Principles for Dealing With the Changing World Order

Ray Dalio, founder of the investment firm Bridgewater Associates, draws on roughly 50 years of experience as a global macro investor to argue that the world is entering a period of radical change driven by forces that, while unprecedented in most people's lifetimes, have occurred many times throughout history. He identifies three converging developments: massive debt creation with near-zero interest rates and money printing in major reserve currencies (currencies widely accepted worldwide for transactions and savings, such as the US dollar); large wealth, political, and values gaps within countries, especially the United States, comparable to those of the 1930s; and the rise of China as a rival power challenging the US-led world order. These forces, he contends, follow predictable patterns visible across centuries of history.

Dalio presents his model of the "Big Cycle," a recurring pattern in which empires rise and decline over roughly 250 years. He identifies eight key determinants of national power: education, competitiveness, innovation and technology, economic output, share of world trade, military strength, financial center strength, and reserve currency status. These factors rise and fall in a predictable sequence, with education and innovation leading the way up and reserve currency status persisting long after other measures have declined. The Big Cycle moves through three broad phases. During the Rise, countries have low debt, small wealth gaps, effective education, and strong leadership. During the Top, excesses accumulate as debt grows, wealth gaps widen, and competitiveness erodes. During the Decline, governments print money to service unsustainable debts, internal conflict intensifies, populist leaders emerge, and external rivals challenge the weakened power.

Dalio expands this framework by identifying 18 total determinants organized into tiers. The "Big Five" most important forces are the debt/money/capital markets cycle, the internal order/disorder cycle, the external order/disorder cycle, the pace of innovation, and acts of nature such as droughts, floods, and pandemics. He argues that human capital, including character, self-discipline, and civility, is the most sustainable source of strength, allowing small nations like the Netherlands and England to achieve great wealth and power. Class struggles recur throughout history as a small elite controls most wealth in symbiosis with political authority, and periodic revolutions redistribute it.

The debt and capital markets cycle receives extensive treatment. Dalio traces how monetary systems repeatedly cycle through three types: hard money (metal coins with intrinsic value), paper money linked to hard assets, and fiat money (government-issued currency with no intrinsic backing). The long-term debt cycle, typically lasting 50 to 75 years, begins with little debt and hard money, progresses through expanding credit and debt crises that force governments to break the link to hard money, and ends with fiat currency debasement and a flight back to hard assets. Of roughly 750 currencies that existed since 1700, only about 20 percent remain, and all have been devalued. Dalio also addresses investing, arguing that most investors base expectations on a survivorship-biased view of winners like the US and the United Kingdom; extending the analysis to 1900 across 10 major powers reveals that seven experienced near-total wealth destruction at least once.

The internal order/disorder cycle progresses through six stages over roughly 100 years, from the consolidation of a new order after revolution through peace and prosperity, then excess, intense conflict, and eventually civil war or revolution. Dalio places the United States in Stage 5 at the time of writing, characterized by bad financial conditions, large wealth gaps, populism and extremism, the collapse of media trustworthiness, and the erosion of respect for rules and norms. The external order/disorder cycle operates through five types of conflict between nations: trade/economic wars, technology wars, capital wars, geopolitical wars, and military wars. Dalio stresses that international relations are governed by raw power rather than law and that the greatest risk of military war arises when two powers have roughly comparable strength and irreconcilable differences. He presents World War II as a case study, tracing how the 1929 crash led to the Great Depression, which produced populist and autocratic leaders, a decade of escalating economic warfare, and finally shooting wars that devastated the losing powers.

Dalio applies his framework to the last 500 years, beginning with the Dutch Empire. The Netherlands gained independence from Habsburg Spain in 1581 and rose through superior education, inventiveness, and the invention of capitalism, including the first publicly listed company (the Dutch East India Company), the first stock exchange, and an innovative banking system that made the guilder the first global reserve currency. The decline followed the classic pattern: The British overtook the Dutch through the Industrial Revolution, military overextension drained finances, and the Fourth Anglo-Dutch War (1780-84) dealt the fatal blow when the Bank of Amsterdam printed money to rescue the failing Dutch East India Company, triggering a bank run.

