Ray Dalio The changing world order

Ray Dalio The changing world order

This is my short summary of Ray Dalio changing world order book that he published on his website https://www.principles.com/

If you want to read the full book i will post a link to the files on the bottom of the page. Its an eye opening read.

I believe that the times ahead will be radically different from the times we have experienced so far in our lifetimes, though similar to many other times in history.

I believe this because about 18 months ago I undertook a study of the rises and declines of empires, their reserve currencies, and their markets, prompted by my seeing a number of unusual developments that hadn’t happened before in my lifetime but that I knew had occurred numerous times in history.

Ray Dalio

Ray Dalio says that we have:

-The long term debt cycles (50-100 years)
-short term debt cycles (7-10 years).
This is where recessions happen. like in the year 2020, 2008, 2000, 1989, etc. Notice how they get bigger and bigger as we move towards the end of the long term debt cycle.

Typically debt crises occur because debt and debt service costs rise faster than the incomes that are needed to
service them, causing a deleveraging. While the central bank can alleviate typical debt crises by lowering real and
nominal interest rates, severe debt crises (i.e., depressions) occur when this is no longer possible.

In the short-term debt cycle, spending is constrained only by the willingness of lenders and borrowers to provide
and receive credit. When credit is easily available, there’s an economic expansion. When credit isn’t easily available,
there’s a recession. The availability of credit is controlled primarily by the central bank. The central bank is
generally able to bring the economy out of a recession by easing rates to stimulate the cycle anew. But over time,
each bottom and top of the cycle finishes with more economic activity than the previous cycle, and with more
debt. Why? Because people push it—they have an inclination to borrow and spend more instead of paying back
debt. It’s human nature. As a result, over long periods of time, debts rise faster than incomes. This creates the
long-term debt cycle.

During the upswing of the long-term debt cycle, lenders extend credit freely even as people become more
indebted. That’s because the process is self-reinforcing on the upside—rising spending generates rising incomes
and rising net worths, which raises borrowers’ capacities to borrow, which allows more buying and spending, etc.
Most everyone is willing to take on more risk. Quite often new types of financial intermediaries and new types of
financial instruments develop that are outside the supervision and protection of regulatory authorities. That puts
them in a competitively attractive position to offer higher returns, take on more leverage, and make loans that
have greater liquidity or credit risk. With credit plentiful, borrowers typically spend more than is sustainable,
giving them the appearance of being prosperous. In turn, lenders, who are enjoying the good times, are more
complacent than they should be. But debts can’t continue to rise faster than

These big cycles were comprised of swings between 1) happy and prosperous periods in which wealth is pursued and created productively and those with power work harmoniously to facilitate this and 2) miserable, depressing periods in which there are fights over wealth and power that disrupt harmony and productivity and sometimes lead to revolutions/wars.

This Study & How I Came to Do It

Studying money and credit cycles throughout history made me aware of the long-term debt cycle (which typically lasts about 50-100 years), which led me to view what is happening now in a very different way than if I hadn’t gained that perspective.  For example, before interest rates hit 0% and central banks printed money and bought financial assets in response to the 2008-09 financial crisis I had studied that happening in the 1930s, which helped us navigate that crisis well.  From that research, I also saw how and why these central bank actions pushed financial asset prices and the economy up, which widened the wealth gap and led to an era of populism and conflict.  We are now seeing the same forces at play in the post-2009 period.

The confluence of these three factors piques my curiosity and most draws my attention to similar periods such as the 1930-45 period and numerous others before that. More specifically, in 2008-09 like in 1929-32, there were serious debt and economic crises.  In both cases, interest rates hit 0% which limited central banks’ ability to use interest rate cuts to stimulate the economy, so, in both cases, central banks printed a lot of money to buy financial assets which, in both cases, caused financial asset prices to rise and widened the wealth gap.  In both periods, wide wealth and income gaps led to a high level of political polarization that took the form of greater populism and battles between ardent socialist-led populists of the left and ardent capitalist-led populists of the right.  These domestic conflicts stewed while emerging powers (Germany and Japan in the 1930s) increasingly challenged the existing world power.

As I studied these factors, I knew that the short-term debt cycle was getting late and I knew that a downturn would eventually come.  I did not expect the global pandemic to be what brought it about, though I did know that past pandemics and other acts of nature (like droughts and floods) have sometimes been important contributors to these seismic shifts.

To gain the perspective I needed about these factors and what their confluence might mean, I looked at the rises and declines of all the major empires and their currencies over the last 500 years, focusing most closely on the three biggest ones: the US empire and the US dollar which are most important now, the British Empire and the British pound which were most important before that, and the Dutch Empire and the Dutch guilder before that.  I also focused less closely on the other six other significant, though less dominant, empires of Germany, France, Russia, Japan, China, and India.  Of those six, I gave China the most attention and looked at its history back to the year 600 because 1) China was so important throughout history, it’s so important now, and it will likely be even more important in the future and 2) it provides many cases of dynasties rising and declining to look at to help me better understand the patterns and the forces behind them.  In these cases, a clearer picture emerged of how other influences, most important technology and acts of nature, played significant roles.  From examining all these cases across empires and across time, I saw that important empires typically lasted roughly 250 years, give or take 150 years, with big economic, debt, and political cycles within them lasting about 50-100 years.  By studying how these rises and declines worked individually, I could see how they worked on average in an archetypical way, and then I could examine how they worked differently and why.  Doing that taught me a lot. My challenge is in trying to convey it well.

Link to download the full book:


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