Ray Dalio’s Perspective on Big Economic Cycles
Curated Blocks: January 17th, 2024
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Page: Curated Book | The Changing World Order: Why Nations Succeed and Fail by Ray Dalio (2021) → BUY BOOK
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Kindle Pages: 1 - 23
Ray Dalio’s Perspective on Big Economic Cycles
In this book, Ray Dalio embarked on a journey to understand the unpredictability of the future by drawing parallels between past and present events. He begins with a profound statement, "The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history."
Dalio's approach over the past 50 years of his career has been to analyze historical events to understand the key factors that lead to the success or failure of countries and their markets. He realized that in order to effectively anticipate and manage new situations, it's essential to study historical cases that are analogous to current events. This method has provided him with principles for effective decision-making.
A few years ago, Dalio observed several major developments that, while new in his lifetime, had historical precedents. He noted the combination of substantial debts and extremely low (near-zero) interest rates, leading to the significant printing of money in the world's three major reserve currencies. Additionally, he pointed out the large political and social conflicts within countries, particularly the United States, driven by the widest wealth, political, and values gaps seen in about a century. Another significant development he noted was the rise of China as a new world power, challenging the existing dominance of the United States and the established global order.
Image: Conceptual illustration of Ray Dalio’s perspective on big economic cycles and the rise and fall of global empires.
YSyncX Illustrations: 1) The Big Cycle (typical) Behind Empire’s Rises and Declines (Ray Dalio) Cubes are placed on top of the entire length of the gradient trajectory line to signify that there are individual world empires that are rising and declining at any given point of the global cycle. 2) A Ray Dalio Cube is located at the bottom of the image. 3) The gradient trajectory line are the 6 main colors in the YSyncX universe, which is displayed in the background of the image.
Understanding these dynamics led Dalio to study the rise and fall of empires, their reserve currencies, and their markets. He sought to understand the underlying mechanics of similar historical periods, including the 1930–45 period, the ascendance and decline of the Dutch and British empires, and the rise and fall of Chinese dynasties. This study was underway when the COVID-19 pandemic struck, a significant event that, while unprecedented in his lifetime, had historical parallels. The pandemic underscored the importance of considering unexpected natural events, such as diseases, famines, and floods, which can have even more impact than the largest economic depressions and wars.
Through his studies, Dalio discovered that history typically unfolds in well-defined life cycles, similar to organisms. He viewed history as a collection of individual life stories that evolve over time, often repeating events for similar reasons. He explored how different aspects of empires, such as education, productivity, and trade, are interconnected and undergo cycles of prosperity and depression. Dalio explained, "All the empires and dynasties I studied rose and declined in a classic Big Cycle that has clear markers that allow us to see where we are in it."
He identified the Big Cycle, alternating between peaceful, creative periods and times of depression, revolution, and war. Despite the longer duration of peaceful periods, the turbulent times are crucial for societal evolution and resetting foundations. He described these periods as "like cleansing storms," necessary for eliminating weaknesses and paving the way for new beginnings.
Dalio points out that the alignment of various cycles often leads to major shifts in the world, affecting the lives of people dramatically. He notes, "when the cycles align, the tectonic plates of history shift, and the lives of all people change in big ways." These shifts can be both positive and negative, but they are inevitable and often unexpected by most people. He suggests that historical trends swing from one extreme to another, making these cyclical shifts a norm rather than an exception.
Dalio observes that most societies experience both prosperous periods and times of depression or conflict. However, people tend to expect the future to be a slightly modified version of the recent past. This expectation often leads to surprises, as significant booms and busts typically occur once in a lifetime and are thus difficult to anticipate without a deep understanding of historical patterns.
He uses personal anecdotes to illustrate this point, mentioning how his father and peers, who experienced the Great Depression and World War II, could not envision the post-war economic boom. Their experiences shaped their perspectives, making them cautious about investing in the stock market during prosperous times. Similarly, those who have only experienced debt-fueled booms might find it hard to believe in the possibility of a depression or war.
Dalio's Methodology for Forecasting Future Trends
Dalio's journey into historical analysis began with a profound experience in 1971, at the age of 22, while working on the New York Stock Exchange. President Nixon's announcement of the U.S. reneging on the gold standard and its unexpected positive impact on the stock market was a pivotal moment for him. He had never experienced currency devaluation before. This incident led him to study past instances of currency devaluations, which significantly shaped his future investment strategies.
He learned from this and subsequent experiences that "one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past." This understanding compelled Dalio to extensively research major economic and market movements over the past century in various countries, akin to a doctor studying diseases, to gain a deeper understanding of their mechanics.
Dalio developed an "archetypical sequence" of the rises and declines in wealth and power from his research. This helped him discern the cause/effect relationships driving these patterns. He then integrated these insights into algorithms at Bridgewater Associates, allowing him to monitor conditions and make informed decisions based on his template.
Through this continuous learning and adaptation, Dalio not only honed his analytical skills but also developed a sense of humility in the face of the financial world's complexities. Dalio’s perspective evolved from being overwhelmed by immediate events to understanding their patterns over time. He described this shift as moving from being "caught in the blizzard of things coming at me to stepping above them to see their patterns through time." This broader view allowed him to see the interconnectedness of various elements, particularly how economic and political cycles interact over extended periods. He believes that people often miss significant evolutionary moments in life because they experience only small fragments of the broader picture. He likened this limited perspective to that of ants, focused solely on their immediate tasks without awareness of larger patterns and cycles.
Image: Outdoor wall of art showcasing a diverse collection of paintings depicting various societal scenes, with observers engaging in reflection, symbolizing the diversity of stories in the human experiences.
