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

The world order has changed numerous times in the past and will continue to do so—so argues Ray Dalio in Principles for Dealing with the Changing World Order, in which he explains how he makes sense of human history in order to anticipate what’s coming next. Having studied the rises, peaks, and falls of over a dozen major empires, Dalio argues that history “rhymes” and that we can learn to recognize where we are in its repeating cycles. With that knowledge, we can make better decisions in life, business, and investing.

Dalio is an American billionaire investor and founder of Bridgewater Associates. Our guide explains his principles for understanding the large-scale patterns of cause-and-effect that drive history as well as his predictions for what’s next—which chiefly concern the unfolding relationship between the US, a major power on the decline, and China, a major power on the rise. In commentary, we explore additional perspectives on the patterns of history, and we offer numerous real-world examples of the concepts Dalio discusses.

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Civil character weakens: Among the wealthy “haves,” people have become used to wealth and leisure—used to living the good life. Born into prosperity, they don’t care for the hard work it takes to maintain it and are unprepared for challenging economic and political circumstances. At the same time, the “haves” use their power to influence the political system to advantage themselves and their children. This exacerbates the growing gaps in values and wealth between them and the “have-nots,” fueling resentment along class divides.

(Shortform note: A real-world example of this is the Ivy League, a group of colleges in the United States that often favor “legacy” students and exclude applicants who don’t come from elite social classes. As William Deresiewicz argues in Excellent Sheep, this actually worsens educational quality and perpetuates social inequality by segregating the rich from the poor and funneling the children of elite families into positions of power and influence, regardless of merit.)

The empire becomes unprofitable: Finally, large empires become unprofitable. The cost to maintain military protection of dominance over trade routes and geopolitical positions becomes a net loss of capital; and holding the reserve currency often leads a power’s leaders to slacken up on financial discipline. Major actors tend to borrow in excess and build up large debts to foreign lenders.

Eventually, funds run dry and the power struggles to finance itself. At this point, wealthy investors who remain mobile tend to exit their investments. In other words, they move their wealth out of holdings in the major power’s currency and businesses. This capital flight further weakens the economic bases of the power.

(Shortform note: Military protection of trade routes isn’t the only way an empire can lose economic power. The Spanish empire of the 16th and 17th centuries is largely considered to have begun its decline after the defeat of the Spanish Armada, a naval fleet with which it had attempted to conquer England. Combined with expensive domestic problems such as plague and a declining population, this defeat spelled the looming end for the Spanish.)

Third, Empires Unravel and End

After rising, then peaking and beginning to slow, a power tilts toward a fall. Weakened by a declining civil society and eroded financial, political, and military strength, the major power typically goes through a period of internal disorder. In turn, this can catalyze external disorder—change on the world stage, between powers—if the power doesn’t restabilize. Most often, Dalio says, falls lead to violent revolutions and new orders.

(Shortform note: Two examples of unraveling empires are Rome in the mid 400s AD and the West (Europe and the US) today. As Peter Heather and John Rapley argue in Why Empires Fall, both empires display remarkable parallels in how, after long periods of prosperity and wealth accumulation, their middle classes weakened, quality of life went down, their militaries shrank, and their wealthy chose to move money elsewhere. While the Western Roman Empire did collapse, it remains to be seen whether the United States can stabilize and persist.)

The catalyzing event is often an economic crisis. When large debt burdens coincide with an economic downturn, a power can find itself in financial as well as sociopolitical crisis. If the country can’t pay off its debts, it has to either default or print large amounts of money. According to Dalio, it usually chooses the latter. (Shortform note: The United States has weathered two major recessions in recent years: The 2007-2009 Great Recession and the Covid-19 Recession in 2020. They saw massive contractions in economic activity and the loss of many jobs, and while the US has recovered from both, experts suggest the possibility of another recession in 2024.)

Printing large amounts of money causes inflation, which, in turn, devalues a currency and brings about economic hardship. When this hardship coincides with the gaps in wealth and values that became apparent during the peak, a power can experience harsh political conflict. In many cases, populism rises up. Populist leaders appeal to the values of the disenfranchised have-nots, and they sometimes try to reform the existing order to redistribute wealth from the rich to the poor.

