Book Review: Principles for Dealing with the Changing World Order – Ray Dalio

“Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail” is authored by legendary investor Ray Dalio. Ray, the author of the #1 New York Times bestseller Principles, has spent half a century studying global economies and markets.

Principles for Dealing with the Changing World Order examines history’s most turbulent economic and political periods to reveal why the times ahead will likely be radically different from those we’ve experienced in our lifetimes—and to offer practical advice on how to navigate them well.

John Sim, Certified Financial Planner and a member of the Financial Planning Association of Singapore (FPAS), shares his thoughts on the book in this book review and summary.

We are in unprecedented times and the world is in severe turmoil, both geopolitically (US vs China, Russia-Ukraine war) and economically (COVID-19, inflation).

How can we safely navigate these periods of uncertainty? One possible way is to look to history.

That is the idea behind Ray Dalio’s book and the source of today’s book review: Principles for Dealing with the Changing World Order. Ray Dalio is the founder & co-Chief Investment Officer of Bridgewater Associates, the largest hedge fund in the world.

Here are 2 quotes that succinctly summarise the key idea behind the book:

History does not repeat itself, but it rhymes.

Mark Twain

Those who do not learn from history are doomed to repeat it.

Winston Churchill

Ray explains that many of the major economic and geopolitical events we are experiencing today catch us by surprise because we have not experienced them in our lifetime.

However, if we look back into history, we will see very similar patterns of event play out, over and over again.

So, if we want to know how to navigate these turbulent times successfully, we need to study history, to learn the lessons from past mistakes.

History Rhymes

The author reviewed 500 years of history to understand how different empires rise in power and the possible causes of their eventual decline.

What he found were surprisingly similar series of events that repeated through the rise and fall of these empires.

The author proposes a framework for evaluating the relative strengths of these countries. The evaluation criteria are:

• Leadership Capabilities. The ability of the nation’s leadership to make good decisions and to resist the temptation of taking the “easy road” while making the necessary tough decisions.
• Education Levels. The emphasis of the nation’s leadership and people to invest in education.
• Character / Determination of Population. This refers to the population’s propensity to work hard and treat each other well.
• Rule of Law. The development and enforcement of rule of law, property and civil rights.
• Corruption. The level of corruption in the nation. Lower levels of corruption lead to better outcomes.
• Resource Allocation Efficiency. The nation’s ability to organize and deploy its resources and includes the development of its capital markets.
• Openness to Global Thinking. How well the nation is able to interact, influence, and be influenced by other nations.

Together, these traits build on and reinforce each other, leading to an upward trajectory of that nation’s relative power and status. The author then focuses his analysis on the 3 most recent nations to reach “superpower status”, namely the Dutch, the British and the Americans.

The Big Cycle

The book then goes into more detail to describe the stages that a country goes through, called the Big Cycle.

The individual stages can further be grouped into 3 broad phases:

• The Rise
• The Top
• The Decline.

The Rise

In the initial phase of the Rise, the rest of the world recognises the rise of this new superpower and its dominance; a New World Order is established.

This superpower enjoys a period of Peace, Prosperity and Productivity. It starts by establishing various systems, institutions and investments in education and the development of civil society. This leads to respect for the rule of law and the people working towards a common purpose.

This eventually leads to high innovation and technological advancement, making this nation the most productive and competitive in the world.

As it trades with the world, it increases its military to protect its interest worldwide. All this trade leads to strong income growth, which is then reinvested back into education, infrastructure, R&D and its military.

This necessitates the development of its capital markets and entrepreneurship, which allows the general population to save, invest and grow wealthy.

Eventually, this leads the nation’s currency to achieve Reserve Currency Status as other nations all want to hold this currency for international trade.

As the world’s reserve currency, it affords the superpower tremendous advantage as it is able to borrow from all over the world at preferential rates and to further invest in itself.

However, all these cheap borrowing eventually leads to the beginning of a Financial Bubble.

The Top

In the middle phase of the Top, as the people of the superpower earn more, they become more expensive and thus less competitive. They also choose not to work as hard as before and to enjoy the fruits of their labour.

All of these lead to a growing Wealth Gap where the rich grows richer as they are able to invest in better education and influence the existing political systems. These differences in the “haves” and “have-nots” result in growing resentment among the population.

Meanwhile, excessive borrowing by all parties in the economy boosts short-term gains but results in the long-term weakening of its currency. Other countries, observing this decline, gradually stop lending and saving in this reserve currency and look for other options.

The Decline

The final phase of the Decline can take various forms like an internal economic weakness and/or costly external conflicts.

This Economic Downturn results in the Bursting of the Financial Bubble.

As the superpower finds it harder to borrow, it begins Money Printing to service its debts. This devalues its currency leading to inflation. Inflation exacerbates the wealth disparity resulting in increased internal conflicts and the rise of political extremism.

As the peak, a Revolution or Civil War happens to redistribute wealth and force necessary changes to the status quo.

Upcoming superpowers, capitalise on the decline of the existing superpower and impose Debt and Political Restructuring on the outgoing superpower and a New World Order is again established.

And the cycle begins again.

Conclusion

The book presents a fascinating look into economic history that presents a compelling explanation of the economic malady that we are currently experiencing.

However, the reader should be careful of too much “curve fitting”  to match history to what we see today.

All in all, this is a great book to read to broaden one’s financial perspective.

This is a FPAS x Money Playschool collaboration.

The article “Book Review – Principles for Dealing with the Changing World Order” by John Sim, CFP, first appeared on FPAS Publications. 

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