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

by Ray Dalio

there were large wealth gaps and conflict, which when heightened by debt/economic collapses, led to revolutionary changes in social and economic programs and big wealth transfers that were manifest in different systems in different countries. Clashes and wars developed over which of these systems—e.g., capitalism or communism, democracy or autocracy—were best.

The richer countries get into debt by borrowing from poorer countries that save more—that is one of the earliest signs of a wealth and power shift.

History is littered with cases in which countries were isolated, sometimes because they chose to cut themselves off to protect their cultures (e.g., the late Tang, late Ming, and early PRC periods in China, and the Edo period in Japan) and sometimes because of circumstances like natural disasters and internal fighting. Both reasons lead them to fall behind in their technology, with terrible consequences. In fact, it is one of the most common reasons for empires and dynasties failing.

Power is usually shared among three or four classes who in aggregate make up only a small percentage of the population.

The balance of power dynamic is the timeless and universal dynamic of allies and enemies working to gain wealth and power. It drives virtually all struggles for power, from office politics to local politics, and from national politics to geopolitics. In some cultures this game is played a bit differently than in other cultures—e.g., in Western society it is played more like chess while in Asian societies it is played more like Go—though the objective is the same: to dominate the other side.

Real wealth has intrinsic value.

Financial wealth has no intrinsic value.

there isn’t a fixed amount of money and credit in existence.

However, having a reserve currency typically sows the seeds of a country ceasing to be a reserve currency country. That is because it allows the country to borrow more than it could otherwise afford to borrow, and the creation of lots of money and credit to service the debt debases the value of the currency and causes the loss of its status as a reserve currency.

Stage 5, moderates become the minority. In Stage 6, they cease to exist.

international relations are driven much more by raw power dynamics.

When individual countries have more power than the collectives of countries, the more powerful individual countries rule. For example, if the US, China, or other countries have more power than the United Nations, then the US, China, or other countries will determine how things go rather than the United Nations.

Not all countries prosper when the leading powers do because countries gain at the expense of others.

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.

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.

The Fourth Anglo-Dutch War (1780–84): The British began the war in retaliation for Dutch support of the colonies in the American Revolution. It ended in a significant defeat for the Dutch, ushering in the end of the guilder as a reserve currency.

biggest military risk for the leading powers is that they lose the economic and technology wars.

when debts are in the currencies that central banks have the ability to print and restructure, debt crises can be well-managed so they are not systemically threatening.

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.

while the Chinese are more interested in asking questions and learning, Americans are more interested in telling you what they think.

Traditional Chinese military philosophy teaches that the ideal way to win a war is not by fighting but by quietly developing one’s power to the point that simply displaying it will cause an opponent to capitulate.

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.

most Americans believe in “give me liberty or give me death” while to the Chinese individual liberty isn’t nearly as important as collective stability is.

But the US’s position is steady, while China’s position in the standings is rising fast. Remember that whoever wins the technology war usually wins the economic and military wars.