Ray Dalio: The Changing World Order In 2022

Ray Dalio, he's one of the most famous investors in the world, and just a few weeks ago, he released a 43-minute summary video of his latest book, which is Principles for Dealing with the Changing World Order. But what's crazy is that video has already amassed over seven million views. So, in this video, we're going to do a bit of a time-saver summary, and then I wanted to talk about Ray's views on the declining American Empire and the rise of the new Chinese Empire.

But first, let's lay some groundwork. Let's look at what Ray Dalio describes as the big cycle of an empire. He notes that if we look to the past, we see a recurring pattern of empires rising and falling as a new world superpower emerges. The Dutch Empire fell to the British Empire, which eventually fell to the U.S. Empire, which is now declining to an emerging Chinese Empire. These cycles happen roughly once every 250 years, and there's generally a 10 to 20-year period of overlap.

To measure the rise and decline of an empire, Ray averages together eight different metrics. 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.

So, let's start with the rise of an empire, as Ray describes it. A new world power is generally established after winning a major war, so dominant new leadership emerges, which must design a new system to raise the country's wealth and power. This starts with strong education. In successful empires, the teaching of knowledge, skills, character, and work ethic leads to increased innovation and technology development. This leads to increased productivity and thus increased competitiveness globally.

This leads to an increase in economic output, which naturally leads to an increased share of world trade. Powers then look to protect their share of world trade, and they grow their military strength. This all culminates in the empire's currency being used as the world's reserve currency, which is a form of currency that is broadly accepted around the world, essentially a currency that everybody wants to use for their savings. So, it's referred to as the preferred storehold of wealth, and that enables the country to borrow extensively from around the world. They can then reinvest that money in education, infrastructure, and research and development.

But eventually, this borrowing finances less and less productive initiatives, and a financial bubble starts to form. This is where the empire hits its top. As the productive people of the country get richer and richer, that makes their time and effort cost more, and it gives an in to those in other countries who do the same work for less. Also, the technology of the superpower spreads around the world and is quickly copied by other rising powers.

Meanwhile, back in the comfort of the superpower's borders, as people get richer, they tend not to work as hard. This causes a slowdown in the superpower's productivity, a slowdown in income, and the current superpower, already swamped with spending to maintain its global over-expansion, now struggles to support itself. And so begins the decline.

Debts are large, but now the economy is struggling, and the lenders start drying up. This causes the boom times to end, and the financial bubble pops. Financial hardships cause increasing resentments between the rich and the poor, which causes an internal conflict. The country must also start to print new money to cover its debts and spending problems, which devalues the currency and raises inflation.

As the economic conditions worsen, living standards fall, and internal conflicts get more severe, culminating in some sort of revolution. And then finally, outsiders holding the reserve currency and the debt of the current power lose faith, and they start to sell. This further devalues the currency, and the empire then finally, with the empire basically on its knees, usually external emerging powers will move to seize their opportunity. Most commonly through military conflict, they will attempt to crush the declining power and replace it, and the cycle starts again with new players wearing different clothes.

So overall, that's my summary of Ray Dalio's 43-minute video on the rise and decline of empires. If you wanted to explore those steps in more detail, I would definitely encourage you to go and watch it. Spend the time; you won't be disappointed, I promise you that.

But with that foundation laid, I want to look at what Ray has been saying lately on the current changing world order. Because news flash, we're currently seeing the decline of the great American Empire and the rise of China. Ray explored this topic quite extensively, actually, in a podcast with Lex Friedman that he did late last year. I think it's fair to say that currently, Ray sees a lot of financial and social characteristics of a declining empire when he looks at the U.S. right now.

So, let's start by looking at the economic factors. What you see in the United States is that we're borrowing a lot more money, creating a lot of debt, and we're printing a lot of money. Our capacity to do that is very much limited, first of all, because when there's a sale of a bond, when the government borrows money because it spends more than it takes in, you have to sell a bond. The world right now has a lot of U.S. dollar-denominated bonds because as the world's reserve currency, they sell very poorly, and they have very bad returns—negative real returns, significantly.

