What’s next?
For those of us looking at recent major global events (Covid, live-streamed genocide, US trade wars with China, Europe and rest of the world, the rise, and rise, and fall then crash of cryptocurrencies, the vanishing of NFTs, etc…) and wondering: what’s next?
Ray Dalio answers: “The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history.” (Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail(p. 1).
How does Dalio know this? Because he has spent the past five decades schooling himself on the history of empires and global economies to detect patterns of events, their cause and effect. He did this in order to successfully meet his obligations as an investment manager at Bridgewater, an asset management company he founded. He studied major empires such as the British, Dutch, French, German, Russian, US, Indian and Japanese for a period of 500 years, and the Chinese empire for 600 years. He saw that 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 (Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail (p. 14).
He discovered that there was an archetypical big cycle of power that an empire goes through. First, it rises in influence through sound leadership, innovation and strong productivity. If it is able to sustain this growth for a long period it will acquire mass wealth that includes military prowess, and reach the top of its game. If it does this better than any other nation, it will become the leading global power. Eventually, the empire will become complacent, and start to overspend on costly expenditures like wars and bail outs of mismanaged companies deemed “too big to fail”. To fund them it will borrow huge amounts of money, creating debts that have to be serviced. Increasingly, fewer and fewer resources go into education and infrastructure, consequently productivity declines as does the standard of living for citizens. Discontent leads to conflict and fighting amongst different social and political groups. The empire’s descent ensues. There can be several empires at the same time competing, however, there is typically one that dominates the world order. This big cycle “produces swings between 1) peaceful and prosperous periods of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish.” (Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail (p. 3). After a period of depression and wars between empires comes a new world order, and the big cycle begins again. For example, the end of WWII saw the creation of a new world order and the US became the dominant global power.
The big cycle has clear markers to allow us to see where we are in it. He identified eighteen determinants as can be seen in the chart below. However, there are eight key ones that propels a nation to the top: 1) education, 2) competitiveness, 3) innovation and technology, 4) economic output, 5) share of world trade, 6) military strength, 7) financial center strength, and 8) reserve currency status. The determinants that lead to the decline of a nation are: large long-term debt, internal disorder caused by increasing wealth gaps and raising cost of living, and the external disorder, fighting (consistent) wars which are costly and trade/economic wars (e.g. sanctions and tariffs).
Where are we right now?
It is now 80 years since the last new world order started after WWII. The US and other major old empires such as the UK, and France are saddled with large debts and monetary policies that don’t work well. They have tried to fill in their financial holes by giving out a lot of money that they are borrowing, while central banks have tried to help by printing a lot of money (i.e., monetizing government debt). At the same time there are big wealth and value gaps and a rising world power, China, that is competing with the leading world power, US, in trade, technology development, capital markets, and geopolitics.
According to Dalio, his model suggests that currently the US “is roughly 70 percent through its Big Cycle, plus or minus 10 percent. The United States has not yet crossed the line into the phase of a civil war/revolution, when the active fighting begins, but internal conflict is high and rising.”(Dalio, Ray. Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail (p. 360).
Dalio highlighted that China was dominant for centuries (consistently out-competing Europe economically and otherwise), though it entered a steep decline starting in the 1800s. This is the period the Chinese dubbed as the century of humiliation when it was plagued by weak leadership in the Qing dynasty, foreign intervention, and invasions by the British, Japanese and other European powers. Current Chinese leaders including Xi Jinping are adamant that history must never be repeated.
Nevertheless, Dalio stresses that cycles come and go, the only thing that is constant and can’t be deterred is evolution. This is because evolution comes from our ability as humans to adapt and learn. It has propelled us to keep moving forward and improving irrespective of cycles of prosperity and destruction. For example, since 1800 despite multiple global wars and financial crises the average life expectancy has gone from 28.5 years to 73.2 in 2023.
Why is it important that we know where we are?
Because he believes as per the quote at the beginning of this piece that times ahead will be radically different to what we’ve experienced in our lifetime and he would like for us to be prepared for what’s to come. Hence why he decided to share his decades of observations and tools publicly. I for one I’m grateful that he did. Even though I was somewhat versed in the history of the major empires I still found his observations and categorization of key determinants of wealth and power, especially the part about the impact of reserve currency, and long-term debt both insightful and novel. Notwithstanding, I feel we’ve already passed the radically different stage. I believe it happened with the global (bar a few countries such as Sweden and Uruguay) lockdown because of Covid-19. Followed by the livestreaming of genocide that has gone on for over a year without the US and other leading Western countries that have since before my lifetime marketed themselves as harbinger and defender of humanrights and justice intervening to stop it. Also, I’m not sure how better prepared I am for what is to come than before I picked up the book. Seriously, how does one prepare oneself for a potential global conflict that could involve nuclear weapons? Since the last world war, nuclear weapons and highly sophisticated missiles are much more widespread and under the command of mostly amoral and/or inept leadership. One thing for sure is that evolution will continue, hopefully in an upward trend as it has done for centuries.