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

by Ray Dalio

People and Their Countries Are Poorer and Still Think of Themselves as Rich. In this stage, debts rise relative to income. The psychological shift behind this leveraging up occurs because the people who lived through the first two stages have died off or become irrelevant and those whose behavior matters most are used to living well and not worrying about the pain of not having enough money. Because the workers in these countries earn and spend a lot, they become expensive, and because they are expensive, they experience slower real income growth rates. Since they are reluctant to constrain their spending in line with their reduced income growth rates, they lower their savings rates, increase their debts, and cut corners. Because their spending continues to be strong, they continue to appear rich, even though their balance sheets are deteriorating. The reduced level of efficient investments in infrastructure, capital goods, and research and development slows their productivity gains. Their cities and infrastructure become older and less efficient than in the two previous stages. They increasingly rely on their reputation rather than on their competitiveness to fund their deficits. Countries typically spend a lot of money on the military at this stage to protect their global interests, sometimes in very large amounts because of wars. Often, though not always, countries run “twin deficits”—i.e., both balance of payments and government deficits. In the last few years of this ...