The current world economy and current events are unpredictable and chaotic. Many place blame on the coronavirus pandemic for one of the worst inflations the world has ever seen. But is that really the case? Ray Dalio, a renowned financial innovator does not see this as anything new. He views the status of the global economy as a pattern that has existed for the past 500 years. The billionaire founder of Bridgewater Associates, the biggest global hedge fund, explains his views in this latest book. The new book’s title is this: Principles for Dealing with the Changing World Order.
What is in Dalio’s book?
Ray Dalio shares his knowledge about the historical behaviors of four major world empires: Dutch, British, the U.S, and China. He explains how an empire forms and changes the world’s new order via the Big Cycle. Dalio has a foundation from which he bases his principles for dealing with the changing world order.
He narrates a story of what happened when he was a clerk at the New York Stock Exchange in 1971. Dalio witnessed a broke American economy for the first time. The United States had declining gold reserves and excess paper money. The president of that era had to stop the people from taking more gold in exchange for their paper money.
Back then, dollar money was like a check, and gold was the recognized currency for carrying out transactions internally and externally. After the government realized what had happened, it decided to resolve the problem by printing more paper notes. It used the paper money to buy more stocks, gold, and commodities. The value of paper money declined. The world saw the same trend after the severe economic decline of 2008. In 2020, it happened again due to the Covid 19 pandemic.
Principles of coping with the new world order
As Ray Dalio studied the trends and behaviors of the biggest world empires over the past five centuries, he recognized a surprising cycle. To make its currency the Reserve Currency an empire follows a cycle. Ray Dalio summarizes everything in a few principles and below is a brief snapshot:
The central banks print more paper currency to buy stocks, commodities, and gold.
When an empire is in total debt and lenders do not want to take the risk of lending more, it results in printing more money. As a result, the value of money drops.
To understand what is about to happen, learn what had happened in the past.
Dalio explains the phenomenon of the changing world order. He noticed three things that cause to changing world order:
Printing of more money
A growing wealth gap,
External conflicts between rival nations.
The world order entails the rules that govern countries and are in the form of a treaty. After conquering others in World War II, the United States of America became the New World Order. In 1944, they laid out the new world monetary system in the Bretton Woods Agreement. It also established the American Dollar as the world’s top Reserve Currency. Reserve Currency works everywhere on earth and propels a country to prosperity and power. Although he studied the rise and fall of the top ten world empires, Dalio focused his discussions on four of them. To measure the power of an empire, he considered eight strengths:
Education
Technology
Competitiveness in global markets
Military power
Economic output
Potential of their financial sectors and capital markets
Share of world trade
Reserve Currency
Better education leads to more innovation and technological advancements. It makes a country more competitive in the global market, gathers a larger economic output, grabs a larger share in the world trade, and eventually establishes its currency as the Reserve Currency. He explains the rise and fall of empires using the Big Cycle chart.
It starts with the rise of a New World Order, which follows a world crisis like an international war or a health pandemic. As no country can challenge the New World Order, a period of peace and prosperity follows. During this period, people continue to borrow money and provoke the occurrence of a financial bubble. As most transactions use the currency of the New World Order, its share of trade grows and eventually becomes the owner of the World’s Reserve Currency.
Simultaneously, this New World Order Empire distributes wealth unevenly. It increases the gap between the rich and the poor. So, the financial bubble explodes, causing an economic downturn and inflation. Without the means to pay its rising debts even when the interest rate is zero percent, the Empire’s treasury prints more money. Also, the internal conflicts begin between the wealthy and the poor where the latter demands the equitable distribution of wealth.
There can be civil wars that could further diminish the power of the New World Order Empire. Another empire launches an external conflict to establish itself as the New World Order. The Big Cycle ends, and another similar sequence begins.
Ray Dalio observed the same cycle for the past 500 years and is happening now between the United States and China.
The Nation’s biggest war is with itself
Another principle is that the country’s biggest war is with itself. The declining America New World Order and the Rise of China are slowly becoming a reality. In the eighties, there was no comparison between the economies of the United States and China. The former was forty times better than China.
Now the United States is borrowing more money and enlarging its national debt. By selling more bonds to other countries, the United States is getting weaker. Bonds have low real returns and now the inflation rate is higher than the bond returns. It is spending more money than it is making.
With the inflation rate higher than the returns from the United States dollar bond, the government must pressure its citizens by raising taxes, mortgage rates, etc.
China exports more commodities to other countries than the United States does. Even if China does not have the Reserve Currency, it boasts more competitiveness in the global market. Also, China has fewer internal conflicts right now than the United States.
Solving the Decline
Ray gives two principles to help shift the declining trend of the United States as the New World Order:
Make more income than we are spending - The principle that could help save the decline in the United States Empire is to earn more money than our expenditures. Ray Dalio says this is possible if those in charge can detect where we are in the Decline Chart and take steps to increase longevity.
Treat each other well – After restructuring our incomes and expenditures, the next thing to do is to treat each other with respect.
By reading his book, you can see how he has eloquently discussed each principle. You can find out more about why China is coming close to being the next New World order and how the U.S could prevent this from happening. Ray Dalio believes that the U.S could persist and retain the New World Order title much longer. Below is great clip that brings this to life.
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