Overview
This paper covers what can be thought of as the characteristics and phases seen when a country or empire goes through its rise, its peak and its subsequent fall. It is based on the book “The Changing World Order” [DALIO] from Ray Dalio1
1 Ray Dalio is a large hedge fund manager at Bridgewater Associates which he founded in 1975 [WIKI-DALIO]
The basis for the book comes from history lessons learned by analyzing a number of countries and empires. By carefully analyzing each one, Dalio was able to deduce characteristics and signs that are common to each rise, peak and fall phases. Dalio analyzed the Tang Dynasty, the Ming Dynasty, the Dutch Empire, the British Empire, and the United States. A few other countries that at one time had a major impact on the world such as Prussia/Germany, France, and Russia were also analyzed. Dalio has found a repeating pattern for these empires and has depicted this in the form of a bell curve which he calls “The Big Cycle”:
The book lists the increasing strengths in various areas that lead to an empire’s rise, then lists the signs that it is at its peak, and well as the signs that it is in decline. Dalio deduces that the cycle last about 250 years (give or take 150 years) [DALIO p14]. This doesn’t necessarily mean that at the end of the cycle that the empire or country disappears (although many do), it just means that it loses its domination at the same time that another country or empire is on the rise; And thus begins a new world order.
The Cycle
From now on , I'll use the term empire, even though it may only apply to a country.
The Rise
The characteristics that lead to a country’s or empire’s rise to prominence:
Strong Leadership:
Not only does a rising empire have strong leaders, it also has leaders who have a vision or “design” for a system that can increase an empire’s economy. As the economy grows, so does its wealth, and then later its power.
Education:
The beginnings of an empire begin with a strong educational system.
Strong Culture:
A country or empire has a system and a society that builds on its people’s character and their respect for society, respect for the rule of law, etc., as well as a society that has a strong work ethic. This can be achieved through the family, the school and through other institutions (ex. religion). It also means that people can work together with a “common view of how they should be together” [DALIO p457].
Incentives:
The system that the empire develops has to have a way to incentivize people to want to improve. In capitalist systems, this can be in the form of entrepreneurs.
Inventiveness/Innovation:
Rising empires show superb inventiveness and innovation.
Investments:
Rising empires tend to invest in infrastructure, education and R&D.
Increases in Productivity and Efficient Resource Allocation:
Productivity leads to growth in income [DALIO p163]. Productivity comes at the cost of having to take on debt, and debt requires capital markets [DALIO p163]. Human productivity is the most important “force” in causing living standards and wealth to rise [DALIO p28].
Competitive:
As productivity improves, a rising empire can export goods and services that are competitive with the rest of the world and this too leads to growth in income for the empire.
Strong Income Growth:
As incomes grow substantially relative to other empires, an empire can become a market leader and develop its own financial center. Strong income growth also makes it easier to service the debt needed for financing the things that increase productivity [DALIO p163].
Strong Markets and Financial Centers:
Successful empires develop capital markets which help people turn their savings into investments and to also fund innovations. Strong markets and financial centers provide the capital needed to invest in some of the items mentioned earlier, namely research and development, infrastructure, etc.
Debt and capital markets themselves run through a cycle of boom and bust [DALIO p233] even as the empire is on the rise:
Strong Military:
As the empire grows, it reaches a point where it needs a strong military in order to protect not only itself, but also its interest overseas.
The Peak
Peace and Prosperity:
The empire generally goes through a long period of peace and prosperity during its growth and much of its peak period.
Productivity Lessens:
There is a shift from the spending on productive investments (such as infrastructure, education, and R&D) to the spending more on “consumption and luxury goods” [DALIO p165]. Although peace and prosperity exists, there is also more spending on the empire’s military in order to protect its global interests [DALIO p166].
Overextended:
As people gain more wealth and income, and at the same time, they believe the empire is in good times and that the good times will remain that way, they tend to borrow more and more2. Eventually the borrowing outstrips the economy’s ability to finance all of these debts [DALIO p165] and this leads to financial bubbles.
2- [DALIO p165] says one of the reasons people borrow more, is that their financial assets have increased in value during this time and they believe these assets will continue to increase in value without realizing that these assets may actually become overvalued.
If an empire is dominant enough to have their currency become the world’s “reserve” currency, then that empire tends to borrow even more so because having a reserve currency allows that empire to “borrow more than it could afford” [DALIO p109]. [DALIO p48] says eventually an empire becomes so indebted, particularly to foreign countries, that holders of the empire’s debt start looking to get out and this in turn causes the empire’s currency to weaken and in turn the empire itself weakens.
Loss in Competitiveness:
As people gain more wealth and income, they tend to become less competitive. This can lead to more spending on foreign goods resulting in a deterioration of the empire’s “balance of payments” (more imports than exports) [DALIO p166].
