Changing World Order
Ray Dalio

Summary

The history of the rise and fall of empires written by one of the world's great investors. Think this will be the most important book to understanding the next decade. Expect a lot more turmoil going forward and Dalio lays out why based on the patterns of history.

Rating: 5/5

Notes

Time’s ahead will be different than those experienced in our lifetimes, though similar to many times in history

Big cycle moves between peace and prosperous periods to depression/revolution/war

When cycles align, tectonic plates of history shift and lives of all people change in big ways

The swinging of conditions b/w one extreme to another is the norm, not the exception

The future we encounter is likely to be very different than what most expect

No system of government, economic system, currency or empire lasts forever yet almost everyone is surprised when they fail

Currency devaluations can increase stock markets

We are like ants pre-occupied with our jobs of comparing crumbs in our brief lifetimes instead of having a broader perspective on big picture patterns and cycles, how they interrelate, where we are in the cycle and what comes next

3 major forces: end of long term debt cycle and printing money, internal and external disorder and rising power (China)

When wealth and value gaps are large and there is an economic crisis, it is likely there will be a lot of conflict on how to divide the pie

To see the big picture, you can’t focus on the details

The people who have wealth own the means to wealth production and work with people in political power to set the rules

All turbulent times are produced by conflicts (wars/revolutions) or severe acts of nature (drought, flood, pandemics)

Humanity’s power to adapt and get to higher levels of well being is greater than the bad stuff thrown at us

Key 8 strengths: education, competitiveness, innovation/technology, economic output, share of world trade, military strength, financial centre strength, reserve currency status

Rise starts with a strong education system

When there is an economic downturn, the country can default on its debts or print money

• They always print money which devalues the currency and raises inflation

Poor economic conditions cause more fighting for wealth and power which leads to war

Bad periods of destruction typically take 10-20 years

2 other major forces: pace of innovation and technological development and acts of nature like draughts, floods and disease

Real wealth (real goods) does not equal financial wealth

Wealth = power but wealth decline = power decline

To be successful, one must earn an amount equal to what one spends

The degree of inventiveness and innovation in a society is the main driver of its productivity

Societies that draw on people for their merits instead of privilege are more successfully sustaining

If you don’t understand how money and credit works, you don’t know how the system works

All entities deal with the same basic financial realities and always have

Debt eats equity

Biggest problem now is debts for most people are very large relative to their assets

Crises that occur during long term debt cycles happen once in a lifetime

When currency devalues, stocks go up as you need more currency to buy the same asset

All currencies devalue or die and when that happens, cash and bond holders are wiped out

Risk in holding lots of cash in currencies at the end of the long term debt cycles

To be successful, the system has to work for most people including the large middle class

Toxic mix: people/country in bad financial shape, large income/wealth/values gaps and an economic crisis (America?)

Signs of decline: populism, class warfare, loss of truth in public domain

Watch for rogue police forces as sign of massive decline

When in doubt, get out

Civil wars inevitably happen, be aware

People who lead revolutions are middle class intellectuals from good backgrounds

Almost all civil wars have foreign interference in them

International relations is driven by raw power dynamics

War won’t go as planned and will be far worse than imagined

Have power, respect power and use it wisely

During periods of economic distress and large wealth gaps, there are typically revolutionary large redistributions of wealth

In war, one’s ability to withstand pain is even more important than one’s ability to inflict pain

All markets are driven by four determinants: growth, inflation, risk premiums and discount rates

3 risks investors face: portfolios won’t provide returns needed to meet their spending, their portfolios could be ruined and large share of wealth taken (higher taxes)

The Dutch invented capitalism as we know it. Great for the Dutch and world but brought potentially deadly consequences

Before all-out wars begin, there is usually a decade of skirmishing

Transactions b/w countries are different than those within countries

The value of assets is reciprocal of the value of money and credit (if money is cheap, assets are expensive)

Wealth and income gaps are largest since the 1930s

Growing inequality of fiscal problems are critical drivers of empires’ decline

If you see capital controls in a certain currency, run from that currency

Conflicts produce struggle but struggle means progress

During crises, autocratic instead of democratic leaders are preferred

The technology war b/w the US and China is the most important

Our greatest war is with ourselves because we have the most control over how strong or weak we are

The future will be much different than you expect it to be

All empires decline and new ones rise to replace them

Next big risk point around 5 years from now

Know all the possibilities, think about the worst case scenario and find ways to eliminate the intolerable ones

Put deferred gratification ahead of immediate gratification so you will be better in the future

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