“I believe that the times ahead will be radically different from the times we have experienced so far in our lifetimes.”
Ray Dalio
“I believe this because about 18 months ago I undertook a study of the rises & declines of Empires & their markets prompted by my seeing several unusual developments that hadn’t happened before in my lifetime but that I knew had occurred numerous times in history.”
Ray Dalio
This is how Ray Dalio starts off his study on the changing world order based on where we are in terms of the cycle & where we are going.
Where We Are Now
- In terms of the Empire & the markets currently, we are in a very unique period in terms of a cycle where three key ingredients are taking place.
- First is the high level of debt & low interest rates. Second is large wealth gaps & political division. Third is a rising world power which is China. During this period we are in, we have seen it numerous times throughout history.
- 1930 to 1945 was a very similar situation to the one we currently are in now. It’s what caused Dalio to enter a transition phase of 10 to 20 years of change between economic & political cycles. Throughout history, power changed between nations.
The History of Power Play
- If we go far back in the day China was a major force that then started to decline in the 1600s & they lost their title to the Netherlands, a country that was small but still became the dominant power. Then in the 1800s, the United Kingdom was a major force that took over the world. Finally over the past 150 has been the United States. Essentially what Dalio is trying to say here is that Empires inevitably rise & then they fall.
Empires Rise & Fall
When an Empire is descending we generally see a couple of things. Strong & capable leadership accompanied by strong education & ability to teach. A strong work ethic is taught in the family & school.
We see low-corruption people working well together united by trying to improve & grow. When these things have aligned this results in strong income growth, higher productivity, a good system for allocating resources, and strong equity currency & credit markets.
In the 1900s we rarely saw the USA building & growing all of these things tremendously. But eventually, things got overdone and the seeds of decline started to creep in. Dalio gives some high-quality examples of what happens at the top phase of an Empire before it crumbles.
So what happens as the countries that become most successful get their ways of being successfully copied by other countries?
British shipbuilders copied the Dutch back in the day or the Chinese copied the Americans. Because copying takes less time & costs less than inventing the smaller Empire’s gain on the large Empire. Another example of when you’re at the top of an Empire is when those who become richer work less hard.
Another thing that happens when an Empire reaches its peak is larger wealth gaps where the wealthy work to maintain the system in the benefits it brings. While other segments of the population lag. This continues to go on & so the split becomes too large & so it is deemed unfair. As Dalio points out, it’s an issue right now in the USA.
Decline Phase
- So, what happens here is debts become extremely large & central banks lose their ability to stimulate the economy, wealth & value gaps grow big, and the rich fear that their money will be taken away, so, they then move out/move their money out of the country.
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