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Ray Dalio Commentary- The Changing World Order Chapter 1: The Big Picture in a Tiny Nutshell

This chapter gives my description of the cause-effect relationships behind the archetypical rise and decline of the most powerful empires. It is my distillation of the dynamics I saw in studying the three reserve currency empires (the Dutch, the British, and the American) and the six other significant empires (Germany, France, Russia, India, Japan, and China) over the last 500 years, as well as all of the major Chinese dynasties back to the Tang Dynasty around the year 600. Besides seeing wealth and power shifts we see notable shifts in all dimensions of life, including technology, culture, and the arts. These individual case studies will be provided in Part 2. By going back and forth between this archetype and those cases, you will be able to see how the individual cases fit the archetype (which is essentially just the average of those cases) and how well the archetype describes the individual cases.


As I explained in the introduction, I'm on a mission to figure out how the world works and to gain timeless and universal principles for dealing with it well. It's both a necessity and a passion for me. While the curiosities and concerns that I described earlier pulled me into doing this study, the process of conducting it gave me a much greater understanding of the really big picture on how the world works than I expected to get. It made much clearer to me how peoples and countries succeed and fail over much bigger swaths of time, and it revealed giant cycles behind these ups and downs that I never knew existed.

Though the big picture synthesis that I'm sharing in the tiny nutshell that is this chapter is my own, you should know that I didn't come up with it without a lot of help. It came from my last 18 months of learning, which was the result of triangulating with remarkably informed scholars and practitioners, reading great history books by insightful authors, doing a lot of original source research with the help of my remarkable research team, and reflecting on the prior research I've done and the experiences that I have from investing globally over nearly 50 years. Still, even with all that help, drawing conclusions about the timeless and universal forces that have driven the successes and failures of countries through time is an audacious, humbling, and necessary endeavor that I can't be sure that I got exactly right. Still, I'm pretty sure that it's by and large right, and I know that what I learned is essential for me to anticipate rather than be surprised by critically important events that have never happened in my lifetime but have happened repeatedly throughout history. My goal in presenting this to you is simply to pass along what I learned for you to assess for yourself.

The Countries Shown in This Study

To be clear, the leading powers covered in this study aren't necessarily the best-off countries for two reasons. First, while wealth and power are what most people want and will fight over most, some people and their countries don't think that these things are most important and wouldn't think of fighting over them. For example, those who believe that having peace and savoring life are more important than having a lot of wealth and power wouldn't think of fighting hard enough to gain enough of the wealth and power to make it into the group included in this study. Second, this group of countries excludes what I will call the "boutique countries" (like Switzerland and Singapore), which score very high in wealth and living standards but aren't large enough to become one of the biggest empires.

How Their Wealth and Power Was Obtained

Let's start with the big picture basics. Throughout recorded history various forms of groups of people (e.g., tribes, kingdoms, countries) have gained wealth and power by building it themselves and/or taking it from others. When they gathered more of it than any other group, they became the leading world power and then determined the world order. When they lost that power--which has been true of every past empire--the wealth, power, and world order changed in very big ways that had big effects on economies, markets, and all aspects of life. In this chapter we will examine how a number of forces come together to determine the ebbs and flows of this cycle, causing the archetypical empire's wealth and power to rise, be sustained, and then decline.

Productivity is the force that causes the world's total wealth, power, and living standards to rise over time as people learn how to do things better. As we will see, productivity is upward trending because over time learning is gained more than lost, though it rises at different rates for different people for understandable reasons such as education, work ethic, the rate of development of new techniques and technologies, etc. These reasons are important for policy makers to understand in order to achieve the best possible outcomes for their countries and for investors and companies to understand in order to determine where the best long-term investments are. While significant, these learnings and productivity improvements are evolutionary so that they are not what cause big shifts in who has what wealth and power.

The big swings in wealth and power are caused by a number of things, most importantly money and credit cycles, though I have identified 17 in total. These big forces generally transpire in classic cycles that are mutually reinforcing in ways that tend to create a single very big cycle of ups and downs that has played out repeatedly throughout history. This big archetypical cycle governs the rising and declining of empires, which influences everything about them including their currencies and markets (which I'm especially interested in). As with the archetypical debt cycle I outlined in Principles for Navigating Big Debt Crises, this archetypical cycle represents the typical one that we can compare others to, including the one that we are now in. With that perspective in mind, we can attempt to squint into the future.