YSyncX Illustrations: 1) History, Stories that repeat themselves throughout history (Ray Dalio), and Stories Cubes are located throughout the different art scenes on the wall with YSyncX space dust in the background of each cube. 2) A group of anthropomorphic YSyncX ants, a human, and an android are located on the right side of the image and are looking at the wall of art.
Through this expanded viewpoint, Dalio came to realize that history is essentially a repetition of a limited number of stories enacted by a limited number of personality types following a limited number of paths. These stories, he suggested, repeat themselves throughout history, with the only changes being superficial – the clothes characters wear, the languages they speak, and the technologies they use.
Dalio's Journey in Studying Economic and Political History
Prior to the research studies for this book, Dalio conducted numerous studies while he was head of Bridgewater Associates. His study on money and credit cycles revealed to him the long-term debt and capital markets cycle, which typically lasts about 50 to 100 years. This understanding shaped his perspective on the events following the 2008 financial crisis. He recognized parallels between the central bank actions of the 1930s and the post-2008 period, noting how these actions influenced financial markets and widened wealth gaps, leading to an era of populism and conflict.
In 2014, Dalio's research focused on forecasting economic growth rates in various countries. He studied historical cases to identify drivers of growth and developed indicators to predict countries' growth rates over 10-year periods. This study, titled “Productivity and Structural Reform: Why Countries Succeed and Fail, and What Should Be Done so Failing Countries Succeed,” provided insights into why some countries thrive while others struggle.
Following the 2016 U.S. presidential election and the rise of populism, Dalio explored these phenomena in his study “Populism: The Phenomenon.” This research highlighted the connections between wealth and values gaps, social and political conflicts, and the rise of nationalistic and protectionist tendencies in the 1930s and in the contemporary era.
Dalio also examined economic conditions across different income groups in the United States, leading to studies like “Our Biggest Economic, Social, and Political Issue: The Two Economies—The Top 40% and the Bottom 60%.” His research revealed stark disparities between the "haves" and "have-nots," contributing to the growing polarity and populism.
His interactions and research on China's economic and geopolitical shifts, especially its rise as a competitor to the U.S., informed his understanding of global power dynamics. This led to his most recent study, which forms the basis of his book, focusing on three significant forces:
1. The Long-Term Debt and Capital Markets Cycle: Dalio focused on the unique situation of historically low or negative interest rates on a massive scale of debt, as seen in 2021 when over $16 trillion of debt had negative interest rates. This scenario led to critical questions about the sustainability and future implications of such economic conditions. Dalio pondered the rationale behind holding negatively yielding debt and the limits to which interest rates could be lowered further. He questioned the actions central banks might take when interest rates could no longer be reduced and the next economic downturn occurred. Would they resort to printing more currency, thereby devaluing it? He also explored the potential consequences if investors started abandoning debt denominated in major reserve currencies like the dollar, euro, and yen, especially in a scenario where the currency's value depreciates while maintaining low interest rates. Dalio underscored the significance of the reserve currency, currently the U.S. dollar, as a cornerstone of global capital markets and economies. He contemplated the future of the dollar as the world's leading reserve currency, what might replace it, and the global ramifications of such a shift.
2. The Internal Order and Disorder Cycle: Dalio examined the current large gaps in wealth, values, and politics, which are greater now than at any other point in his life. Drawing lessons from the 1930s and other periods of high polarization, he reflected on the substantial impact of whether the left or right prevails in these divides. Dalio was particularly concerned about the potential conflicts over resource distribution during economic downturns, especially given the limitations of central banks to stimulate the economy through traditional means like interest rate cuts. He also noted that quantitative easing, while a popular tool, exacerbates wealth disparities as it tends to inflate the value of financial assets, disproportionately benefiting the wealthy.
3. The External Order and Disorder Cycle: For the first time, Dalio observed the United States facing a genuine economic rival in China, unlike the primarily military rivalry with the Soviet Union. He noted China's rapid rise in various domains – trade, technology, geopolitics, capital, and economic/political/social ideologies – and its potential to surpass or at least match the United States in global influence. Dalio expressed concern about the increasing conflicts between these two powers and speculated on how these tensions might reshape the world order in the coming years.
Dalio's research for this book spanned over 500 years, focusing on major empires and their currencies, including the U.S., British, and Dutch empires, and giving significant attention to China. He observed that great empires typically lasted around 250 years, with internal economic, debt, and political cycles lasting about 50 to 100 years.
Image: Artistic montage integrating historical icons, global landmarks, and futuristic elements around a radiant central light, representing the convergence of past, present, and future.
YSyncX Illustrations: 1) Historical Trends (Large), Universal Patterns, and Overarching Trends Cubes are swirling around circular YSyncX space vortex. 2) An anthropomorphic YSyncX lion and elephant are sitting on top of a stone ledge while a YSyncX human observes the vortex.
He concluded that to understand these large-scale historical patterns, one must look beyond the details and focus on the overarching trends. He acknowledged the challenges of comparing different countries and systems across various eras but emphasized the importance of recognizing the universal patterns that history teaches us.
Dalio delved into areas deeply studied by others and interacted with scholars and historical figures. Despite their expertise, he found that no single individual had the holistic understanding he sought. Instead, he gleaned insights from various perspectives and triangulated these with his own research. He treated conclusions as theories rather than facts, emphasizing the importance of diversification in decision-making.
The book is structured to cater to various levels of interest and understanding. Part I provides a summary of his findings in the form of an archetype of empire rises and declines, incorporating eight indices of different types of power and 18 key determinants. Part II delves into the individual cases of major reserve currency empires over the last 500 years, including the current conflicts between the U.S. and China. Part III concludes with Dalio's thoughts on the implications of his findings for the future.