Principles for Dealing with the Changing World Order by Ray Dalio

Name: Principles for Dealing with the Changing World Order by Ray Dalio
Uploaded: 2022-03-02T22:16:04.000Z
Duration: 1 h 26 min 43 s

The Changing World Order

Ray Dalio discusses how the times ahead will be different from those experienced in our lifetimes, but similar to many times before. He explains that he learned valuable lessons by studying the last 500 years of history for similar situations where he saw that they had indeed happened many times before with the ups and downs of the Dutch, British, and US empires.

Anticipating the Future by Studying the Past

In 1971, when Ray was a young clerk on the floor of the New York Stock Exchange, the United States ran out of money and defaulted on its debts.

Gold was used as money in transactions between countries. Paper money like dollar had no value other than it could be exchanged for gold which was real money.

As people turned these checks into banks for gold money, amount of gold in US started to dwindle. It soon became obvious that US couldn't keep its promises for all existing paper money.

President Nixon went on television to tell world that US was breaking its promise to let people exchange their dollars for gold.

When opening bell rang next day after announcement pandemonium broke out but not kind expected. Market was up - way up - and went on to rise nearly 25%.

Lessons Learned from History

The most important events that surprised Ray were those that never happened in his lifetime.

Ray studied last 500 years of history for similar situations where he saw that they had indeed happened many times before with ups and downs of Dutch, British, and US empires.

Every time changing world order occurred it was a sign of the changing world order.

Ray's study taught him valuable lessons that he passes along in his book, Principles for Dealing with the Changing World Order.

Introduction

In this section, the speaker introduces the concept of printing money and how it affects the economy. He also talks about his experiences and principles that led him to study history.

Printing Money

When governments print more money without a corresponding increase in productivity, it causes prices of stocks, gold, and commodities to rise.

Governments print more money when they run out of money due to spending more than they take in taxes.

When central banks print a lot of money to relieve a crisis, buy stocks, gold and commodities because their value will rise and the value of paper money will fall.

This printing of money happened in 2008 to relieve the mortgage-driven debt crisis and in 2020 to relieve the pandemic-driven economic crisis.

Studying History

To understand what is coming at you, you need to understand what happened before you.

The speaker studied how the roaring twenties bubble turned into the 1930s depression which allowed him to anticipate and profit from the 2007 bubble turning into the 2008 bust.

The speaker developed an almost instinctual urge to look to the past for similar situations to learn how to handle future events well.

Changing Orders

In this section, the speaker discusses three big things that hadn't happened in his lifetime that prompted him to study history. He also explains what orders are and how they change.

Three Big Things

Countries didn't have enough money to pay their debts even after lowering interest rates. So their central banks began printing lots of money.

Big internal conflicts emerged due to growing gaps in wealth and values, which showed up in political populism and polarization between the left and right.

Increasing external conflict between a rising great power and the leading great power, as is now happening with China and the United States.

Changing Orders

Orders are governing systems for people dealing with each other. There are internal orders for governing within countries, typically laid out in constitutions. And there is a world order for governing between countries, typically laid out in treaties.

Internal orders change at different times than world orders, though whether within or between countries, these orders typically change after wars.

Civil wars within countries or international wars between countries happen when revolutionary new forces defeat weak old orders.

The current world order commonly called the American world order formed after the allied victory in World War II when the US emerged as the dominant world power.

Monetary Systems

In this section, the speaker talks about how monetary systems work and how they affect global governance.

Bretton Woods Agreement

The Bretton Woods Agreement established the dollar as the world's leading reserve currency in 1944.

Having a reserve currency is a key factor in a country becoming the richest and most powerful empire.

New World Order

With a new dominant power and monetary system established, a new world order begins.

These changes take place in a timeless and universal cycle that he calls "the big cycle."

Introduction

In this section, the speaker introduces the topic of his study and directs the audience to his book for more information.

The Study

The speaker studied the 10 most powerful empires over the last 500 years and their reserve currencies.

He also studied the rise and fall of Chinese dynasties and their monies back to the year 600.

The four most important empires he focuses on are Dutch, British, US, and Chinese.

He used eight metrics to measure an empire's power including education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, power of financial center for capital markets and strength of currency as a reserve currency.

Empires' Rise & Decline Cycles

In this section, the speaker explains how he observed patterns in empires' rise and decline cycles.

Patterns

Empires' rise and decline cycles lasted about 250 years with 10 to 20 year transition periods between them.