(Shortform note: Viktor Orban, the long-time prime minister of Hungary, is a prime example of a populist leader who rose to power during economic hardship. He was first elected in 2010, on the heels of economic recession in Europe, and has remained popular by appealing to nationalist sentiment, using propaganda, and wielding us-versus-them narratives against migrants and the EU.)

Wealthy people want to hold onto their wealth, so they often leave nations that try to serve the general population more than the rich. To avoid high taxes or more extreme redistribution measures, they reinvest, move their holdings into different currencies, and relocate. As wealth floods out from a major power’s borders, its economic base grows even weaker. Dalio says that the government may close the borders to prevent capital flight. Meanwhile, prevailing economic hardship means that productivity continues falling, so less new wealth gets generated and there’s less to go around.

(Shortform note: In The Divide, Jason Hickel explains that today, wealthy individuals and corporations use a global network of tax havens, which includes countries like Ireland, Samoa, and Hong Kong, to covertly move and store wealth. This allows them to avoid taxes, extract profits from foreign nations, and, as Dalio says, to exit nations that don’t serve their interests. These outflows are often illicit, and they tend to impoverish the nations they flee from because money moved covertly can’t be taxed and reinvested in those nations. Recent trends also indicate that US millionaires are increasingly seeking secondary citizenships so that if need be, they can move more easily between their home country and others in Europe and elsewhere. )

In this increasingly impoverished and disordered situation, autocratic leaders often emerge to take control, promising order and restoration (think of Adolf Hitler’s seizure of power in Germany, at the time a poor and conflicted country in the years between World War I and World War II). This often leads to outright conflict that escalates into revolution—sometimes peaceful, but most often violent—after which the winners create a new economic and political system, and the cycle begins anew.

(Shortform note: One such leader was Francisco Franco, Spain’s 20th-century dictator who grabbed power with a military coup that took advantage of Spain’s fragmented political situation in the 1930s. In the midst of partisan conflict and through the ensuing civil war, Franco succeeded with help from Hitler’s Germany—a characteristic example of the violent revolution and subsequent creation of a new system that Dalio describes above.)

The Three Dimensions of Dalio’s Model

Now that we’ve established the overarching pattern of causes and effects that Dalio describes, we’ll explain the key takeaways from the financial or economic dimension (how economies cycle), the sociopolitical dimension (how societies cycle), and the geopolitical dimension (how international world systems cycle) of this model.

The Financial Dimension: Credit, Debt, and Economic Cycles

First, Dalio explains that all economies go through debt cycles that typically last around 50-75 years. In other words, an economy cycles through phases of increased debt and credit use, or leverage, and phases of lessened debt and credit use, or deleveraging. Expansion and contraction are both natural and inevitable: Major powers go through periods of prosperity and periods of austerity, and this reflects in their economy. Debt and credit enable wealth building and prosperity, but because people tend to overextend financially, contraction always follows expansion.

For instance, recall how in 2008, the US housing market ballooned during a period of seeming prosperity—banks handed out big loans left and right. But when the bubble burst and many borrowers couldn’t pay off their debts (not to mention that many of the loans were predatory) a number of major banks ended up defaulting and needing bailouts from the US Federal Reserve.

(Shortform note: While cycles of contraction and expansion may be natural, G. Edward Griffin argues in The Creature from Jekyll Island that the US Federal Reserve artificially amplifies these cycles by allowing fractional lending. Fractional lending is a banking practice wherein banks can lend out 10 dollars on every one they keep in reserve. Griffin argues that this worsens economic cycles because it allows for exponential increases and decreases of the money supply. In other words, it makes the economic rollercoaster much steeper.)

According to Dalio, this oscillation between expansion and contraction of an economy is a natural feature of economic systems and has occurred throughout history. He explains that the most recent cycle began in 1945, when the US-led world order took over after WWII. A major power often experiences several of these economic cycles before a final, major downturn contributes to its demise.

