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

by Dalio

All the empires and dynasties I studied rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it.

peaceful/creative periods lasted much longer than the depression/revolution/war periods, typically by a ratio of about 5:1,

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

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.

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.

From examining all these cases across empires and across time, I saw that the great empires typically lasted roughly 250 years, give or take 150 years, with big economic, debt, and political cycles within them lasting about 50 to 100 years.

Evolution is the biggest and only permanent force in the universe, yet we struggle to notice it.

Culture. As the saying goes, “culture is destiny.” Cultural differences—differences in how people believe they should be with each other—matter enormously. All societies create cultures based on how they think reality works, and they all provide principles for guiding how people should deal with reality, and most importantly how they should deal with each other.

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.

before around 16501 tribes and states were more important than countries. History shows that the groupings that people collect in and that are the most important to them evolve.

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.

Similarly, since one entity’s debts are another’s assets, an entity that defaults reduces other entities’ assets, which requires them to cut their spending. This dynamic produces a self-reinforcing downward debt and economic contraction that becomes a political issue as people argue over how to divide the shrunken pie.

When governments print a lot of money and buy a lot of debt, they cheapen both, which essentially taxes those who own it, making it easier for debtors and borrowers. When this happens to the point that the holders of money and debt assets realize what is going on, they seek to sell their debt assets and/or borrow money to get into debt they can pay back with cheap money. They also often move their wealth into better storeholds, such as gold and certain types of stocks, or to another country not having these problems.

periods of “reflation” either stimulate a new money and credit expansion that finances another economic expansion (which is good for stocks) or devalue the money so that it produces monetary inflation (which is good for inflation-hedge assets, such as gold, commodities, and inflation-linked bonds).

Civil wars and revolutions inevitably take place to radically change the internal order. They include total restructurings of wealth and political power that include complete restructurings of debt and financial ownership and political decision making.

the financial strength to outspend one’s rivals is one of the most important strengths a country can have. That is how the United States beat the Soviet Union in the Cold War. Spend enough money in the right ways, and you don’t have to have a shooting war.

Winning means getting the things that are most important without losing the things that are most important, so wars that cost much more in lives and money than they provide in benefits are stupid.

have power, respect power, and use power wisely.

Having power is good because power will win out over agreements, rules, and laws all the time.

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.

The alchemy of lending as we know it today was first created in Italy around 1350.

when claims on hard money (i.e., notes or paper money) are introduced, at first there is the same number of claims on the hard money as there is hard money in the bank. However, the holders of the paper claims and the banks soon discover the wonders of credit and debt. Debt holders like it because they can lend these paper claims to the bank in exchange for an interest payment so they get interest. The banks that borrow it from them like it because they can lend the money to others, who pay a higher interest rate so the banks make a profit. Those who borrow the money from the bank like it because it gives them buying power that they didn’t have. And the whole society likes it because asset prices and productivity rise.

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.

during periods of great crisis, more autocratic and less democratic leadership tends to be preferred.

Despite all the analytical work I do, I know that the unknown is still much greater than the known. While history can be told pretty precisely, the future is exactly the opposite.

Essentially, if I have a bunch of bets that are attractive but unrelated, I can reduce my risks by up to 80 percent without reducing my upside at all. While this sounds like an investment strategy it’s actually an old and well-established good life strategy that I apply to investments as well. There is a Chinese saying that “a smart rabbit has three burrows,” meaning three places to go to in case any one of them becomes dangerous. This principle has saved many people’s lives when things got bad, and it’s one of my most important principles.