The Changing World Order Has Just Begun | How To Prepare

What's up, guys? It's Graham here.

So throughout the last week, there's been a new topic gaining a lot of attention with over two and a half million views over these last few days. It has to do with the video posted by Ray Dalio titled Principles for Dealing with the Changing World Order. This is a 43-minute presentation about the impending downfall of every major economy as we know it, how these evolving cycles typically happen on a regular basis, why the times ahead would be radically different from those that we've experienced in our lifetimes, and how we could best prepare for what's to come based on predictable events that have happened in the past.

So let's talk about what this is, what this means for you, and my own thoughts about the changing world order coming from the CEO of the world's largest hedge fund, with over 45 years of investing experience. Right after, of course, you change that like button order by giving it a gentle tap for the YouTube algorithm and subscribing if you haven't done that already. I'll also link to Ray Dalio's full video down below in the description for anyone who wants to watch that as well.

And now with that said, let's begin.

So first, we gotta talk about what the changing world order even is because despite what some people might assume, it has nothing to do with the Great Reset, the Russia-Ukraine invasion, or even an event that's happened in most of our lifetimes. But instead, it's a repeating cycle of rise and declines since the beginning of time that all starts with this: no, it's not Benjamin Franklin; it's the US dollar.

See, Ray Dalio explains that throughout history, there's a constantly revolving changing world order between what he calls the leading economy and the rising economy, both fighting for the economic superpower of being what's known as the reserve currency. This refers to a currency that's commonly accepted around the world, and since 1945, the United States has been the reserve currency with the dollar.

When the system was first adopted, it was used as a way to keep the price of investments, commodities like oil and gas, and exchange rates stable, knowing that no matter which currency you had and held, its value was always pegged to that of the US dollar. However, as Ray Dalio points out, reserve currencies like this don't last forever, and a change occurs in what he calls the big cycle.

This starts with the new world order, which last occurred in 1945 when the United States became the reserve currency after World War II. Prior to then, that title was held by the British pound, which lasted for 105 years, followed by the French franc, then the Netherlands, then Spain and Portugal, and Venetian gold, and so on, with the understanding that reserve currencies have not lasted forever.

About every hundred years, they change, giving way to a new world order with the transition that lasts anywhere from 10 to 20 years. So what causes this, you might ask?

Well, Ray Dalio points out that this could be summarized into three segments: the rise, the top, and the decline. During the rise, after every new reserve currency, there's a period of peace and prosperity as people bet and borrow on that system continuing. This is typically marked with strong education, critical thinking, character building, and work ethic that allows for new innovation, new technologies, and other resources for a continual rise in productivity.

However, in order to finance that continued push in productivity, there must be a system in place for borrowing and allowing people from around the world to convert their currencies into investments to share in the success of making that happen. In fact, Ray Dalio points out that all of the most powerful reserve currencies followed the exact same path leading to the top.

At the peak, the growing consensus is that will people earn more as the more expensive their time becomes relative to other countries who are willing to do the same work for less. On top of that, other countries have the ability to take the blueprints from the latest innovation and then replicate the same thing for less, reducing the leading power's competitiveness.

At the same time, as people become richer, they tend to work less; their values change over generations, and as a result, they continue to borrow even more without contributing to the same innovation, leading to a growing divide between the rich and the poor over a sustained period of time.

Now, even though excess spending and borrowing is great in the short term, long term, he explains that it weakens the economy because at some point, it becomes unprofitable to sustain, and the country grows deeper into debt, potentially than borrowing money from poorer countries who are able to save more.

The tipping point, though, comes when people lose faith in the reserve currency, refuse to lend more money, and would rather sell than reinvest the profits, leading to the decline. Ray Dalio explains that during a downturn, if a country can't sustain its own debts, it needs to choose between defaulting or printing more money, and they're always going to choose printing more money.

That devalues the currency, raises inflation, and since the 1990s, the US had three occurrences where the central bank had to step in to finance an industry collapse from the dot-com bubble, mortgage crisis, and COVID shutdown.

Historically, it's said that when a government has difficulty funding itself during bad economic conditions and rising internal conflict, the rich moved their assets to places, investments, and currencies they feel the safest in, reducing tax revenue, innovation, and productivity, and giving way for other nations to eventually become the new reserve currency and the new world order.

Surprisingly, he explains that these events have repeated themselves since the beginning of the Roman Empire, and even though no two changes have been the exact same, they do contain a very similar blueprint that we could look at today to determine what might happen in the future.

For example, France held the reserve currency from 1720 to 1815. This occurred when France conquered the Netherlands and then issued their own dominant currency. However, over time, they began to run at a deficit where they spent a lot more money than they made. That led to a lowering of interest rates and then eventually reissuing even more currency when it came back to the treasury instead of destroying it.

Even though it was initially a boom to their economy, over time, it devalued their currency, and within just two years, their notes held only 82 percent of their original value. From there, within 10 years after declining economic conditions, the world had lost faith in France's reserve currency and then moved on to the British pound, which held reserve status from 1815 to 1920.

During the time that France was economically declining, Britain was quickly becoming one of the largest economies in the world. London was the center of international trade, and as a result, their currency was already being used around the world. On top of that, even though the pound was directly redeemable for gold, they also allowed the opportunity to directly invest into London and earn an interest rate, effectively making it a safe, stable store of wealth.

Although after World War One, the UK went through a time of economic depression, slowing growth, and deflation, eventually leading them to abandoning the gold standard and the eventual US reserve currency that we have today from 1944 until who knows when.