(Shortform note: According to Dalio’s timings, the most recent debt cycle in the US should have begun in the late 1990s or mid 2010s. Back in 1997, two experts argued that the US was in fact in the midst of a major economic boom that would continue rising into the 2020s, around the midpoint of what would be the current cycle, using Dalio’s timings. Today, we’d be in around that midpoint, and debt does appear to be on the rise, as the cycle would suggest.)

The Sociopolitical Dimension: Internal Cycles of Harmony and Disharmony

As these economic cycles unfold, a major power’s civil society develops in particular ways. That society is organized as a sociopolitical system made of spoken and unspoken rules and norms that govern how large groups of people work and live together.

Just like economies, societies fluctuate between periods of harmony and periods of disharmony. At times, people generally get along and work well together, and at other times, discord, strife, and conflict tend to arise between classes within a society.

Dalio describes societies as progressing through three stages of building harmony, wherein people cooperate and economic activity flourishes, and three stages of increasing disharmony, wherein civil society degrades and falls apart.

Most sociopolitical cycles end in violence, such as civil war or revolution, which are an inevitable fact of life, Dalio argues. This is because any society benefits a certain small class over most others (such as how capitalism privileges those who own the means of production), so the unprivileged majority eventually becomes dissatisfied with the status quo. Conflict breaks out over values, how to distribute wealth and power, and who should be in charge. Generally, a revolution succeeds when it yields broad economic prosperity for the previously unprivileged.

(Shortform note: The Russian Revolution, a period of intense social unrest and eventually violent conflict in early 1900s Russia, exemplifies Dalio’s cycles of harmony and disharmony. Prior to the 1900s, the Russian Empire had, since the 1700s, exerted relatively nominal control over its various subjects and had multiple popular monarchs who presided over long periods of expansion and prosperity. But later, after a 1905 defeat in the Russo-Japanese War as well as the domestic unpopularity of Russia’s participation in WWI, workers strikes in Petrograd in 1917 snowballed toward violent conflict and the eventual fall of the monarchy.)

The Geopolitical Dimension: External Cycles of Peace and Conflict

Much like a major power’s internal society, there’s an international order between different world powers. According to Dalio, it also follows a six-stage cycle that progresses through times of peace (building, growing, peaking) and times of conflict (overextending, declining, and dissolving through revolution or war). However, while a nation can structure its society through enforceable laws and punishments that guide citizens’ behavior, there is no broadly enforceable legal system on the international scale. Instead, the major powers, with their large militaries, tend to act in their own interests. For instance, entities like the UN can’t outright control the US, which holds dominant military and economic power.

(Shortform note: Jason Hickel argues in The Divide that one way major powers assert their interests is through violent coups. Specifically, he discusses how in the 1970s and 1980s, the United States and some European countries intervened in countries such as Iran and Guatemala to remove leaders who didn’t serve their interests and to place Western-friendly dictators in positions of power. Ostensibly to fight communism, Hickel says that these interventions were in fact made in service of corporate interests, such as those of the United Fruit Company (in Guatemala) and British Petroleum (in Iran).)

Instead, only other powerful countries can exert influence on one another, like how the US and China must acknowledge one another as rival actors. And, Dalio suggests, wealth and power accumulate on the global scale much like they do within a nation. Mirroring the cooperation of wealthy individuals within a nation, wealthy nations tend first to seek win-win relationships to establish a geopolitical system that benefits them both. However, Dalio says they always devolve into conflict—typically when an ascending power wants to take the reins from a declining power. He describes five kinds of conflicts, ranging from economic fights over trade and tariffs, fights over access to technologies such as computer chips, disputes over borders and territories, conflict over international debt, credit, and bank access, and finally violent conflict, or “hot” war.

If violent war breaks out, the powers that “win” get to determine the new international order. For instance, the winning nations of WWI created the League of Nations, a short-lived international system that attempted to prevent another brutal, global-scale war.

