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

by Ray Dalio

The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history.

the swinging of conditions from one extreme to another in a cycle is the norm, not the exception.

no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.

one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past.

You can miss seeing these cycles if you watch events too close up or if you are looking at the averages rather than the individual cases.

I also know from experience that if I wait to learn enough to be satisfied with what I know before acting or sharing, I’d never be able to use or convey what I have learned.

Throughout time, the formula for success has been a system in which well-educated people, operating civilly with each other, come up with innovations, receive funding through capital markets, and own the means by which their innovations are turned into the production and allocation of resources, allowing them to be rewarded by profit making. However, over the long run capitalism has created wealth and opportunity gaps and overindebtedness that have led to economic downturns and revolutions and wars that have caused changes in the domestic and world orders.

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.

Because these turbulent times are small in relation to the evolutionary uptrend of humanity’s capacity to adapt and invent, they barely show up in the previous charts of GDP and life expectancy, appearing only as relatively minor wiggles. Yet these wiggles seem very big to us because we are so small and short-lived.

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

While the consequences are worse for some people, virtually no one escapes the damage. Still, without minimizing them, history has shown us that typically the majority of people stay employed in depressions, are unharmed in shooting wars, and survive natural disasters.

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.

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.

History shows that when an individual, organization, country, or empire spends more than what it earns, misery and turbulence are ahead.

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.

In each generation, roughly a few hundred people made all the difference.

real wealth doesn’t last long and neither do inheritances.

If you look at societies that expropriated the wealth of the rich and tried to live off it and weren’t productive (e.g., Russia after the revolutions of 1917), you will see that it didn’t take them long to become poor. 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.

Those who spend modestly and have a surplus are more sustainably successful than those who earn a lot more and have deficits.

History shows that when an individual, organization, country, or empire spends more than what they earn, misery and turbulence are ahead. History also shows that countries that have higher percentages of people who are self-sufficient tend to be more socially, politically, and economically stable.

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.

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.

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.

there are many people, companies, nonprofit organizations, and governments that look rich even while they are in the process of going broke.

History has shown that we shouldn’t rely on governments to protect us financially. On the contrary, we should expect most governments to abuse their privileged positions as the creators and users of money and credit for the same reasons that you might commit those abuses if you were in their shoes.

holding debt is a bit like holding a ticking time bomb that rewards you while it is still ticking and blows you up when it stops.

the closer most people are to the blowup, which is also when the claims outstanding are largest relative to the amount of hard money and tangible wealth there is, the riskier the situation is but the safer people tend to feel. That is because they have held the debt and enjoyed the rewards of doing so. The longer it has been since the last blowup, the more people’s memories of it have faded

Some central banks have made acting on this temptation harder by separating themselves from the direct control of politicians, but virtually every central bank has to bail out their government at some point, so devaluations always happen.

Of the roughly 750 currencies that have existed since 1700, only about 20 percent remain, and all of them have been devalued.

Stage 1, when the new order begins and the new leadership consolidates power, which leads to… … Stage 2, when the resource-allocation systems and government bureaucracies are built and refined, which if done well leads to… … Stage 3, when there is peace and prosperity, which leads to… … Stage 4, when there are great excesses in spending and debt and the widening of wealth and political gaps, which leads to… … Stage 5, when there are very bad financial conditions and intense conflict, which leads to… … Stage 6, when there are civil wars/revolutions, which leads to… … Stage 1, which leads to Stage 2, etc., with the whole cycle happening over again.

be successful the system has to produce prosperity for most people, especially the large middle class.

ideally they are still strong and inspirational, above all else they need to be able to design and build the system that is productive for most people, or they need to have people working for them who can do that.

These debt-financed purchases emerge because investors, business leaders, financial intermediaries, individuals, and policy makers tend to assume that the future will be like the past so they bet heavily on the trends continuing.

When the government runs out of buying power, there is a collapse. But on the way to a collapse there is a lot of fighting for money and political power.

Those who favor policies that are good for the whole—e.g., free trade, globalization, advances in technology that replace people—without thinking about what happens if the whole is not divided in a way that benefits most people are missing the fact that the whole is at risk.

during times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies.

When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution.

No system allows people to bring down the system—in most, an attempt to do so is treason, typically punishable by death. Nonetheless, it is the job of revolutionaries to bring down systems, so governments and revolutionaries test each other to see what the limits are.

when in doubt, get out—if you don’t want to be in a civil war or a war, you should get out while the getting is good.

As you might imagine, it is a much bigger deal to break a system/order and build a new one than it is to make revolutionary changes within an existing system/order. Though breaking a system/order is more traumatic, it isn’t necessarily a worse path than operating within a system.

Deciding whether to keep and renovate something old that is not working well or to dispose of it and replace it with something new is never easy, especially when the something new is not clearly known and what is being replaced is as important as the domestic order. Nonetheless, it happens, though typically it is not decided on intellectually; it is more often emotionally driven.

Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of not having them, it is better to be wary of them and look for the markers to indicate how close one is.

While most of the archetypical civil wars and revolutions shifted power from the right to the left, many shifted wealth and power to the right and away from those on the left.

while they looked united during the revolution, after winning the revolution, they typically fought with each other over issues and for power.

Our society has not established limits to how terrible it will allow conditions to get.

the two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined.

have power, respect power, and use power wisely.

Though it is generally desirable to have power, it is also desirable to not have power that one doesn’t need.

In war one’s ability to withstand pain is even more important than one’s ability to inflict pain.

All markets are primarily driven by just four determinants: growth, inflation, risk premiums, and discount rates.