Book Summary: Principles for Dealing with the Changing World Order by Ray Dalio

Quick Summary: In Principles for Dealing with the Changing World Order (2021), Ray Dalio examines how and why the established world order has changed repeatedly in the past. Dalio, a renowned investor, looks at debt, rising and falling interest rates, and international power struggles. He examines the rise and fall of major empires such as the Dutch, British, American, and Chinese. Dalio offers principles based on historical lessons to help readers predict the future and act wisely.

You don’t have to read the whole book if you don’t have time. This summary will provide you with an overview of everything you can learn from this book.

Without further ado, let’s get started.

Principles for Dealing with the Changing World Order Book Summary

Studying the Future

Ray Dalio began researching events and situations that had not occurred in his lifetime but had occurred several times throughout history several years ago. He investigated the convergence of debts and zero or near-zero interest rates, which resulted in massive money printing in the world’s three major reserve currencies – first the Dutch guilder, then the British pound, and now the US dollar.

He studied major social and political conflicts between countries as well as within one country, focusing on the United States, the world’s leading power. He witnessed the rise of a new global power, China, as a rival to both the United States and the established world order. The most comparable period in recent history was the period from 1930 to 1945, when wealth, power, and the world order also shifted.

Dalio discovered that history typically repeats itself within limited cycles that resemble organisms evolving with each passing generation as he studied it. Humanity’s past and future can be thought of as a collection of stories that have evolved over time. All of the stories seem to fit together like different parts of one big story, beginning with early human history and repeating for the same reasons but in slightly different ways. He could predict what would happen in the future by studying the patterns and their cause-and-effect relationships.

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The Big Cycle

Every empire he studied rose to power and then collapsed in a Big Cycle with distinct characteristics, allowing us to pinpoint our exact location on it. The Big Cycle is divided into peace and prosperity periods and depression and revolution periods.

Dalio discovered that the most important struggle that people face in most countries is how to make, take, and distribute power and wealth, but they have also fought for other things, particularly religion. Struggles have occurred in various but timeless forms, affecting all aspects of life.

Wealthy people want to save and grow their wealth, so they work with political elites to create and enforce laws that benefit them. Today’s world is witnessing a massive shift in wealth, power, and world order, which will have far-reaching consequences for all peoples and countries. This shift is not immediately apparent, however, because most people are unable to recognize historical patterns.

A Big Cycle is made up of three major cycles: long-term debt and capital market cycles, internal order and disorder cycles, and external order and disorder cycles. The details change with different political and economic situations, but the fundamentals remain constant because human nature rarely changes over time. Humans have always had feelings of fear, jealousy, love, and greed.

Power, Wealth, Money, and Credit

It is sometimes said that “history rhymes,” because all of its major events repeat, albeit in different ways. Even though the causes and effects are the same, events unfold in different ways. It becomes easier to identify causes and effects by observing several analogous events from different times and places. We can look for the same cycle in empires and countries, just as we can study the cycle of human life from birth to death and determine how one generation affects the next. We can identify the peak and decline periods of an empire.

There is a current set of conditions at every point in history, which includes the existing domestic and global orders, as well as the timeless and universal forces that bring about change. Most people place far too much emphasis on what exists rather than on universal patterns.

Money and credit are major determinants of power and wealth, which are sought by most countries and individuals. You’ll never be able to see what’s coming your way unless you understand how money and credit work. If you talk to some of the world’s top leaders, ministers, and bankers, you’ll discover that they all have different pieces of the same puzzle that explains how the world works.

Money and credit are related to wealth, but they are not the same thing. You cannot create more wealth simply by creating more money and credit. You must be more productive in order to create more wealth. People frequently misunderstand the relationship between money, credit, and wealth creation, but it remains the primary driver of economies.

There are two kinds of economies: financial economies and real economies. Supply and demand in the real economy are determined by the amount of goods and services produced and the number of customers who want them. In the financial economy, central banks typically reduce credit to reduce real-world demand; when demand is too low, they do the opposite. Each economy is driven by supply and demand factors. Banks can control the production of services, goods, and financial assets by controlling the supply of money and credit.

The Changing Value of Money

Countries print more money to reduce their debt burdens. When given the option of allowing interest rates to rise at the expense of the economy or preventing interest rates from rising by printing more money and buying cash and debt assets, banks will choose the latter. The later this happens in the debt cycle, the greater the likelihood of a monetary collapse.

Some currency depreciations are beneficial, while others are not, but depreciation may be required to pay off debts and establish a new monetary order.

Large depreciations are not evolutionary. They happen quickly and in episodes. Many countries borrowed heavily to fund World War I, resulting in debt cycle collapses and devaluations. After the war, the Paris Peace Conference attempted to establish a new global order based on the League of Nations, but these efforts failed to prevent financial crises caused by the war’s debts. Germany, for example, faced a total collapse of the value of money, resulting in the most remarkable hyperinflation in history.

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Order vs. Disorder

Conflicts over wealth, power, ideology, and religion have had a significant impact on all aspects of human life, including taxation, economies, and how people interact with one another. They can be healthy competitions that motivate people, or they can devolve into destructive fights. Struggles can shift from productive to destructive within a cycle of cause and effect, and they can happen for similar reasons.