So that means that more bonds have to be sold than are bought, and that means that the Federal Reserve is faced with the choice of having to raise the interest rate to curtail borrowing, which slows the economy and hurts the markets, or by filling that difference and producing money—the debt monetization—which produces inflation in goods, services, and financial assets. So in that regard, that's the United States's position. Essentially, the U.S. is spending more than it takes in, and the government needs to borrow lots of money to keep the system running.

So, they sell bonds, but now when you look at the real returns of bonds, they're absolutely rubbish; no one really wants them. The Federal Reserve has fired up the old money printer over the past few years and has bought a lot of government bonds, but the consequence of that has been this steep inflation we're experiencing. So they can't really do that money printing anymore without making a bad situation worse.

So, to control inflation, they will raise rates, which slows the economy and puts pressure on citizens and businesses in the country. Mortgages get more expensive, car loans are harder to pay back, business debts get more expensive to cover, financial conditions get tougher, and as Ray describes, these are historical characteristics of an empire in decline, which I think is really interesting.

But with that said, what's Ray's view of the situation in China? In China's case, its balance of payments is better. China has displaced the United States as the world's largest trading country. In other words, they have more exports to other countries, and as a result, they're economically competitive. But it doesn't have the world's reserve currency; it's a real blessing.

So the United States has the world's reserve currency, but it is risking it because of this imbalance. Interestingly, on the flip side, China is on the rise financially. They've just passed the U.S. in world trade, which gives them increased economic competitiveness. The only thing is, as Ray said, China doesn’t have the reserve currency, which is a huge economic advantage. It doesn’t have the global trust in that currency above all others.

But as China's share of world trade increases, they do get closer and closer to tipping the global reserve currency in their favor. It's interesting; economically, Ray essentially thinks China is on the up, and America is in decline.

But what about the social conditions within the empires? Then there's the issue of internal order. Right now, there's a lot of internal conflict in the United States, which affects how well it works. In China, there's less internal conflict because it's a more autocratic state, but also they've created this bifurcation of what is political and what is economic in terms of producing that prosperity.

So if you stay out of the politics, then you're seeing entrepreneurship, you're seeing the finances of new businesses, and so on. That internal working is subject to different people's interpretations, whether they like it or not. But the internal conflict, in terms of those kinds of measures, is less.

Now, I find this really interesting when you look at Ray's internal factors that have led to the decline of prior great empires. The U.S. is really struggling. You have the financial factors such as money printing, inflation, and higher interest rates, which are leading to a decline in living standards. I would say there is more resentment between the rich and the poor than ever before. This has caused an enormous political divide in the U.S., so much so that Americans are no longer united by dominant leadership and a common purpose.

You have literal internal conflict as a result that basically hits every social factor of a declining empire smack bang on the head. When you look to China, there isn’t as much internal conflict. Now, you can disagree with the way China goes about ensuring that, but their autocratic system does keep internal conflict to a minimum.

"I am a proud member of the Communist Party. The party is more important than the individual, and you can't argue with the facts." This has led to enormous economic strength and a rise in living standards for most people. 800 million people have been lifted out of poverty in China since the 1990s.

So, all things considered, economically, internally, socially, no doubt America is looking like a declining empire by Ray's analysis, whereas China continues to gather momentum. So, you know, is that it for America?

Well, let's listen to what Ray thinks needs to happen for America to start to turn things around. "It's most often the case that a nation's greatest war is with itself over whether or not it can make the hard decisions needed to sustain success. As for what we need to do, it comes down to just two things: earn more than we spend and treat each other well. All other things I mentioned—strong education, inventiveness, being competitive, and all the rest—are just ways of getting at these two things. It's easy to measure if we're doing them."

So, like people who want to get fit, "let's get on the program and improve our vitals. Let's do that individually and collectively, and that's what it comes down to." Great empires are defeated when they begin to wound themselves.

"I like Ray's sentiment: let's stop targeting each other. Let's work together. Let's find common purpose. Let's increase our productivity and let's enjoy the spoils together." You know, if you're ahead and you can do that, then you will stay ahead. But if you can't, then it's only a matter of time before another well-oiled empire crushes yours into irrelevance.

But with that said, guys, thank you very much for watching. Leave a like if you enjoyed. Subscribe to see more; I'll see you guys in the next video.

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