The Changing World Order by Ray Dalio

Introduction

• Thesis: The future will be radically different, similar to past cycles of rise and decline among major empires.
• Experience: Ray Dalio’s 50 years of global macroeconomic investing.
• Learning Approach: Studied 500 years of history to understand recurring patterns.
• Book Reference: 'Principles for Dealing with the Changing World Order'.

Personal Story (1971)

• Event: US defaulting on debts; shift in money's nature.
• Gold Standard: Paper money was exchangeable for gold; US over-issued paper money.
• Nixon's Announcement: Suspension of gold convertibility.
• Market Reaction: Contrary to expectations, the stock market rose significantly.
• Historical Pattern: Similar to the 1933 currency devaluation under Roosevelt.

Key Principles Learned

1. Central Bank Actions: During crises, central banks print money, causing stock, gold, and commodity prices to rise.
2. Studying the Past: Understanding historical patterns helps anticipate future events.

Current Global Context

• Three Issues:
  1. Countries lacking funds despite zero interest rates, resorting to printing money.
  2. Internal conflicts due to wealth and value gaps.
  3. External conflicts, exemplified by US-China tensions.
• Historical Comparison: Similar circumstances led to changing orders from 1930 to 1945.
• Defining Order: System for how people and countries govern themselves; changes often follow wars.

Examples of Internal and World Orders

• Internal Orders: Formed post-American, Russian, and Chinese revolutions.
• World Orders: US-led post-WWII order, structured by Bretton Woods Agreement establishing the dollar as the reserve currency.

Big Cycle Overview

• Historical Empires: Dutch, British, and US empires; rise and decline of currencies (guilder, pound, dollar).
• Pattern: Empires rise and fall in cycles lasting about 250 years with transition periods marked by conflict.

Metrics of Empire Power

1. Education
2. Innovation and Technology
3. Competitiveness in Global Markets
4. Economic Output
5. Share of World Trade
6. Military Strength
7. Financial Center Strength
8. Reserve Currency Strength

Typical Cycle Phases

Rise

• Revolutionary Leadership: Gains, consolidates power, establishes systems, and selects strong successors.
• Virtuous Cycles: Education → Innovation/Technology → Economic Growth → Trade → Military Strength.
• Financial Systems: Development of capital markets; reserve currency status enables borrowing.

Top

• Prosperity: Increased leisure, decreasing labor competitiveness.
• Wealth Gaps: Growing disparity between rich and poor.
• Borrowing Excessively: Leads to financial bubbles and increased reliance on loans.
• Comparative Decline: Other nations catch up technologically and become more competitive.

Decline

• Economic Weakness and Debt: Bursting financial bubbles and over-borrowing weaken economy.
• Internal Conflict: Wealth gaps lead to increased internal strife; political extremism.
• Civil and International Wars: Struggles with emerging powers, wars create new winners/losers.
• Reserve Currency Decline: Loss of confidence in currency marks end of the cycle.

Historical Examples

• Dutch Empire: Financial crisis post-Anglo-Dutch War.
• British Empire: Economic decline post-WWII despite victory.
• US Empire: Currently high debt but no major financial crisis yet.

The Future

• Indicators: Monitoring vital signs (education, debt levels, etc.) helps estimate an empire's longevity.
• Reversal of Decline: Possible through efficient management of internal factors.
• Key Takeaways:
  1. Earn more than you spend.
  2. Treat each other well.
• Call to Action: Improve personal, collective societal health and decision-making.

Conclusion

• Goal: Help understand where we are in the cycle and make wise decisions.
• Further Learning: There's more to learn in Dalio's book, 'Principles for Dealing with the Changing World Order'.
• Closing Message: Encouragement to apply evolutionary principles.