By examining sequences from many countries we can see how a typical cycle transpires.

Simplifying it a bit shows that better education typically leads to increased innovation and technology development which leads to establishment of currency as a reserve currency. These forces then declined in a similar order reinforcing each other's decline.

Typical Sequence of Events

In this section, the speaker explains the typical sequence of events that produce empires' rises and declines.

Sequence

The big cycle typically begins after a major conflict, often a war, establishes the new leading power and the new world order.

A period of peace and prosperity typically follows. As people get used to this peace and prosperity, they increasingly bet on it continuing.

The empire's share of trade grows. And when most transactions are conducted in its currency, it becomes a reserve currency which leads to even more borrowing.

At the same time, this increased prosperity distributes wealth unevenly. So the wealth gap typically grows between the rich "haves" and poor "have-nots".

When a new rising power gets strong enough to compete with the dominant power that is having domestic breakdowns, external conflicts most typically wars take place.

Out of these internal and external wars come new winners and losers. Then the winners get together to create the new world order. And the cycle begins again.

Conclusion

In this section, the speaker concludes his study by comparing empires' rise and decline cycles to human life cycles.

Comparison

The cause-and-effect relationships drove cycles of rises and declines all the way back to Roman empire.

Like human life cycles, each individual story blends with others to make an epic 500-year story that is our collective history.

The Big Cycle

In this section, the speaker describes the typical cycle of empires by dividing it into three phases: the rise, the top, and the decline.

The Rise

Successful new orders that rise are typically started by powerful revolutionary leaders doing four things: winning power by gaining more support than opposition, consolidating power by converting or eliminating opposition, establishing systems and institutions that make the country work well, and picking successors well.

After winning the fight, there is typically a period of peace and growing prosperity because leadership is clearly dominant and has broad support so no one wants to fight it.

Leaders within the country have to design an excellent system to raise wealth and power. First and foremost, they must have strong education which provides a healthy respect for rules and laws, order within society, low corruption, and enables them to unite behind a common purpose.

As countries trade more globally they must protect their trade routes from attack so they develop great military strength. If done well this virtuous cycle leads to strong income growth which can be used to finance investments in education infrastructure research development.

Capitalism Approach

Most successful empires used a capitalist approach to develop productive entrepreneurs. Even China used a form of this capitalist approach.

They must also develop their capital markets - lending bond stock markets - that allows people to convert their savings into investments.

Financial Centers

The greatest empires developed the world's leading financial centers for attracting and distributing world's capital.

The Rise of Empires

This section discusses how empires rise to power and the factors that contribute to their decline. It also highlights the importance of having a reserve currency.

The Role of Government, Business, and Military in Empire Building

Empires are built when capitalists, governments, and military work together.

Coordination between government, business, and military operations is crucial for success.

Having a reserve currency enables an empire to borrow more than other countries.

Reserve Currency as a Tool for Borrowing

A widely accepted currency becomes the preferred medium of exchange and storehold of wealth.

The world's leading reserve currency is used for international transactions.

Countries without a reserve currency cannot borrow as much as those with one.

The Downfall of Empires

As people become richer in powerful countries, they become less competitive relative to other countries willing to work for less.

People in other countries copy methods and technologies from leading powers which further reduces competitiveness.

As people become richer, they tend not to work as hard which makes them more vulnerable to challenges.

Wealth Gap Reinforcement

Wealth gaps grow because rich people use their greater resources to reinforce their powers.

Rich people give greater privileges to their children like better education and influence the political system to their advantage.

The Cycle of Empires

This section discusses how empires become unprofitable and decline due to large debts with foreign lenders, domestic overconsumption, and costly external fighting. It also explains how wealth and power shifts occur when richer countries borrow from poorer ones.

Borrowing Sustains Power Beyond Fundamentals

Large debts with foreign lenders boost spending power over the short term but weaken the country's financial health and currency over the long-term.

Borrowing sustains the country's power beyond its fundamentals by financing both domestic overconsumption and international military conflicts required to maintain the empire.

The cost of maintaining and defending the empire becomes greater than the revenue it brings in, making having an empire unprofitable.

Wealth and Power Shifts

Richer countries eventually get deeper into debt by borrowing from poor countries that save more, which is one of the early signs of a wealth and power shift.

The US started borrowing from China in the 1980s when it had a per capita income 40 times that of China's, while similarly, Britain borrowed a lot of money from its much poorer colonies.