Wealth Gaps Develop:
As certain groups of people gain wealth and become rich, then tend to gain power and influence which leads to even more gain in wealth. Meanwhile those that have less, tend to stay that way.
Copy-cat Countries:
Other countries start stealing or copying “methods and technologies” that have made or continue to make the empire great.
The Fall
Bad Financial Conditions: Large Debts, Printing of Money3 And Loss of Reserve Currency:
As an empire becomes more indebted, and has a hard time finding lenders to loan it money, or has a hard time raising more revenues to pay off its debts, it tends to print money as a way to pay its debts4.
3- It should be noted that creating money and debt is not bad as long as it is used in a productive manner resulting in gains that are better than the money and debt being created [DALIO p172]. As an example, if an economy grows by 3%, then one would want the money supply to also grow close to this same amount
4- [DALIO p9] calls this the “long term debt and capital markets cycle” which he says takes around 50 to 100 years.
This excessive printing of money devalues the empire’s currency and causes inflation. [DALIO p49] Devaluing the currency also lessens the likelihood of an empire maintaining their “reserve” currency status. The timing of this often occurs when the empire is losing to a rising rival [DALIO p147].
Internal Conflict:
Wealth gap issues boil over5, and politics become more extreme, leading to rise of populism (both left and right), as those on the left want the government to distribute wealth, and those on the right want to preserve the status quo. This leads to attacks on the wealthy such as trying to raise their taxes, etc. and this causes the wealthy to move their assets overseas and this in turn causes the government’s tax revenues to decrease. The government tries to combat this by outlawing the movement of assets overseas.
5-In the U.S., the top 10% have 45% of the incomes as compared to Germany at 38%, and Japan at 43%. In Dalio’s book, he uses income gaps and other factors to compute an "internal conflict gauge". The U.S. is considered to have an “internal conflict gauge” of “high” whereas Germany and Japan, for other reasons are considered to be “low” [DALIO p516, 532].
Anarchy increases and sometimes a strong populist leader emerges [DALIO p49]. Sometimes this leader is able to make themselves a dictator and they not only seize power within the empire, but they also look to expand their powers outside the empire’s borders [DALIO p313].
There are more protests, and these can sometimes become violent. Policing of this can become a political tool and even a paramilitary police can emerge. [DALIO p179]
External Conflict6:
As an empire is in its downfall, sometimes another country can be going through its “Rise” cycle and the rival country can become strong enough to challenge the falling empire. The falling empire may want to combat this by increasing their military but the empire finds it difficult to even maintain funding of its military, much less increasing it. [DALIO p51]
6 [DALIO p201] says External Conflicts have their own cycle, as it starts out with a long period of peace and prosperity, and over time evolves to a hard war.
The rivalry can lead first to soft fighting: trade wars, technology wars, capital wars, freezing of assets, or even embargoes and blockades, and or eventually to hard fighting7 (where militaries get involved) [DALIO p194, 209].
7-[DALIO p215] says that wars are often financed by printing money, and this leads to the currency being devalued.
Weak Leadership:
[DALIO] doesn’t elaborate on this particular point, but one could imagine that after an empire starts to break down from both Internal Conflict and External Conflict, that there is no one leader that most of its people can rally around. As a result, the Internal Conflicts get worse.
War, Civil War and/or Revolution:
Eventually the anarchy that is mentioned from the Internal Conflict above, escalates to a point where either a civil war or a revolution erupts. Dalio points out that revolutions however can be done by peaceful means (ex. FDR’s revolution of the U.S. government). [DALIO p50]
If this is not bad enough, a rival country’s challenge to the empire could be strong enough to lead to the empire’s outright downfall.
New World Order
After a war or revolution, either the empire arises anew, or the challenging country becomes the new empire. In the latter case, the older empire can have all of its wealth wiped out, for examples – Chinese Communist Party and Russian communists taking over their countries [DALIO p224, 228]. Either way a “New World Order” is created, but it may take 10 to 20 years to fully play out. Once a New World Order is created, there is usually peace that lasts for forty to eighty years. [DALIO p55].
Where is the U.S.?
[DALIO] was published in November 1981. [DALIO p481] believes the U.S. is about half-way through its "The Fall" phase. It is currently going through the “Internal Conflict” part of “The Fall”, and its “internal conflict gauge is very high” [DALIO p516]. By comparison, England hit this stage in the early 1900s, when social reforms began taking place, and organized labor gained strength and hit the country hard with coal miner strikes [DALIO p314]
[DALIO] throughout his book lists China as THE rising rival to the U.S and dedicates a chapter to it, but doesn’t make any conclusions or predictions.
References
[DALIO] Principles for Dealing with THE CHANGING WORLD ORDER, Ray Dalio, Avid Reader Press, 2021
[DALIO-WIKI] https://en.wikipedia.org/wiki/Ray_Dalio
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