See, prior to then, the US grew to the point of becoming the world's largest economy by 1920, during a time where other countries were abandoning the gold standard to pay for World War One. By the time World War II came around, the US was in a position to supply weapons and goods that were later repaid back with gold, giving them the leverage to officially become the reserve currency as laid out in the Bretton Woods agreement in 1944.

However, the US decided to sever its ties with the gold standard during the Vietnam War, leading to a surplus of spending, borrowing, and money printing that we see today and worrying people that maybe we could see a changing world order like Ray Dalio suggests.

Objectively speaking, I have to say Ray Dalio is on point. When you look at this from his perspective, he explains that there is a measurable output for each country as a reserve, and in this case, there are eight factors to consider: education, technology, competitiveness, output, world trade, military strength, financial center, and the strength of the currency.

When it comes to this, he alludes to the concern that the United States has begun to decline from their peaks since the 1950s and now is beginning to look less appealing as China's economy begins to grow in its place. This was even seen back in 2020 when China and Russia created a financial alliance to reduce their dependency on the US dollar.

With China, for instance, as you could see since 2015, the number of settlements to the US dollar has been on a consistent decline, possibly as a result of increased tariffs on Chinese goods. On top of that, the US has seen a slight decline in its reserve currency status over the last 10 years, and the billionaire Jeffrey Gundlach said that at the same time, estimates for when China's economy will be the largest keep getting pulled forward, noting some economist projections show China's economy will surpass the US by 2028.

Now, when a Charles Schwab analyst looked at this even further, they concluded that still, the US dollar is used in 40 percent of global trades and almost 80 percent of all cross-border transactions. Overall, if there is going to be a new reserve currency, there has to be something better to take its place, of which there aren't many viable options. Even now, the US dollar is held roughly the same value since 1987, and even throughout international turmoil, it's continued to rise against other currencies as investors dive into safe haven assets.

Now, when the big picture so far, the decline that we've seen is still relatively small compared to the volume of transactions taking place in USD. However, not everybody agrees, and even though it seems like being the reserve currency is the most sought-after title while the US is at risk, it might not be on the surface.

Being a reserve currency means that the US could borrow from foreign nations, driving down interest rates and fueling more spending. But as a result, it's thought that our own products and services would be more expensive because the dollar is worth more, we'll become in effect less competitive, and as a result, unemployment will go up.

In 2016, the Federal Reserve chair Ben Bernanke said the name declining share of a growing global economy and the rise of the euro and yen means nations other than the US could also borrow at low rates. But the rising wealth of other nations doesn't spell doom for the US; it doesn't mean the US is getting poorer, just that other nations are getting richer. That was followed up by the Council of Foreign Relations, who wrote that absent a catastrophic US policy error, I would expect the dollar to remain the most powerful reserve currency for the next several decades.

Although what I did find interesting is that Senator Rand Paul suggested that Bitcoin could one day replace the world's reserve currency if people lose faith in government institutions. Even now, Bitcoin has seemed to become the default digital reserve of cryptocurrency, with nearly everything being linked back to the value of each Satoshi and countries like El Salvador who have adopted it as their own legal source of tender.

However, others counter this by saying that even though Bitcoin is decentralized, creating a reserve would elevate the importance of miners, the developers, and disruptions of protocols if there isn't a clear legal recourse.

Anyway, in terms of my overall thoughts on the changing world order, I see his point, and you can't argue with the fact that so far, we've seen a drastic change in power every 100 and 250 years since the beginning of the Roman Empire. I think it's an incredibly fascinating topic with a lot of moving parts that make it very difficult to determine whether or not this is something that could happen in a lifetime, if it's going to be gradual, if it'll be sudden, or if we could even ever see it coming.

So obviously, the fact that 80 percent of all US dollars were printed in the last 22 months, combined with 64 percent of Americans now living paycheck to paycheck, while China's economy is poised to outpace the US by 2030, isn't exactly confidence inspiring. Especially when high energy prices increase the risk of an upcoming recession. But by and large, a lot needs to happen first if and when there's going to be a new reserve currency, and notwithstanding a massive black swan event that undermines the United States role in worldwide trade, it might not happen, or it might not happen in a time that we could ever reasonably predict.

In fact, in physics, there's a term known as the observer effect, where the mere act of observing something or being aware of it diminishes its power and accuracy because you can now act on the signals. So in essence, we can now see the forces that led to the previous demises of previous reserve currencies, allowing us to act in a slightly different way to prevent that same outcome from occurring.

That's why Ray Dalio makes the mention that history doesn't always repeat itself but it can rhyme, alluding to the fact that even with all of this previous data, we have no idea what's really going to happen. So as much as I do think this has merit, over the next 100 years, realistically in the short term, it's better to focus on what you can control, making sure you save your income, have a diversified portfolio, keep a stable career, and invest consistently regardless of what happens.

That way, you're not going all in on gold for 20 years while significantly underperforming the market, but you still get to enjoy the appreciation of a global portfolio. That's the reason why I've been allocating 10 percent of my entire account to an international ETF and another five to eight percent in both Bitcoin and Ethereum because we don't know what's going to happen. Another economy could very well surpass the US, and at the end of the day, it's anyone's guess.

So yes, I do think it's something to be made aware of, but no, I do not think it's something worth worrying about. And for anyone curious, I will link to Ray Dalio's full video down below in the description for anyone who wants to give it a watch.

So with that said, you guys, thank you so much for watching. Make sure to subscribe if you haven't done that already. Also, feel free to add me on Instagram or on my second channel, The Graham Stephan Show. I'll have all the links down below in the description. Thank you again for watching, and until next time!