Decline of Empires

The decline comes from internal economic weakness together with internal fighting or costly external fighting or both.

When debts become very large, there is an economic downturn, and the empire can no longer borrow necessary funds to repay its debts; this creates great domestic hardships.

The country must choose between defaulting on its debts or printing a lot of new money, which devalues the currency and raises inflation.

For the Dutch, this was the financial crisis brought about by financial excesses and paying for the Fourth Anglo-Dutch War. Similarly, for the British, it was paying for its financial excesses and its debts from the two world wars.

For the US, it's been three cycles of debt, finance, booms, and busts since the nineties with the central bank stepping in each time with stronger measures.

Internal Conflict

When there are bad economic conditions and living standards for most people are declining, internal conflict between rich and poor as well as different ethnic, religious, and racial groups greatly increases.

Populist leaders emerge from both sides seeking to redistribute or maintain wealth. Taxes on the rich rise during such times.

Wealth outflows reduce tax revenue leading to a classic self-reinforcing hollowing-out process.

Conclusion

This section summarizes how empires become unprofitable due to large debts with foreign lenders that boost spending power over short-term but weaken financial health over long-term. It also explains how wealth and power shifts occur when richer countries borrow from poorer ones. Finally, it discusses how internal conflict arises when there are bad economic conditions leading to political extremism that shows up as populism of left or right.

The Big Cycle

This section discusses the concept of the big cycle and how it applies to empires throughout history. It explains how internal conflict weakens an empire, making it vulnerable to external rivals, and how this can lead to great international conflict.

The Big Cycle

The big cycle is a pattern that most empires follow throughout history.

Internal conflict weakens an empire and makes it vulnerable to external rivals.

Great international conflict can arise from this vulnerability.

Defending against rivals requires great military spending, which can worsen domestic economic conditions.

International conflicts are typically resolved through tests of power.

As challenges become bolder, the leading empire must choose between fighting or retreating.

Poor economic conditions often lead to war for wealth and power.

End of Empires

Wars are costly but produce tectonic shifts that realign new orders with new realities of wealth and power in the world.

When those holding reserve currency and debt lose faith and sell them, that marks the end of its big cycle.

The US has massive debt but hasn't yet reached this point as there haven't been any wars yet.

New World Order

Out of these conflicts come new winners who restructure losers' debts and political systems to establish a new world order.

Most empires have their time in the sun before inevitably declining. Reversing a decline is difficult but possible by paying attention to vital signs.

The Future

This section discusses how to estimate the remaining years of an empire and what indicators to look for. It also explains that reversing a decline is difficult but possible.

Estimating Remaining Years

By looking at indicators, it's easy to see which stage of the big cycle an empire is in and whether its condition is improving or worsening.

These estimates aren't precise, but they can help one estimate how many years an empire has left.

Reversing a Decline

Reversing a decline requires undoing a lot that's already been done, making it difficult.

However, paying attention to vital signs can extend the cycle.

Vital Signs of Empires

In this section, the speaker talks about how one can measure the vital signs of empires and use them to increase longevity.

Measuring Vital Signs

One can measure the vital signs of empires.

It won't be precise, but it will be broadly indicative and give clear direction on steps to take to increase longevity.

A Nation's Greatest War

In this section, the speaker talks about how a nation's greatest war is with itself over whether or not it can make the hard decisions needed to sustain success.

Making Hard Decisions

A nation's greatest war is with itself over whether or not it can make the hard decisions needed to sustain success.

Two Things We Need To Do

In this section, the speaker talks about two things that we need to do as individuals and collectively in order to improve our vitals.

Two Things We Need To Do

As for what we need to do, it comes down to just two things - earn more than we spend, and treat each other well.

It's easy to measure if we're doing them. So like people who want to get fit, let's get on the program and improve our vitals. Let's do that individually and collectively.

Navigating These Times Well

In this section, the speaker shares his goal for sharing a picture of how the world works and a few principles for dealing with it well in order to help us recognize where we are and the challenges we face.

Navigating These Times Well

My goal for sharing this picture of how the world works and a few principles for dealing with it well is to help you recognize where we are and the challenges we face, and to make the wise decisions needed to navigate these times well.

Since there is a lot more to discuss and we are out of time, you can learn more in my book Principles for Dealing with the Changing World Order. And I look forward to continuing this conversation at economicprinciples.org and on social media. Thank you, and may the force of evolution be with you.