic mix.

Out of disorder and discontent come leaders who have strong personalities, are anti-elitist, and claim to fight for the common man. They are called populists. Populism is a political and social phenomenon that appeals to ordinary people who feel that their concerns are not being addressed by the elites. It typically develops when there are wealth and opportunity gaps, perceived cultural threats from those with different values both inside and outside the country, and “establishment elites” in positions of power who are not working effectively for most people. Populists

Most of the media folks I speak with share my concerns, though they typically won’t share them openly. Still, in reflecting on the problem, Martin Baron, then executive editor of The Washington Post, said, “If you have a society where people can’t agree on the basic facts, how do you have a functioning democracy?” This dynamic is impeding free speech since people are afraid to speak up because of how they will be attacked in both traditional and social media by distortions that are meant to bring them down.

Even very capable and powerful people are now too afraid of the media to speak up about important matters or run for public office. Since most high-profile people are torn down, most everyone I speak with agrees that it is dangerous to be a high-profile, vocal person who fights for truth and justice, especially if one offends people who are inclined to use the media to fight.

My study of history has taught me that nothing is forever other than evolution, and within evolution there are cycles that are like tides that come in and go out and that are hard to change or fight against.

To handle these changes well it is essential to know which stage of the cycle one is in and to know timeless and universal principles for dealing with it. As conditions change the best approaches change—i.e., what is best depends on the circumstances and the circumstances are always changing in the ways we just looked at. For that reason it is a mistake to rigidly believe that any economic or political system is always best because there will certainly be times when that system is not best for the circumstances at hand, and if a society doesn’t adapt it will die. That is why constantly reforming systems to adapt well is best.

The test of any system is simply how well it works in delivering what most of the people want, and this can be objectively measured, which we can do and will continue to do. Having said that, the lesson from history that comes through most loudly and most clearly is that skilled collaborations to produce productive win-win relationships to both grow and divide the pie well, so that most people are happy, are much more rewarding and much less painful than fighting civil wars...

If you believe that fake and distorted media is a problem and you are interested in watching the media/propaganda for clues about whether and how this is transpiring, here are a few commonly recommended things to look out for. Ask yourself: 1) Does the story consist of emotionally triggering, unsubstantiated accusations, or are the facts substantiated and the sources provided? When the facts are put aside to create an exciting story and the sources are undisclosed, don’t believe the story. 2) Does the writer welcome or not welcome replies or arguments that refute what they are asserting, and are they willing or not willing to publish them along with what they published? 3) Are the accusations in the story consistent with what has been identified and proven in the legal system? If people or groups are accused in the media of doing bad things but they haven’t been accused and judged to have done bad things in the legal system (which follows a process that tries to weigh the evidence to get at what is true), at least ask yourself why that is and probably don’t believe the story. 4) If the writer or outlet has previously shown themselves to be biased, assume that they and their stories are biased.

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.

All-out wars typically occur when existential issues (ones that are so essential to the country’s existence that people are willing to fight and die for them) are at stake and they cannot be resolved by peaceful means. The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters. That clarity over who sets the rules then becomes the basis of a new international order.