As of this writing, we are seeing all of these 17 forces in play, most importantly the debt cycle, the wealth gap cycle, and the global geopolitical cycle. As mentioned in the introduction, we recently hit 0% interest rates while having large amounts of debt in an economic downturn. This is leading to the creation of massive amounts of more government debt that central banks are printing money to monetize at the same time as there are big political and values gaps within countries, and there is an emerging world power (China) challenging the leading world power (the United States). While this sort of configuration of events has not happened in our lifetime, it has happened many times in history (most recently in the 1930-45 period). For reasons I will explain in this study, I believe that we are now seeing the archetypical big shift in relative wealth and power and, with this shift, we are seeing a profound shift in the world order that will affect all countries.

This big shift is not obvious because, while it is evolving at a fast pace, it is not happening in an abrupt way that bangs us over the head with its obviousness and because most people haven't paid attention to the patterns in history so that they can put where we are in perspective. So in this first chapter, I will describe in a very brief way how I see the archetypical mechanics behind rises and declines of empires and their markets working.

To See the Big Picture, You Can't Focus on the Details

While I will attempt to paint this big sweeping picture accurately, I can't paint it in a precise way, and, in order for you to see it and understand it, you can't try to do so in a precise way. That is because we are looking at evolution over long time frames. To see it, you will have to let go of the details. Of course, when the details are important, which they often have been, I will go from the very big, imprecise picture to a detailed one.

Looking at what happened in the past from this very big picture perspective will radically alter how you see things. For example, because the span of time covered is so large, many of the most fundamental things that we take for granted and many of the terms we use to describe them did not exist over the full period of time. As a result, I will be imprecise in my wording so that I can convey the big picture without getting tripped up on what might seem to be big things but in the scope of what we are looking at are relative details.

For example, I wrestled with how much I should worry about the differences between countries, kingdoms, nations, states, tribes, empires, and dynasties. Nowadays we think mostly in terms of countries. However, countries as we know them didn't come into existence until the 17th century after Europe's Thirty Years' War. In other words, before then there were no countries--generally speaking, though not always, there were kingdoms instead. In some places, kingdoms still exist and can be confused with being countries, and some places are both. Generally speaking, but not always, kingdoms are small, countries are bigger, and empires are biggest (spreading beyond the kingdom or the country). The relationships between them are often not all that clear. The British Empire was mostly a kingdom that gradually evolved into a country and then an empire that extended way beyond England's borders so that its leaders controlled broad areas and many non-English peoples. It's also the case that each of these types of singularly controlled entities--e.g., countries, kingdoms, tribes, empires--controls its population in different ways, which further confuses things for those who seek precision. For example, in some cases empires are areas that are occupied by a dominant power while in other cases empires are areas influenced by a dominant power that controls other areas through threats and rewards. The British Empire generally occupied the countries in its empire while the American Empire has controlled more via rewards and threats--though that is not entirely true, as at the time of this writing the US has military bases in 70 countries. So, though it is clear that there is an American Empire, it is less clear exactly what is in it. Anyway, you get my point--that trying to be precise can stand in the way of conveying the biggest, most important things. So in this chapter you are going to have to bear with my sweeping imprecisions. You will also understand why I will henceforth imprecisely call these entities countries, even though not all of them were countries technically speaking.

Along these lines, some will argue that my comparing different countries with different systems in different times is impossible. While I can understand that perspective, I want to assure you that I will seek to explain whatever major differences exist, that the timeless and universal similarities are much greater than the differences, and that to let the differences stand in the way of seeing those similarities that provide us with the lessons of history we need would be tragic.

