Empires rise and fall in predictable ways that follow long-established patterns.
An emerging power invests heavily in education, infrastructure and trade to create wealth, which it protects by strengthening its military. Elsewhere the current leading power grows decadent with rising wealth inequality, in-fighting and fading investments until the emerging power confronts it – and wins. War and revolution start the cycle anew.
That’s among the biggest themes from the high profile 2020 book from Ray Dalio, the founder of one of the world’s largest hedge funds: Principles For Dealing With The Changing World Order Why Nations Succeed And Fail. It’s part of the “principles” series that includes extensive independent research that Dalio’s team maintains here. He intends to look at the longest historical period possible to find patterns that can inform what happens next.
Most pressingly, he argues we’re at the late stage of the American empire, when the United States will continue to decline from its role as the world’s global hegemony and cede that position to China. I’ve been disappointed that much of his coverage has not challenged him on what seems a very big conflict of interest: Dalio is heavily invested in China, an authoritarian country that does not protect criticism, and he has been careful to avoid criticizing the party. In short, the book’s biggest flaws may be that he pulls his punches against China. Still, by using his own determinants and data, he paints a stark picture of unassailable patterns over the last 500 years up until today that looks like this:
Below I share my notes from reading the book for my future reference.
Here are my notes:
- His eight determinants of wealth and power: education, competitiveness, innovation and technology, economic output, share of world trade, military strength, financial center strength and reserve currency status (Graph from photos)
- My own thought: How much does the “American empire” include other countries that follow our culture, our military and involved in our economy?
- The rise, the top and the fall of empires: at the top, wealth gap widens (ie. network effect from rich families), workforce gets decadent and everyone takes on more debt assuming good times will keep roaring
- Aristotle said “the poor and the rich quarrel with one another, and whichever side gets the better, instead of establishing a juster popular government, regards political supremacy as the prize victory”
- Revolution often follows when (inherited) wealth gap is too wide in decline
- “The greatest challenge for policymakers is to engineer a capitalist economic system that raises productivity in living standards without worsening inequities and instabilities.” (99)
- Using market values of what one owns to measure one’s wealth gives an illusion of changes in wealth that don’t really exist
- Policymakers have 4 tools to reduce debt
- Austerity (spending less)
- Debt defaults or restructuring
- Raising taxes (to redistribute)
- Printing money to devalue it
- Printing money hurts those who hold it, though it can often boost asset prices so many diversify across these
- Rocks as a store of wealth in Germany Weimar Republic (we always seek alternative assets)
- We do not consider currency risks (devaluations) anywhere near as much as we consider asset price valuations
- “The goal of printing money is to deuce debt burdens (133)
- Dalio’s 6 stages of empire (He argues America is in stage 5; He further details these in the chart below)
- Stage 1 New World Order (The Founding Fathers)
- Stage 2 Early Prosperity establishes systems
- Stage 3 Mid Prosperity (Empires that last combat wealth inequality, reinvest in education, research and institutions)
- Stage 4 Bubble Prosperity (Empires add debt because we assume good times will last, but we move toward less productive spending, like luxury goods, than infrastructure and R&D; Military investments stay high)
- “In stage 5, moderates become the minority. In stage 6, they cease to exist“
- Aristotle said in Politics: “Those states are likely to be well administered in which the middle class is large and stronger if possible then both the other classes… Where the middle class is large they are least likely to be factions and dissensions… For when there is no middle class, and the poor or excessive and number, troubles arise in the state soon comes to an end”
- “The single most reliable leading indicator of Civil War or revolution is a bankrupt government’s finances combined with big wealth gaps.”
- “Improvements in education and infrastructure, even those financed by debt, were essential ingredients behind the rises of virtually all empires, and declines in the quality of these investments were almost always ingredients behind empires declines” (173)
- How to put cash to productive use?
- Dalio is auditioning for a job in China, on page 175 lists examples of class warfare and only mentions how Chinese are persecuted in non Chinese countries, not China’s own persecution.
- Viscount North Cliffe: publisher of popular journalism and a propagandist
- Big cycles of prosperity — like The Renaissance (1400-1600~), The Enlightenment (1685-1789) and the Industrial Revolution (1760-1840) — were interrupted by big wars, like the 30 Years War (1618-1648), Napoleonic Wars (1803-1815) and the World Wars (1914-1945)
- “Two things about war that one can be confident in is that it won’t go as planned and that it will be far worse than imagined” (196)
- Longterm success depends on sustaining both the guns and the butter without producing the excesses that lead to their declines (197)
- All markets are primarily driven by just four determinants: growth, inflation, risk premiums and discount rates
- The Ming Dynasty (1368 to 1644 A.D.) gave into its own fall by believing it had nothing else to learn from the wider world
- The Venetian florin was the closest first global reserve currency but defaulted on its early bond market by 1500 after several lost wars etc.
