How To Prepare For The Changing World Order - Ray Dalio

Dalio opens by conceding that his forecasts about America and the global economy have been uncomfortably accurate: watching events unfold, he says, is like watching the same movie over and over. His explanation is methodological rather than prophetic. In roughly 55 years as a global macro investor he learned that many of the things that surprised him had never happened in his own lifetime, so whenever he saw them he went back into history and studied earlier periods; studying the Great Depression, he says, allowed him and his colleagues to anticipate the 2008 financial crisis.

From that method he isolates three large developments that did not occur in his lifetime but did occur between 1930 and 1945. The first is the creation of enormous amounts of debt combined with the printing of money to pay for it, with the resulting effects on inflation and growth. The second is internal conflict over the largest wealth and values gaps since that period, together with the rise of populism on both right and left. The third is the rise of a rival great power — China challenging the United States, with Russia in the picture — producing international great-power conflict on a scale not seen since the Depression era.

He then adds two further factors that he says he paid more attention to because of their large effects. One is acts of nature — droughts, floods and pandemics — which he claims killed more people and toppled more empires than the political and economic forces. The other is cumulative learning and new technology, which raises living standards, per-capita income and life expectancy. Those five factors, in his telling, combine in patterns seen before to produce the big cycle.

The scope of the underlying research is deliberately long: he studied the last 500 years because these big cycles run about 75 years, give or take 50, citing the rise and decline of the British Empire and of debt as examples. The material was published in a book and in an animated video, The Changing World Order. His stated motive is partly generational — at 74 he wants to pass along what he considers valuable — and he is explicit that the purpose is to show cause-and-effect relationships rather than to issue a prophecy.

Asked how likely a dollar meltdown is, Dalio declines to give a probability; he says he does not want to overdo it or jump to conclusions, and that his goal is to show how the machine works. He then reframes the question: holding dollars means holding a debt instrument, because countries hold dollars in the form of debt. The accumulation is a consequence of America's postwar position as the largest trading country and dominant empire, and of large deficits that had to be funded by selling dollar-denominated debt to foreigners, banks and others.

The mechanism that follows is a creditor's arithmetic. An owner of dollar debt needs an interest rate high enough to more than compensate for inflation. At the same time, he argues, heavy new issuance, a large existing stock and international sanctions — which freeze dollar-denominated debt — have all reduced demand for that debt, as have foreign concerns about what is happening inside the United States. The visible result is more transactions in other currencies, and, he adds, people then want to save in the currencies they pay in.