Principles for Dealing with the Changing World Order

Why Nations Succeed and Fail

Ray Dalio

• Publisher: Avid Reader Press / Simon & Schuster
• Year: 2021
• ISBN:
  9781982164799
• Topic: Économie
• Subtopic: Économie internationale

NEW YORK TIMES BESTSELLER * MORE THAN ONE MILLION COPIES SOLD "A provocative read...There are few tomes that coherently map such broad economic histories as well as Mr. Dalio's. Perhaps more unusually, Mr. Dalio has managed to identify metrics from that history that can be applied to understand today." —Andrew Ross Sorkin, The New York Times From legendary investor Ray Dalio, author of the #1 New York Times bestseller Principles, who has spent half a century studying global economies and markets, Principles for Dealing with the Changing World Order examines history's most turbulent economic and political periods to reveal why the times ahead will likely be radically different from those we've experienced in our lifetimes—and to offer practical advice on how to navigate them well. A few years ago, Ray Dalio noticed a confluence of political and economic conditions he hadn't encountered before. They included huge debts and zero or near-zero interest rates that led to massive printing of money in the world's three major reserve currencies; big political and social conflicts within countries, especially the US, due to the largest wealth, political, and values disparities in more than 100 years; and the rising of a world power (China) to challenge the existing world power (US) and the existing world order. The last time that this confluence occurred was between 1930 and 1945. This realization sent Dalio on a search for the repeating patterns and cause/effect relationships underlying all major changes in wealth and power over the last 500 years.In this remarkable and timely addition to his Principles series, Dalio brings readers along for his study of the major empires—including the Dutch, the British, and the American—putting into perspective the "Big Cycle" that has driven the successes and failures of all the world's major countries throughout history. He reveals the timeless and universal forces behind these shifts and uses them to look into the future, offering practical principles for positioning oneself for what's ahead.

PART I HOW THE WORLD WORKS

CHAPTER 1 THE BIG CYCLE IN A TINY NUTSHELL

As explained in the introduction, the world order is now rapidly shifting in important ways that have never happened in our lifetimes but have happened many times before. My objective is to show you those cases and the mechanics that drove them and, with that perspective, attempt to imagine the future.

What follows here is an ultra-distilled description of the dynamics that I saw in studying the rises and declines of the last three reserve currency empires (the Dutch, the British, and the American) and the six other significant empires over the last 500 years (Germany, France, Russia, India, Japan, and China), as well as all of the major Chinese dynasties back to the Tang Dynasty in around the year 600. The purpose of this chapter is simply to provide an archetype to use when looking at all the cycles, most importantly the one that we are now in.

In studying these past cases, I saw clear patterns that occurred for logical reasons that I briefly summarize here and cover more completely in subsequent chapters. While the focus of this chapter and this book are on those forces that affected the big cyclical swings in wealth and power, I also saw ripple-effect patterns in all dimensions of life, including culture and the arts, social mores, and more, which I will touch on later. Between this simple archetype and the cases shown in Part II, we will see how the individual cases fit the archetype (which is essentially just the average of those cases) and how well the archetype describes the individual cases. Doing this, I hope, will help us better understand what is happening now.

I’m on a mission to figure out how the world works and to gain timeless and universal principles for dealing with it well. It’s both a passion and a necessity for me. While the curiosities and concerns that I described earlier pulled me into doing this study, the process of conducting it gave me a much greater understanding of the really big picture of how the world works than I expected to get, and I want to share it with you. It made much clearer to me how peoples and countries succeed and fail over long swaths of time, it revealed giant cycles behind these ups and downs that I never knew existed, and, most importantly, it helped me put into perspective where we now are.

For example, through my research, I learned that the biggest thing affecting most people in most countries through time is the struggle to make, take, and distribute wealth and power, though they also have struggled over other things too, most importantly ideology and religion. These struggles happened in timeless and universal ways and had huge implications for all aspects of people’s lives, unfolding in cycles like the tide coming in and out.