Countries achieve greatness by marshaling all of their resources, including their educational system, military forces, technological innovation, and economic output.

Today’s leading countries, including the United States, are in a state of chaos. The United States is going through a period of bad financial conditions and growing conflicts, but it still has many strengths, particularly in the military and technology fields. These advantages, however, are fading.

This stage usually comes after a period of excessive spending, debt, and political voids before a revolution or civil war. It does not imply that the United States or any other great country will soon face a period of massive decline or conflict, but it is necessary to recognize the indicators in order to comprehend what is happening now and what may occur in the future. Internal orders shift in accordance with phase sequences, just as any disease does. We can determine a country’s stage by examining symptoms.

The Five Categories of War

There are five types of wars between countries: economic wars, technological wars, capital wars, geopolitical wars, and military wars. Economic wars are conflicts over imports and exports, tariffs, and other policies that disadvantage a rival country.

Fights over technology are a source of concern for national security. Geopolitical conflicts are fought over territories and alliances, but they can be settled through negotiations and mutual commitments. Capital wars are conflicts characterized by sanctions and restricted foreign access. Military conflicts are physical conflicts involving armed forces and weaponry.

Almost all international conflicts fall into at least one of these categories. Even though the majority of them do not involve military action, they are all about power, wealth, ideology, or some combination of these. Wars can be contained or allowed to spiral out of control, depending on how sensitive the issue is and how powerful the opposing countries are. However, once a real military conflict begins, governments seek to weaponize all remaining war dimensions.

Central Governments and Central Banks

Different strategies are used by central governments and central banks to control market returns and the economy. Central governments can control where their money comes from and where it goes. They, however, cannot create credit or money. Central banks, on the other hand, have the ability to create money and credit, but they cannot control what money and credit become in the real economy. Central governments’ and central banks’ actions have an impact on the pricing and sale of goods, services, and assets.

When growth is stronger than expected, stock prices rise, and when both inflation and growth are stronger than expected, bond prices fall. Most investors base their decisions on both their past experiences and their history. Our decisions change when we gain a new perspective from history.

Looking back over the last few centuries, we can see that boom and bust cycles occurred frequently. Capital booms occurred several times throughout history, including the Second Industrial Revolution and the Gilded Age. These were followed by transitional periods. They eventually led to periods of conflict and economic downturn.

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Earliest Evolutions

The world was very different in the year 1500, but it functioned the same way it does now, because even though everything has evolved since then, their evolution is always the same.

Back then, the world seemed much bigger. Kingdoms existed instead of countries. Families ruled over territories. Religions and their leaders wielded more power, and today’s scientific breakthroughs did not exist. The world was also far less egalitarian.

Since 1500, the most notable changes in thinking and behavior have occurred. It is simple to identify periods of significant change because they are commonly referred to as “revolutions” or “ages.” There were many thought revolutions that brought about great evolution and progress, as well as many periods of peace and prosperity, depression, and war that brought about new orders.

The Commercial Revolution marked a shift from an economy based entirely on agriculture to one based primarily on the exchange of goods. This process began in the twelfth century. The Age of Exploration began in the 1400s, as Europeans searched the world for wealth and made contacts with various peoples. Then, in the 1500s, Protestant movements launched a revolution against the Roman Catholic Church, sparking a series of wars and upending Europe’s established order.

Great Empires

New empires rise to prominence when others falter, as the Dutch Empire did when the Habsburg Empire faltered. Charles V was the Roman emperor and ruler of the Habsburg Empire, ruling over most of modern-day Belgium, Italy, Austria, Spain, the Netherlands, and Italy.

His empire was the most powerful in Europe, but that changed in the mid-1500s, when it began its long decline and a revolution in power began. This decline occurred in a variety of ways. The have-nots began revolutions against the elites, who possessed all wealth and power. As Protestants challenged the existing system, new religious movements arose in opposition to the wealthy and powerful Roman Catholic Church.

The Dutch invented capitalism as we know it in the 1600s. It was a fantastic invention for them and the rest of the world, but it had some potentially dangerous consequences, as do almost all groundbreaking inventions. Shifts in the established world order occur when two equally powerful countries fight and one wins, establishing new rules that form the new world order.

However, before this can occur, the newly emerging country must be as powerful as the reigning country. Thus, the story of an empire’s rise begins long before it becomes a major global power, and the story of its decline continues long after it has collapsed.

The story of the British Empire began years before it became a prominent power because it needed to establish its educational and institutional strengths first in order to compete with the Dutch. Despite the fact that the Dutch empire was destroyed in the 1700s, Britain’s rise to prominence and leadership did not end until the 1800s. Napoleon, the French emperor who sought to conquer Europe and become its most powerful leader, remained Britain’s most formidable foe. His ambitions sparked rivalries among great powers, a fierce power struggle, and years of war.

At the height of its power, Britain produced more than 20% of global income and controlled more than 20% of global land. Nonetheless, it experienced significant turmoil over power and wealth.