(Shortform note: In recent history, the conflict between Russia and Ukraine is one prominent example of the descent of a geopolitical cycle into outright conflict. Some experts say that the conflict is the cumulation of decades of expansion of the North Atlantic Treaty Organization (NATO) into formerly Soviet territories—in other words, Ukraine became the flashpoint of a larger conflict between Western Europe and Russia, with Russia’s Putin intent on restoring Russia’s former control over Ukraine. Although the war likely won’t result in a total restructuring of the world order, Western relations with Russia are unlikely to return to normal, afterward.)

Dalio’s Predictions: The US Weakens, China Strengthens

With Dalio’s main models and concepts covered, we’ll end this guide by discussing his thoughts on anticipating the future. Specifically, we’ll discuss his predictions regarding the United States and China as the two major powers to watch on the global stage, and we’ll explain how to prepare for an ultimately uncertain future.

The US and China: Four Factors to Watch

To anticipate what’s next in the world’s cycles, Dalio asserts that you must watch for the signals that indicate what major shifts will most likely occur. He calls back to four key concepts: human inventiveness and the three dimensions of the main pattern.

Human Inventiveness

Human inventiveness: Given the many spectacular inventions of the past—from electricity to vaccines—and due to advances in AI and quantum computing, Dalio is optimistic about human progress continuing. The US and China will lead this progress, as both have productive, innovative workforces and economies.

(Shortform note: Another major country to watch is India, which some experts argue is perhaps the most important emerging world power. With the world’s largest population and a unique position as a longstanding voice for the Global South since prime minister Jawaharlal Nehru’s cofounding of the Non-Aligned Movement during the Cold War, India can’t be overlooked.)

Debt and Economic Cycles

Debt and financial cycles: Dalio says the US Dollar is in decline as a reserve currency, as the US is late in its cycle as a major power. High US debt will likely lead to the dollar weakening, whereas China has moderate debt and the renminbi (China’s currency) is on the rise.

(Shortform note: While China’s economy is large, powerful, and growing, the renminbi does not yet have a strong position as a reserve currency. As of 2024, the Euro, British pound, and Japanese yen all trail the dollar yet surpass the renminbi in average international usage.)

Sociopolitical Cycles

Sociopolitical cycles: According to Dalio, the US shows strong signs of internal turmoil and may be heading toward more serious fragmentation. Increasing levels of political polarization, values gaps, and financial uncertainty mean that the US could descend into a period of possibly violent restructuring—Dalio suggests a 30% chance of a civil war-like event within 10 to 15 years.

However, he also argues that the US has weathered more political turmoil than most empires do, having persisted through 250 years that saw a civil war, multiple major depressions and world wars, and other major civil conflicts. While Dalio says it would be difficult—given the US’s high international debt, weakened political standing, and high levels of internal conflict—the country could manage by recognizing the decline and aiming for a nonviolent restructuring.

(Shortform note: Various experts and pundits have long thrown around rhetoric to the effect that “the West is in decline,” and that may be true, at least in part. However, John Rapley, one of the authors of Why Empires Fall, argues that the United States, which helms the Western world order, isn’t doomed to disappear. Rather, he says that while America can’t return to the heights of global dominance it held in the decades following WWII, the nation still has abundant power in the form of its huge capital reserves, advanced military, extensive alliances, and cultural soft power. Rather than attempt another era of “America First,” Rapley says that the United States can remain powerful through cooperation and coalition-building with other major world powers.)

China, on the other hand, is presently in a period of peace and prosperity. They have relatively strong economic fundamentals (low debt, high productivity) and a strong civil society with low conflict over values and wealth distribution. While he doesn’t go into great detail, Dalio expresses optimism about China.

(Shortform note: In contrast to Dalio’s assertion that China boasts strong civil society, other experts say that Chinese civil society struggles to define itself as fully apart from the government. In one example, domestic non-governmental organizations (NGOs) tend to end up as governmentally organized NGOs, or GONGOs, since China’s government doesn’t often sanction organized activity that’s outside party control.)

Geopolitical Cycles

In the global order, Dalio explains that the US and China are the two major powers to watch. He contends that they’re engaged in four of the five types of war: Economic, technological, geopolitical, and capital conflicts (explained earlier). For instance, both countries have long been engaged in tense diplomacy regarding activities in the South China Sea. These conflicts will intensify as China becomes more competitive as a global power.

