The Changing World Order

The Changing World Order by Ray Dalio

As in nature, so in economics and in politics everything happens in cycles. Ray Dalio analyzes history of more than 500 years to compare the developments that we are seeing today to the ones experienced in the past. And comes to a conclusion that there is nothing new in the developments that we are seeing today. While technologies and instruments change human psychology remains the same and continues to drive the cycles.

He identifies the following archetypical big cycle and breaks it down to 6 stages that every great World power goes through.

The 6 stages of the internal cycle are:

Stage 1, when new order begins and the new leadership consolidated power, which leads to
Stage 2, when the resource-allocation systems and government bureaucracies are build and refined, which if done well leads to
Stage 3, when there is peace and prosperity, which leads to
Stage 4, when there are great excesses in spending and debt and the widening of wealth and political gaps, which leads to
Stage 5, when there are very bad financial conditions and intense conflict, which leads to
Stage 6, when there are civil wars/revolutions which in the end leads to stage 1.

He also uses a very great analogy of why the financial conditions change so much. Imagine an example:

New Order: people are poor and they feel poor, therefore they work hard, save a lot and invest for a better day
The Rise: people get rich, but they still feel poor, that is why they continue to save and invest and avoid any form of debt
The Top: people are rich and they feel rich - spending increases, people start to take on debt and save less
The Decline: people are poor, but they feel rich - excessive borrowing and inefficiencies in economy as well as wealth gaps

In the book Ray covers in detail four great World super powers. Starting with Dutch, which were overtaken by British and then by Americans and eventually China which is on the track to overtake United States.

Ray lists 18 determinants which define if the country is successful or not. The main 5 are:

1. The cycle of good and bad finances (the capital markets cycle)

2. The cycle of internal order and disorder

3. The cycle of external order and disorder

4. The pace of innovation and technological development

5. Acts of nature

In order to deal which whatever might come Ray Dalio gives some important tips:

Know all the possibilities, think about the worst-case scenarios and then find way to eliminate the intolerable ones
Diversify
Put deferred gratification ahead of immediate gratification so you will be better off in the future
Triangulate among the smartest people possible

You will find much more interesting stuff inside the book.

The Changing World Order by Ray Dalio

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