The British Empire rose through parliamentary rule of law, Enlightenment-driven education, centralized fiscal authority, and the Industrial Revolution. After defeating Napoleon, Britain established a new world order at the Congress of Vienna (1814-15), ushering in the Pax Britannica, a roughly century-long period of global dominance and relative peace in which Britain produced over 20 percent of world income and controlled 40 percent of global exports. The decline came through eroding competitiveness as Germany and the United States surpassed Britain in the Second Industrial Revolution, extreme wealth inequality, and the devastating costs of two World Wars. The pound's reserve currency status eroded through suspended convertibility in 1947, a 30 percent devaluation in 1949, and another devaluation in 1967.

The United States rose through strong education, the Second Industrial Revolution, and profiting from both World Wars. By 1945, the US held two-thirds of the world's government gold and established the Bretton Woods system, an international monetary agreement that made the dollar the world's reserve currency linked to gold. Excessive spending on military and social programs eroded the balance of payments, and in 1971 President Richard Nixon severed the dollar's link to gold. The period from 1990 to 2008 saw globalization, digitalization, and debt-financed booms, during which a symbiotic relationship developed with China: China manufactured goods cheaply and lent the US money to buy them. The 2008 financial crisis pushed interest rates to zero and led to massive money printing, which raised asset prices and widened wealth gaps. President Donald Trump's 2016 election reflected populist resentment against globalization and elites, and the COVID-19 pandemic in 2020 triggered unprecedented stimulus. Dalio assesses the US as roughly 70 percent through its Big Cycle, with congressional party-line voting at record levels and ideological gaps between parties at the widest ever measured.

China's major dynasties followed the same internal order cycle. The Tang Dynasty (618-907) produced about 150 years of peace and prosperity, while the Song Dynasty (960-1279) was the most innovative economy in the world, inventing paper money. Each dynasty declined through growing inequality, monetary problems, and internal conflict. After a steep decline from approximately 1840 to 1949, known as the Century of Humiliation, when European powers exploited a weakened Qing Dynasty, Mao Zedong, China's Communist leader, consolidated power and built the country's institutional foundation, though devastating episodes like the Great Leap Forward caused an estimated 16 to 40 million famine deaths. Deng Xiaoping, the post-Mao reformist leader, introduced market reforms beginning in 1978 while maintaining Communist Party control, transforming China from 90 percent poverty to rapid growth averaging 10 percent annually. Under Xi Jinping, China's current president, the country has accelerated economic development, built leading technologies, and consolidated political control while encountering growing conflict with the United States. Since 1978, China's output per person has increased 25 times.

Dalio examines US-China relations through the lens of five types of war already underway. The technology war is the most serious, as China produces roughly three times as many science, technology, engineering, and mathematics (STEM) graduates as the United States and leads in some dimensions of artificial intelligence (AI) and quantum computing. Taiwan is the most dangerous sovereignty issue: China considers reunification non-negotiable, while the US not fighting to defend Taiwan would signal American decline in the Pacific. The dollar's reserve currency status gives the US enormous power through sanctions, but excessive money printing and the development of alternatives threaten that status. Dalio estimates the probability of a major military war in the next 10 years at roughly 35 percent.

Looking ahead, Dalio argues that evolutionary trends in productivity and technology will continue upward, but converging cycles pose serious risks. He expects advances in AI and quantum computing to produce potentially the greatest shift in wealth and power in history. At the same time, reserve currency debts are too large to repay in hard money, the US faces roughly a 30 percent chance of civil-war-type dynamics within 10 years, and US-China conflict is intensifying across multiple domains. His assessment of 18 determinants across 11 countries shows the US as the most powerful (empire score 0.87 out of 1) but declining, with China close behind (0.75) and rising quickly. Computer-generated growth projections place India highest at 6.3 percent annual real growth, followed by China at 4.3 percent, with the US at 1.1 percent. Dalio concludes that the most important war for both countries is internal: the struggle to maintain the strengths, including education, sound finances, and national unity, that make a country powerful.