Principles for Dealing with the Changing World Order (5-minute Version) by Ray Dalio

I studied the 10 most powerful Empires over the last 500 years and the last three Reserve currencies. It took me through the rise and decline of the Dutch Empire and the Guilder, the British Empire and the Pound, the rise and early decline in the United States Empire in the Dollar, and the Decline and Rise of the Chinese Empire and its currencies. I also examined the rise and decline of the Spanish, German, French, Indian, Japanese, Russian, and Ottoman Empires, along with their significant conflicts, as measured in this chart. To understand China's patterns better, I also studied the rise and fall of Chinese dynasties and their monies back to the year 600.

Because looking at all these measures at once can be confusing, I'll focus on the four most important ones: the Dutch, British, U.S., and Chinese. You'll quickly notice the pattern. Now, let's simplify the form of it. As you can see, they transpired in overlapping cycles that lasted about 250 years, with 10 to 20-year transition periods between them. Typically, these transitions have been periods of great conflict because leading Powers don't decline without a fight.

So how am I measuring an Empire's power in this study? I used eight metrics. Each country's measure of total power is derived by averaging them together. They are education, inventiveness and Technology development, competitiveness in global markets, economic output, share of World Trade, military strength, the power of their financial center for Capital markets, and the strength of their currency as a reserve currency. Because these powers are measurable, we can see how strong each country is now, was in the past, and whether they're rising or declining.

By examining the sequences from many countries, we can see how a typical cycle transpires. Because the Wiggles can be confusing, we can simplify it a bit to focus on the pattern of cause-effect relationships that drive the rise and decline of a typical Empire. As you can see, better education typically leads to increased innovation and Technology development, and with a lag, the establishment of the currency as a reserve currency. You can also see that these forces then decline in a similar order, reinforcing each other's decline.

Let's now look at the typical sequence of events going on inside a country that produces these rises and declines. In a nutshell, the big cycle typically begins after a major conflict, often a war, establishes the new leading power and the New World Order. Because no one wants to challenge this power, a period of peace and prosperity typically follows. As people get used to this peace and prosperity, they increasingly bet on it continuing. They borrow money to do that, which eventually leads to a financial bubble.

The Empire's share of trade grows, and when most transactions are conducted in its currency, it becomes a reserve currency, which leads to even more. At the same time, this increased prosperity distributes wealth unevenly, so the wealth gap typically grows between the rich have and the poor have-nots. Eventually, the financial bubble bursts, which leads to the printing of money and increased internal conflict between the rich and the poor, which leads to some form of revolution to redistribute wealth. This can happen peacefully or as a civil war.

While the Empire struggles with this internal conflict, its power diminishes relative to external rival powers on the rise. When a new rising power gets strong enough to compete with the dominant power that is having domestic breakdowns, external conflicts, most typically wars, take place. Out of these internal and external wars come new winners and losers. The winners then get together to create the New World Order, and the cycle begins again.