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

by Ray Dalio

Anyone who studies history can see that no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.

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.

For example, the geographies of the United States and China—both with large expanses of land bounded by large natural barriers of water and mountains—created the inclination for them to be one big whole, increasing the commonalities of their people (e.g., shared language, government, culture, etc.). In contrast, the geography of Europe (i.e., having many more natural boundaries within it) reinforced its divisions into different states/countries, leading to fewer commonalities among its people (e.g., different languages, governments, cultures, etc.).

The Big Balance of Power Cycle That Drives the Big Peace/War Cycle Both Within Countries and Between Countries. 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 ≠ Financial Wealth. Real wealth is what people buy because they want to have and use it, such as a house, car, streaming video service, etc. Real wealth has intrinsic value. Financial wealth consists of financial assets that are held to a) receive an ongoing income in the future and/or b) be sold in the future to get money to buy the real assets people will want. Financial wealth has no intrinsic value.

History also shows that countries that have higher percentages of people who are self-sufficient tend to be more socially, politically, and economically stable.

Whether because of wars3 or bursting financial bubbles or both, what typifies this stage is an accumulation of debt that can’t be paid back in non-depreciated money. I call countries in this stage “early declining countries.” While countries of all sizes can go through this stage, when big countries go through it, they are typically approaching their decline as great empires.

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.

The long-term debt cycle that is now in the late-cycle phase was designed in 1944 in Bretton Woods, New Hampshire, and began in 1945, when World War II ended and the dollar/US-dominated world order began.

Successful entrepreneurs, inventors, and adventurers produce new ideas and take their societies to new places and become the heroes who others aspire to be like because of how they come up with revolutionary new ideas, make people’s lives better, and are rewarded for it. Debt growth fuels productivity and in turn real income growth, which makes debts easy to service and provides excess profits that make equity returns excellent.

Obviously the peaceful and prosperous path is the ideal path, but it is the much more difficult path to pull off. That path requires a “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 (i.e., is highly productive in a way that benefits most people). There are few such cases in history. We pray for them.

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.

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.

As reflected in output per capita, the UK’s living standards caught up to those in the Netherlands by around 1800 and overtook them in the mid-19th century, when the UK approached the zenith of its share of world output (around 20 percent). In parallel to this economic growth—and helping to reinforce it—the UK became the world’s dominant trading nation, pulling decisively ahead of the Dutch in the late 1700s and maintaining that position through the 19th century.

However, a united China is largely self-contained because the diversification and coordination of the parts make it that way. Still, these conditions plus shortages of clean water, cropland, and coastal marine fisheries have historically made China vulnerable to food shortages.

Taoism teaches that it is of paramount importance to live in harmony with the laws of nature. Taoists believe that nature is composed of opposites—yin and yang—and that harmony is achieved when they are balanced well.

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

Because it was clear to me that the closed door was the reason for China’s poverty, I believed that its removal would naturally equalize its standards of living with the developed world, just as unconstrained water naturally seeks the same level.