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

by Ray Dalio

Typically during such times taxes on the rich rise, and when the rich fear their wealth and well-being will be taken away, they move to places, assets, and currencies they feel safer in. These outflows reduce the country’s tax revenue, which leads to a classic self-reinforcing, hollowing-out process.

When the flight of wealth gets bad enough, the country outlaws it. Those seeking to get out begin to panic.

Can Bitcoin become a refuge for the wealthy? A sneaky way out? If so, anticipate a huge increase in BTC price.

When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle.

When all of these forces line up—indebtedness, civil war/revolution at home, war abroad, and a loss

of faith in the currency—a change in the world order is ...

Because these steps unfold in a logical sequence of timeless and universal cause/effect relationships, it is possible to create a health index of where a country stands by looking at these measures. When the measures are strong/good, the condition of the country is strong/good and the period ahead is much more likely to be strong/good; when the ratings of these items are weak/bad, the condition of the country is weak/bad and the period ahead is much more likely to be weak/bad.

At the same time, I am equally confident that there will be radical changes that will be traumatic for many people.

Everything that has happened and everything that will happen has had and will have determinants that make it happen. If we can understand those determinants, we can understand how the machine works and anticipate what will likely be coming at us next.

you can’t understand the success of the United States without recognizing that it is separated from European and Asian powers by two oceans and blessed with most of the minerals, metals, and other natural resources it needs to be prosperous and self-sufficient, including the topsoil, water, and temperate climate that allows it to produce most of its own food.

but geology should not be overvalued relative to human capital. History shows us that every commodity has declined in value (in inflation-adjusted terms) with big up and down cycles around that downtrend. That is because inventiveness changes what is in demand—e.g., new energy sources replacing old ones, fiber-optic cable replacing copper wiring, etc.—and natural resources are depleted over time.

The most vulnerable position to be in is having a high reliance on one or a few commodities because they are highly cyclical and sometimes lose value altogether.

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.

While many countries have natural resources that they are able to draw upon, human capital is the most sustainable capital because inherited assets that are drawn down eventually disappear, whereas

human capital can exist forever. Human capital is why people who come up with new ideas and build them out (e.g., entrepreneurs) beat giants with vast resources (just look at Elon Musk and his startup Tesla, which rivals resource-rich General Motors, Ford, and Chrysler; or Steve Jobs and Bill Gates, whose computer startups surpassed giants like IBM; and so on). Great human capital allows people to overcome their weaknesses and identify and capitalize on their opportunities.

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.

Class warfare has profound effects on the internal order

Think about it. What are you seeing happen?

What global news networks does Ray Dalio watch?

The less productive a society, the less wealthy and hence the less powerful.

By the way, spending money on investment and infrastructure rather than on consumption tends to lead to greater productivity, so investment is a good leading indicator of prosperity.

To be successful one must earn an amount that is at least equal to the amount one spends. Those who spend modestly and have a surplus are more sustainably successful than those who earn a lot more and have deficits.

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.

You can tell countries in this stage from those in the first stage because they have gleaming new cities next to old ones, high savings rates, rapidly rising incomes, and, typically, rising foreign exchange reserves.

Priorities shift from an emphasis on working and saving in order to protect oneself from bad times, to savoring the finer things in life. People become more comfortable spending more. Arts and sciences typically flourish.

Prior to the mid-20th century, large countries at this stage literally controlled foreign governments and created empires from them to provide the cheap labor and cheap natural resources they needed to remain competitive.

Because their spending continues to be strong, they continue to appear rich, even though their balance sheets are deteriorating.

Often, though not always, countries run “twin deficits”—i.e., both balance of payments and government deficits. In the last few years of this stage, bubbles frequently occur.

To compensate, government debt and government deficits grow, and central bank “printing” of money typically increases. Central banks and governments cut real interest rates and increase nominal GDP growth so that it is comfortably above nominal interest rates in order to ease debt burdens.

Humanity’s capacity to invent solutions to its problems and to identify how to make things better has proven to be far more powerful than all of its problems combined.

The degree of inventiveness and innovation in a society is the main driver of its productivity.

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.