An American Lesson

The United States, like all new countries and dynasties, went through the traditional revolution and post-revolutionary phases, during which it established new domestic orders. Organized groups led by strong leaders fought for control, and many had different ideas about how the government should function.

Nonetheless, the United States was able to establish its new orders more peacefully than other countries, thanks to negotiations, agreements, and good governance. Following the American Civil War, the Second Industrial Revolution was characterized by a peaceful pursuit of wealth and prosperity that increased incomes in England, Europe, and the United States.

Gains in the United States were financed by free-market capitalism, which created a lot of wealth but also a lot of wealth disparities. The path of the US dollar to becoming the world’s leading reserve currency was fraught with ups and downs. During the country’s early years, its financial systems were completely undeveloped.

Banks were lending far more money than they had, so they couldn’t keep their promises and eventually devalued the currency. Furthermore, the United States initially lacked a central bank capable of controlling financial markets or serving as a lender of last resort. The United States experienced numerous boom and bust cycles, some of which were characterized by debt-financed investments and credit losses.

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The Chinese Example

Unlike the cycles of the Dutch, British, and American dynasties, which began with a rise and then a decline, the Chinese cycle has been characterized by a slow decline followed by a quick rise over the last two centuries. While the Chinese order has been reversed, the cycle has been driven by the same forces.

During the war-torn 1940s and 1950s, China was at its lowest point. But then China’s educational, economic, and military systems began to improve, and its economy and trade took off in 1980. Between 1984 and 2008, debt growth followed economic growth, as quick improvements were implemented without piling up debts.

Then came the 2008 financial crisis, and China, like many other countries, relied on debt to propel its economy. As a result, debts grew in relation to income. When Xi Jinping became president in 2013, he improved China’s management of its economy, debts, innovation, technological growth, educational system, and military, but he also faced rising tensions with the United States.

China is now almost tied with the United States as the world’s leading trade, economic, and technological power, and it is expanding its military and educational capabilities. China is also becoming a more powerful financial power, but it lacks a strong reserve currency and financial center.

A Vicious Cycle

The combination of destiny and debt cycles has pushed the United States into a long-term debt cycle. In this cycle, a country has excessive debts but needs to generate a lot more debt quickly, which is impossible to do with hard currency. As a result, it must print money in order to cover the government’s deficits. Ironically, America’s political and international successes have resulted in this bad situation.

The US dollar has become the world’s leading reserve currency, allowing Americans to borrow heavily from other countries that have been left holding the debts of a debt-laden country. As a rising power, China has been attempting to amass massive amounts of the world’s reserve currency, which has compelled it to make massive loans to Americans who require so much borrowing. As a result, China and the United States have established a debtor-creditor relationship.

Knowing what changed in the past allows us to predict similar events in the future. There are numerous examples throughout history of revolutions, wars, and natural disasters that wiped out wealth, so we should always be on the lookout for signs that the same thing might happen again. Instead of being unaware and unprepared, we can protect ourselves.

The best thing you can do in the game of life is try to understand how the world works and consider possibilities, risks, and rewards in your attempts to forecast future events. The most important things in life evolve in predictable ways, so it’s not difficult to predict how they’ll be in the future as long as the game’s historical rules remain constant.

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Principles for Dealing with the Changing World Order Review

This book examines the economic history of nations and the world going back hundreds of years. Ray Dalio’s writing style is intriguing and informative, though he frequently refers to previous or subsequent chapters. Several ideas are repeated several times throughout the book, which includes graphs, charts, and tables to support Dalio’s historical lessons.

There is no way we can escape patterns and economic realities that are just about as predictable as the sun rising and setting every day.

As I don’t need additional shock at the moment, I appreciated the fact that it was written in a very matter-of-fact non-alarmist manner.

I personally do not believe that I or we can change our course in a major way. Having traveled so far along the road, there are too many irreversible realities. In preparation for a very different world, I am bracing myself and preparing my heart and mind.

About The Author

Ray Dalio has been a well-known global investor for the past 50 years. His investment career began when he was 12 years old, and his firm Bridgewater is now ranked as the fifth most important private company in the United States. TIME named him one of the 100 Most Influential People in the World.

Principles for Dealing with the Changing World Order Quotes

“History has shown that we shouldn’t rely on governments to protect us financially. On the contrary, we should expect most governments to abuse their privileged positions as the creators and users of money and credit for the same reasons that you might commit those abuses if you were in their shoes.”

 

“History has shown that we shouldn’t rely on governments to protect us financially.”

 

“no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.”

 

“While having a perfect model that gives a nearly perfect picture of that predestined future would be great, I don’t expect my model to come close to that. My goal is simply to have a crude yet evolving model that gives me a leg up relative to the competition and relative to the position I would be in if I didn’t have the model.”

 

“This leads to political extremism that shows up as populism of the left or of the right. Those of the left seek to redistribute the wealth while those of the right seek to maintain the wealth in the hands of the rich. This is the “anti-capitalist phase,” when capitalism, capitalists, and the elites in general are blamed for the problems.”

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