The Changing World Order by Ray Dalio

Introduction

• Times ahead will be radically different from those we've experienced, but similar to the past.
• Important lessons from history, especially about 'changing world orders'.
• Comprehensive insights available in Dalio's book.

Dalio's Personal Story

• 1971 Experience:

  • US defaulted on debts; broke promise to exchange dollars for gold.
  • Nixon removed the gold standard.
  • Stock market rose unexpectedly despite the crisis.

• Historical Parallels:

  • Similar situation in 1933 during Roosevelt's time.
  • Both events led to devaluation of the dollar and rise in the prices of stocks, gold, and commodities.
  • Lesson: When central banks print a lot of money, buy stocks, gold, and commodities.

Key Principles Learned

• Understand what is coming by studying the past.
• Events from 2008 mortgage crisis and 2020 pandemic reaffirmed lessons from history.
• These principles are significant for anticipating future economic and political shifts.

Three Big Things Leading to Study

1. Debt and Money Printing: Countries couldn't pay debts, even after lowering interest rates.
2. Internal Conflicts: Gaps in wealth and values causing political polarization.
3. External Conflicts: Rising great power (China) vs. leading great power (US).
   • Led Dalio to study 1930-1945 period for parallels.

Understanding Orders

• Order: A governing system for people within and between countries.

  • Internal orders: Constitutions.
  • World orders: Treaties.

• Orders traditionally change after wars (civil and international).

• Historical examples of new orders:

  • US (post-American Revolution).
  • Russia (post-1917 revolution and 1991 revolution).
  • China (post-1949 civil war).

The American World Order

• Formed after WWII with US as the dominant power.
• Bretton Woods Agreement (1944) established the dollar as the leading reserve currency.
• Reserve currency provides wealth and power.

The Big Cycle

• Analyzed 10 most powerful empires over 500 years:

  • Dutch, British, US, Chinese, Spanish, German, French, Indian, Japanese, Russian, and Ottoman.

• Metrics of Power:

  • Education
  • Technology development
  • Competitiveness in global markets
  • Economic output
  • Share of world trade
  • Military strength
  • Strength of financial markets
  • Reserve currency strength

• Cycle Patterns:

  • Education --> Innovation --> Economic growth --> Military strength --> Reserve currency.
  • Decline sequence follows the reverse pattern.

Phases of the Big Cycle

1. The Rise:

   • Revolutionary leader brings new order.
   • Period of peace and prosperity follows.
   • Investment in education, infrastructure, and R&D.
   • Development of lending, bond, and stock markets.
   • Leading financial centers emerge (Amsterdam, London, New York).

2. The Top:

   • Sustained strengths but seeds of decline begin.
   • Increased wealth gap and decadence.
   • Financial bubbles and over-borrowing.
   • Losing competitiveness.

3. The Decline:

   • Economic downturns, large debts, and financial bubbles burst.
   • Internal conflicts and political extremism rise.
   • External conflicts and costly military spending.
   • Potential revolutions or civil wars to redistribute wealth.
   • New rivals rise, leading to reformation or downfall of the current order.

Application Today

• US shows signs of decline but hasn't reached collapse.
• Indicators of weakening financial health and rising internal/external conflicts.
• Possible to reverse decline by focusing on two things:
  • Earning more than we spend.
  • Treating each other well.
  • Key aspects include strong education, competitiveness, and productivity.

Conclusion

• Collective history offers valuable foresight.
• Improve national 'vital signs' by making wise, difficult decisions.
• For more, consult Dalio's book on 'Principles for Dealing with the Changing World Order'.

Remember: Assess the future by understanding the past.