Innovation + Commercial Spirit + Thriving Capital Markets = Great Productivity Gains = Increases in Wealth and Power

Naturally those who benefit from and control the system by and large like the system and seek to maintain it. Because those with wealth can influence those with power and because those with power can influence those with wealth, these ruling classes or elites have alliances among themselves and want to maintain the existing order with everyone following its dictums and laws, even as the system increases the gaps between those with power and wealth and those without them.

Classically, the Big Cycle transpires with periods of peace and productivity that increase wealth in a disproportionate way, which leads to a very small percentage of the population gaining and controlling exceptionally large percentages of the wealth and power, then becoming overextended, which leads to encountering bad times that hurt those who are the least wealthy and powerful the hardest, which then leads to conflicts that produce revolutions and/or civil wars, which then lead to the creation of a new order and the cycle beginning again.

The monarchs needed people to manage the day-to-day operations for them. The top people were ministers, who oversaw the bureaucracies of people who did the various jobs that needed to be done for government to work.

For example, in England around 1200 there was a wealth and power struggle that evolved gradually at first and then abruptly into a civil war, which is how these shifts tend to evolve, between the nobility and the monarchy. Like most of these struggles, the fight was over money and the power to determine who got how much money. The monarchy under King John wanted to get more tax money and the nobles wanted to give less tax money. They disagreed over how much say the nobles should have on the matter, so they had a civil war. The nobles won and gained more power to set the rules, which led to what they first called a “council,” which soon became the first Parliament, which evolved into what exists in England today. The peace treaty that formalized this deal into law in 1215 is called the Magna Carta.

i.e., the shifts in wealth and power over these centuries were from a) landowning nobles (who then had the wealth) and monarchies (who then had the political power) to b) capitalists (who in the later period had the wealth) and elected representatives or autocratic government leaders (who in the later period had the political power). Almost all countries made these shifts—some peacefully but most painfully.

They called this internal order based on three classes the ancien régime (which means “old order”). Then practically overnight it changed in a revolutionary way via the French Revolution, which began on May 5, 1789, when the third class—the commoners—had enough of that system, overthrew the others, and took the power for itself.

You might consider writing these down and thinking about them because during periods of greater conflict the classes you are in or are assumed to be in will become more important in determining who you will be with and against, what you will do, and where you will end up.

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.

(e.g., AI and information technology developers are now evolving to gain it at the expense of those who are being replaced by such technologies)

They don’t pay much attention to whether the economic machine is producing opportunity and prosperity for most people. They can also overlook the fact that their form of profit making is suboptimal when it comes to achieving the goals of most people. For example, in a purely capitalist system, the provision of excellent public education—which is clearly a leading cause of higher productivity and greater wealth across a society—is not a high priority.

Socialists and communists tend to focus on dividing the pie well and typically aren’t very good at increasing its size.

But capitalism is also a source of wealth and opportunity gaps that are unfair, can be counterproductive, are highly cyclical, and can be destabilizing.

“the enemy of my enemy is my friend.”

History has shown that, when there are not clear rules and/or when the parties don’t abide by them, the fighting will be far more brutal, often to the death.

Understanding this typical dynamic, one should look out for internal fighting among the winners right after the big war is over.

For as long as there is peace and prosperity for the majority of the people, which will only be the case if the system is fair and the majority of the people remain self-disciplined and productive, peace and prosperity are likely to continue.

in the last century, the wealth share of the top 1 percent in the US ranged from close to 50 percent in the 1920s to a bit over 20 percent in the late 1970s; in the UK, it ranged from over 70 percent in 1900 to around 15 percent in the 1980s and is currently around 35 percent (figures from World Inequality Database).

This is the exact thing that happened in the wake of the economic crisis caused by the COVID-19 pandemic. Many versions of this have happened many times in history. Who pays? It is bad for those outside the central bank who still hold the debts as assets—cash and bonds—who won’t get returns that would preserve their purchasing power.

Pencil out what your financial safety margin looks like (how long will you be financially OK if the worst-case scenario happens—e.g., you lose your job and your investment assets fall to be only half as much to account for possible price falls, taxes, and inflation). Then do that calculation for others, add them up, and then you will have a good picture of the state of your world. I’ve done that with the help of my partners at Bridgewater and find it invaluable in imagining what is likely to happen.1