TLDR;
Ray Dalio discusses the changing world order and how to anticipate the future by studying the past 500 years of history. He explains the big cycle of empires, including their rise, top, and decline, using the Dutch, British, US, and Chinese empires as examples. He emphasizes the importance of understanding the cause-and-effect relationships that drive these cycles and provides insights into the current state of the US and the potential future.
- Understanding the past is crucial for anticipating the future.
- Empires rise and fall in predictable cycles driven by internal and external factors.
- Maintaining financial health, competitiveness, and internal unity are essential for sustaining an empire's success.
How I Learned to Anticipate the Future by Studying the Past [1:33]
In 1971, the US defaulted on its debts by breaking its promise to exchange dollars for gold. President Nixon suspended the convertibility of the dollar into gold. This event led to a stock market increase of nearly 25%, which surprised Dalio. He discovered a similar event occurred in 1933 when President Roosevelt also broke the link between paper dollars and gold. This allowed the US to print more money, devaluing the dollar and causing the prices of stocks, gold, and commodities to rise. Dalio learned that when central banks print money to relieve a crisis, it's wise to invest in stocks, gold, and commodities as their value will increase while the value of paper money falls. He also highlights the importance of understanding past events to anticipate future ones, referencing the roaring twenties bubble turning into the 1930s depression and the 2007 bubble leading to the 2008 bust.
Changing Orders [8:00]
Dalio was prompted to study changing world orders due to three major events: countries lacking funds to pay debts even with zero interest rates, significant internal conflicts arising from wealth and value disparities, and increasing external conflict between a rising power (China) and the leading power (US). He notes that these events have occurred together before, often leading to changes in domestic and world orders. An order is defined as a governing system for people dealing with each other, including internal orders within countries and a world order between countries. The current world order, often called the American world order, was formed after World War II, with the US as the dominant power. The Bretton Woods Agreement in 1944 established the dollar as the world's leading reserve currency, which is crucial for a country to become the richest and most powerful empire.
The Big Cycle [11:38]
Dalio studied the 10 most powerful empires over the last 500 years and the last three reserve currencies, including the Dutch empire and the guilder, the British empire and the pound, the US empire and the dollar, and the Chinese empire and its currencies. He also examined the rise and decline of other empires such as the Spanish, German, French, Indian, Japanese, Russian, and Ottoman empires. These empires transpired in overlapping cycles lasting about 250 years, with 10 to 20 year transition periods marked by great conflict. An empire's power is measured using eight metrics: education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, the power of their financial center, and the strength of their currency as a reserve currency. Better education leads to increased innovation and technology development, and eventually the establishment of the currency as a reserve currency.
500 Years of Big Cycles [18:26]
The big cycle typically begins after a major conflict, often a war, establishes a new leading power and world order, leading to a period of peace and prosperity. People start betting on the continuation of this prosperity, borrowing money and leading to a financial bubble. The empire's share of trade grows, and its currency becomes a reserve currency, leading to even more borrowing. Increased prosperity distributes wealth unevenly, widening the wealth gap. Eventually, the financial bubble bursts, leading to money printing and internal conflict between the rich and poor, potentially resulting in revolution. As the empire struggles internally, its power diminishes relative to rising external rivals, leading to external conflicts and wars. The winners then create a new world order, restarting the cycle.
The Rise [18:45]
Successful new orders are started by powerful revolutionary leaders who win and consolidate power, establish effective systems and institutions, and pick their successors well. This leads to peace and prosperity, as the dominant leadership has broad support. Leaders must design a system to enhance the country's wealth and power, emphasizing strong education, character, civility, and work ethic. This fosters respect for rules and laws, order, and unity. Countries shift from producing basic products to innovating new technologies. For example, the Dutch became highly educated and inventive, creating ships for global trade and inventing capitalism. They enhance their thinking by being open to the best ideas globally, increasing productivity and competitiveness. Countries protect their trade routes and foreign interests by developing great military strength.
The Top [26:16]
During the top phase, strengths are sustained, but the seeds of decline are present. As people in rich countries earn more, they become more expensive and less competitive. Other countries copy the leading power's methods and technologies, reducing competitiveness. Wealthier individuals may work less, enjoy leisure, and become decadent. Values shift from those who fought for wealth to those who inherited it, making them vulnerable. People bet on continued good times and borrow money, growing financial bubbles. Wealth gaps increase as the rich use resources to reinforce their power, causing resentment among the less well-off. Having the world's reserve currency leads to excessive borrowing and large debts with foreign lenders, weakening financial health. Maintaining the empire becomes unprofitable as costs exceed revenue.
The Decline [32:01]
The decline results from internal economic weakness, internal fighting, and costly external conflicts. Debts become large, and the empire can no longer borrow to repay them, causing the financial bubble to burst. This leads to domestic hardships, forcing the country to print money, devaluing the currency and raising inflation. Internal conflict between the rich and poor increases, leading to political extremism and populism. The rich move assets to safer places, reducing tax revenue and hollowing out the empire. Governments may outlaw wealth flight, causing panic. Turbulent conditions undermine productivity, shrinking the economic pie and causing more conflict. Populist leaders emerge, challenging democracy and potentially leading to a strong leader who promises order. Internal conflict weakens the empire, making it vulnerable to rising external rivals, increasing the risk of international conflict.
The Future [39:39]
Most empires decline, and reversing this decline is difficult but possible. By monitoring indicators, one can see an empire's stage in the big cycle and estimate its remaining years. These estimates aren't precise, but the cycle can be extended by improving vital signs. A nation's greatest challenge is making the hard decisions needed to sustain success. The key is to earn more than is spent and treat each other well. Strong education, inventiveness, and competitiveness are ways to achieve these goals. By recognizing the current situation and challenges, wise decisions can be made to navigate these times well.