Additionally, the US military remains the strongest in the world. However, China’s is nearly comparable and is growing, particularly across Asia—from the Koreas and Southeast Asia to India and Pakistan. Dalio estimates a 35% chance of a hot war within 10 years, and he says it would likely break out over Taiwan, a major pain point between the two powers. If we’re lucky, he says the tenet of “mutually assured destruction” may prevent outright military conflict on a global scale.

(Shortform note: In recent years, US-China relations have been fraught with tension over Taiwan, the world’s largest manufacturer of semiconductors and therefore a massive economic asset, as well as over a military arms race and looming elections in Taiwan. During the Trump administration, US-China relations deteriorated, and while the Biden administration has been more diplomatic, no major issues have been solved. China’s intent to expand its nuclear arsenal remains a prominent concern for the US, and the possible reelection of Donald Trump in the US’s 2024 elections could also spell a return to deteriorating diplomacy.)

Dalio On How to Prepare for the Future

Though he expresses confidence in the above predictions, Dalio also recommends learning how to deal with what you don’t know. He stresses that all of these indicators and predictions are, in the end, educated guesses, and that we can’t predict everything. While history does “rhyme” in some ways, it’s also full of unpredictable happenings, such as the industrial and microcomputing revolutions as well as major political revolutions, like the movement away from feudalism and toward modern democracy.

To deal with unpredictability, Dalio says you must expect to be surprised and, when you are, be ready to adapt. While he doesn’t explain exactly how to do this (that’s the difficulty with unpredictable events), he advises that you stay aware of major political and economic trends around the world so that you can adapt when major events begin to suggest themselves.

(Shortform note: Here, Dalio’s thinking dovetails with that of Nassim Nicholas Taleb, who writes in The Black Swan that history is rife with unpredictable events that massively impact human society. Black Swans, Taleb says, are unpredictable by nature—they’re the things that we don’t know we don’t know. Even experts, he says, struggle to predict them more accurately than regular people.)

In addition to good guesses, Dalio explains how to make good decisions in the face of uncertainty:

• Prepare for the worst. Based on the probable futures his model predicts, Dalio stashes backup funds in safe accounts or in physical stores like precious metals. This ensures he can provide for his family if things go south politically, economically, or otherwise.
• Diversify your bets. Develop a portfolio that isn’t limited by boundaries between industries or borders—invest in multiple countries and in multiple sectors of the economy. Be prepared to move your money across borders if need be.
• Learn from the smartest people you know. Look for others who anticipate the future, and discuss your principles and ways of thinking with them. This way, you’ll enrich one another’s mental models and can improve your bets together.

(Shortform note: Continuing the parallels between Dalio and Taleb’s view, Taleb offers similar yet distinct strategies to prepare for uncertainty. Chiefly, he recommends that you don’t bother trying to predict the future. Instead, he says you can prepare for the effects of Black Swan events by being proactive and sociable (others may be able to help you), which will increase your chances of benefiting from positive Black Swans, and by balancing a small amount of risky investments with a large amount of safer investments, which will create the potential for big wins but keep your money generally safe. He also suggests distinguishing between “positive” and “negative” Black Swan areas, so that you can decide where best to take risks with your money.)

Last, Dalio gives a general recommendation that we bet on things getting better. While major periods of downturn and destruction could happen in our lifetimes—wars, natural disasters, and major restructurings of the world’s systems have all been common in the past—things also tend to improve. Human life has steadily improved throughout history, Dalio says, and human inventiveness will continue to drive that positive evolution.

(Shortform note: One prominent expert who shares Dalio’s view is Steven Pinker, a Harvard professor and author of books including Enlightenment Now, in which he argues that the quality of life for humans today is better than it’s ever been. More specifically, he argues that the progressive ideals and values that emerged during the European Enlightenment of the 17th and 18th centuries have revolutionized human civilization and will continue to improve life around the world.)