- The Commercial Revolution led and funded the Renaissance; China’s Neo Confucianism had already done similarly but lapsed; Spanish silver also nearly a global reserve currency as it was used in China but really Dutch guilder is first.
- Spanish Price Revolution (1520-1650~) was an inflationary period after gold and silver from conquest arrived (though others dispute the cause)
- Japanese Sakuko, the isolationist period from 1630s-1853
- The 30 Years War (1618-1648) concludes with the Peace of Westphalia , which introduced the idea of the independent nation state; the Dutch emerge as leaders.
- The Amsterdam Stock Exchange the world’s first in 1602; Bank of England’s first bond in 1694 to fund its war with France regarded as capitalism foundations (260)
- Capitalism fed the Scientific Revolution like exploration fed the Renaissance
- Congress of Vienna followed Napoleonic Wars and Napoleonic Wars led to Pax Britannica (1815-1914)
- After the Europeans invade Asia, the Meiji restoration in Japan worked but the self strengthening movement in China did not, resulting in what the Chinese call the “Century of humiliation”
- The Dutch guilder was paper money though tied to hard currency, partly why it finally became reserve currency
- England did have the natural resources of iron and coal to help its rise in cost Industrial Revolution
- Why did England, not France, lead capitalism? The Mississippi Company Bubble, and costly wars, less financial innovation than UK so tried to fund with unpopular taxes; The Enlightenment and American Revolution inspired a new assembly from the Third Estate (commoners, who once partnered with clergy and nobility to represent the “ancien regime:). King Louis shut it down, which spiraled into French Revolution, eventually Napoleon and the Napoleonic Wars. In short, no stability to become great power.
- England got “splendid isolation” and their “Imperial Century” while others weakened. (Treaties of Paris did reasonably limited damage to France territory, keeping it from going as rogue as Germany after WWI)
- “The value of assets is the reciprocal of the value and money and credit” (cheaper money, like lower interest rates, the higher assets, like stocks)
- The 1971-1991 up and down debt cycle was triggered in part by leaving the gold standard and ensuing inflation (because money was no longer tied to gold)
- Reagan’s military investments drove the Soviets who could not afford to keep up with a weak economy
- monetary policy order of stability in author’s opinion:
- 1: interest-rate driven
- 2. Printing money and buying financial assets (quantitative easing)
- 3. Fiscal and monetary: debt financed government spending and central bank buys that debt
- Chinese history in short: Tang dynasty consolidated, Song invented, Ming ditched the Mongols and Qing had a third of the world’s population before Century of Humiliation
- Chinese dynasties, like empires, last 250 years give or take 150 years, the author says
- Learning from Chinese dynasties: Revolutionary leaders consolidate power and establish a good system with relatively equal distribution and investments in infrastructure and education; over time decadence and polarization come in, weaker and weaker rulers
- Initially aligned with Stalin, after Kruschev’s death, the Soviets split with China; Mao saw the American’s hatred of Soviet as an in road to grow with America alignment
- Breaking the iron rice bowl
- Author argues longterm thinking in China comes from long history and leadership structure (in contrast with frequent American regime changes)
- Big cycle destiny led to American success, will mark its decline
- At present some American China hawks want war sooner, since the U.S. may still be stronger, andm ore than China because China is still rising (Chinese have reason to be patient)
- Chinese culture: collective stability more valuable than American individual liberty
- The Rockets Daryl Morley demonstrated Americans defending free speech and Chinese defending stability
- This author never chides China for not even letting their citizens hear criticism of their system
- “Americans might not like how the Chinese handle their human rights issues and the Chinese might not like how Americans handle their human rights issues..” (454)
- “I don’t have surveys of Chinese public opinion of the United States.” The author said … because they don’t exist right?
- Betting on things being better is pretty much a sure bet. But betting too much on that so that a bump along the way can ruin you is bad. The goal is to stay in the game
- “The Empire long divided must unite and long united must divide. Thus it has ever been.” Romance of the Three Kingdoms
- “Peace is profitable and war is costly” (480)
- “Power rules and tests of power are the ways one learns who rules.”
- Biggest part of the game is to not get knocked out: worst case scenario planning and hedge against that worst. (Eisenhower: Plans Are Worthless, But Planning Is Everything)
- A smart rabbit has three burrows