I also saw how, throughout time and in all countries, the people who have the wealth are the people who own the means of wealth production. In order to maintain or increase their wealth, they work with the people who have the political power, who are in a symbiotic relationship with them, to set and enforce the rules. I saw how this happened similarly across countries and across time. While the exact form of it has evolved and will continue to evolve, the most important dynamics have remained pretty much the same. The classes of those who were wealthy and powerful evolved over time (e.g., from monarchs and nobles who were landowners when agricultural land was the most important source of wealth, to capitalists and elected or autocratic political officials now that capitalism produces capital assets and that wealth and political power are generally not passed along in families) but they still cooperated and competed in basically the same ways.

I saw how, over time, this dynamic leads to a very small percentage of the population gaining and controlling exceptionally large percentages of the total wealth and power, then becoming overextended, and then encountering bad times, which hurt those least wealthy and least powerful the hardest, which then leads to conflicts that produce revolutions and/or civil wars. When these conflicts are over, a new world order is created, and the cycle begins again.

In this chapter, I will share more of this big-picture synthesis and some of the details that go along with it. While what you’re reading here are my own views, you should know that the ideas I express in this book have been well-triangulated with other experts. About two years ago, when I felt that I needed to answer the questions I described in the introduction, I decided to immerse myself in studying with my research team, digging through archives, speaking with the world’s best scholars and practitioners who each had in-depth understandings of bits and pieces of the puzzle, reading relevant great books by insightful authors, and reflecting on the prior research I’ve done and the experiences that I’ve had from investing globally for nearly 50 years.

Because I view this as an audacious, humbling, necessary, and fascinating undertaking, I am worried about missing important things and being wrong, so my process is iterative. I do my research, write it up, show it to the world’s best scholars and practitioners to stress test it, explore potential improvements, write it up again, stress test it again, and so on, until I get to the point of diminishing returns. This study is the product of that exercise. While I can’t be sure that I have the formula for what makes the world’s greatest empires and their markets rise and fall exactly right, I’m pretty confident that I got it by and large right. I also know that what I learned is essential for my putting what is happening now into perspective and for imagining how to deal with important events that have never happened in my lifetime but have happened repeatedly throughout history.

UNDERSTANDING THE BIG CYCLE

For reasons that are explained in this book, I believe that we are now seeing an archetypical big shift in relative wealth and power and the world order that will affect everyone in all countries in profound ways. This big wealth and power shift is not obvious because most people don’t have the patterns of history in their minds to see this one as “another one of those.” So in this first chapter, I will describe in a very brief way how I see the archetypical mechanics behind rises and declines of empires and their markets working. I have identified 18 important determinants that have explained almost all of the basic ebbs and flows through time that have caused ups and downs in empires. We will look at them in a moment. Most of them transpire in classic cycles that are mutually reinforcing in ways that tend to create a single very big cycle of ups and downs. This archetypical Big Cycle governs the rising and declining of empires and influences everything about them, including their currencies and markets (which I’m especially interested in). The most important three cycles are the ones I mentioned in the introduction: the long-term debt and capital markets cycle, the internal order and disorder cycle, and the external order and disorder cycle.

Because these three cycles are typically the most important, we will be looking at them in some depth in later chapters. Then we will apply them to history and the present day so that you can see how they play out in real examples.

These cycles drive swings back and forth between opposites—swings between peace and war, economic boom and bust, the political left and political right being in power, the coalescing and disintegrating of empires, etc.—that typically occur because people push things to extremes that surpass their equilibrium levels, which leads to swings that get overdone in the opposite direction. Embedded in the swings in one direction are the ingredients that lead to the swings in the opposite direction.

These cycles have remained essentially the same through the ages for essentially the same reason that the fundamentals of the human life cycle have remained the same over the ages: because human nature doesn’t change much over time. For example, fear, greed, je...