The Evolution and the Cycles Around It

As mentioned earlier, over long periods of time we evolve because we learn to do things better, which raises our productivity. Over the long run, learning produces productivity gains and that is the most important force, though over the short run the swings around this uptrend are most important. This is conveyed in the below chart, which shows estimated output (i.e., estimated real GDP) per person over the last 500 years. As shown from this

top-down, big picture perspective, output per person appears to be steadily improving though very slowly in the early years and faster after around 1800 when the slope up becomes much steeper, reflecting the faster productivity gains. This shift from the slower productivity gains to faster productivity gains was primarily due to the improvements in broad learning and converting that faster learning into faster increases in productivity. That was brought about by a number of factors going as far back as the invention of the printing press in Europe in the mid-15th century (it had been used in China substantially earlier), which increased the knowledge and education available to many more people and contributed to the European Renaissance, the Scientific Revolution, the Enlightenment, and the First Industrial Revolution in Britain. That broader-based learning also shifted wealth and power away from 1) an agriculture-based economy in which agricultural land was the primary source of wealth and power that supported the monarchies, nobles, and the church, who owned the land and worked together to maintain the power system that allowed them to have the wealth and power to 2) an industrial-based economy in which inventive capitalists created and owned the means of production of industrial goods and worked together with those in government to maintain the power system that allowed them to have the wealth and power. In other words, since the Industrial Revolution, which brought about that change, we have been operating in a system in which wealth and power have primarily come more from the combination of education, inventiveness, and capitalism, with those who run governments working with those who control most of the wealth and education. While there have been deviations away from capitalism to communism (which didn't work in the forms that have been tried) and socialism (which is essentially a hybrid wealth and opportunity distribution system that people can debate the merit of), the process of having educated people come up with innovations and own the means by which they are turned into production and of allocating resources and rewarding people by profit making (i.e., capitalism and government systems that work symbiotically with it) has been the formula for success.

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Underneath this relatively smooth upward trajectory of productivity are the turbulent times that include booms, busts, revolutions, and wars. Because these turbulent times are small in relation to the evolutionary uptrend, they show up in the chart as relatively minor wiggles. Yet these wiggles seem very big to us because we are so small and short-lived. Take the 1929-45 depression and war period, for example. To us around 15 years seems like a long time and the swings within it seem enormous. The chart below shows the part of the prior chart that represents that 17-year period. As you can see, during the Great Depression period real output per person declined first by about 10%, which was followed by a recovery. The US stock market fell by 85%. Then the depression period was followed by a war that raised output of things that were used in the war. Much of this equipment was blown up, so it would be a misnomer to call the war years a "productive period" even though when measured in output per person, it was. And at the end of the war, global GDP per capita fell by about 12%, much of which was driven by declines in the economies of countries that lost the war.

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While the first charts I just showed you are for the whole world (to the best of our ability to measure it), they don't show the shifts in wealth and power that occurred between countries. The chart below shows you the relative wealth and power of the 11 leading empires over the last 500 years.[1] Each one of these indices of wealth and power is a composite of eight different measures that I will explain shortly. Though these indices aren't perfect because all data through time isn't perfect, they are excellent in painting the big picture. As you can see, nearly all of these empires saw periods of ascendancy followed by periods of decline. The thicker lines are the four most important empires: the Dutch, British, American, and Chinese. These empires held the last three reserve currencies--the US now, the British before it, and the Dutch before that. China is included because it has risen to be the second-most powerful empire/country and because it was so consistently powerful in most years prior to around 1850. To very briefly summarize what the chart shows:

  • China was dominant for centuries (consistently outcompeting Europe in goods trade), though it entered a steep decline starting in the 1800s.

  • The Netherlands, a relatively small country, became one of the world's great empires in the 1600s.

  • The UK followed a very similar path, peaking in the 1800s.

  • Finally, the US rose to become the world's superpower over the last 150 years, though particularly during and after WWII, and is now in relative decline while China is catching up once again.



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The next chart is the same chart going back to the year 600. I included the one above because it is simpler, though with 11 countries, 12 major wars, and over 500 years, it can hardly be called simple. The one below is more extensive. I left out the shading of the war periods to lessen the confusion. As shown, in the pre-1500 period, China was almost always most powerful, though the Middle Eastern caliphates, the French, the Mongols, the Spanish, and the Ottomans are also in the picture.

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Continue reading here.

This article first appeared on GuruFocus.


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