Ray Dalio: I have studied 500 years of history and I fear that I am beginning the most dangerous phase

Most people are shocked by what is unfolding in the world right now. I am not. I’ve seen this film before.

As a global macro investor for more than 50 years, I needed to study the cause and effect relationships that drive history to place my bets. What I have found is that all monetary orders, political orders, and geopolitical orders rise, evolve, and collapse in a recurring pattern that I call the “Great Cycle,” typically lasting about 75 years, with a variation of about 30 years or so.

I believe that the times ahead will be radically different from what most people have become accustomed to, and that they will look more like the turbulent period before 1945 than what we have experienced since the end of the Second World War.

We are now in stage 5

In my book “Principles for Dealing with the New World Order,” I described six stages of the Great Cycle. Stage 6 is the collapse, the period of great disorder. Stage 5 is the one immediately preceding it. That’s where we are now.

I realize that the way I see things today is very different from the way most other people see them, because of our different perspectives. My perspective has been shaped by being a global macro investor who needs to bet on what the future will look like. In the quest to do this well, I have found it invaluable to study the cause and effect relationships that have repeatedly driven major global macro events over the past 500 years.

With this perspective, watching what is happening now is like watching a movie I have seen many times before, because the events are unfolding in the same way I have seen them unfold many times before. This perspective has been very valuable to me when placing my bets, so at this stage in my life I want to share it in the hopes that it can help others prepare for what lies ahead.

In contrast to my perspective, it seems to me that most people are surprised by what is happening because nothing like it has occurred in their lifetimes and because they are more attentive to the events of the day than to how monetary orders, domestic political orders, and international geopolitical orders evolve over time.

This isn’t new, it just seems to be

In my exploration of history, I have seen that all monetary orders, domestic political orders, and international political orders began, evolved, and collapsed in a progression of the Great Cycle. For example, I saw how the monetary, political, and geopolitical orders collapsed in the period of great disorder between 1929 and 1945, how new orders were created in 1945, and how these new orders evolved to bring them and their circumstances to the point they are in today, similar to what was happening in the period 1929 to 1939. I also saw how major natural events such as droughts, floods, and pandemics and the invention of powerful new technologies had great impact on monetary, political and geopolitical orders, influencing the Great Cycle, and vice versa.

The evolutions of these orders throughout their Great Cycles were almost always driven, in essence, by the same cause and effect dynamics. For example, over this 500-year period and in different countries, I have repeatedly seen how major debt and monetary cycles have been driven by rising debt and debt service relative to income. This compressed spending until it caused debt service problems and restrictions on consumption and investment.

I saw that when this happened at the same time that there were large volumes of debt assets, such as bonds, and debt liabilities in circulation, as well as large budget deficits that required larger sales of these debt assets, i.e., bond issues, than the existing demand, the resulting supply-demand imbalance led to a fall in the value of the debt and/or currency.

I also saw how periods of major domestic and international conflicts, especially periods preceding wars, led creditors to fear that the debtor country issuing the reserve currency would devalue the currency or default on its debts, and I saw how this led these creditors and central banks to transfer part of their bond positions to gold, as a way of protecting themselves from the risk of these debts being paid with devalued currency or not being paid at all because of capital wars. What is happening now in the markets and monetary system is consistent with this pattern.

Nothing is predestined, but I’m not optimistic

In Principles for Dealing With the Changing World Order, I described how these cycles unfolded and collapsed. The big disruptions occur in what I call stage 6 of the cycle, which is a period of great disorder. The last major stage 6 period began in 1929 and ended in 1945, after World War II, when there were clear winners, most notably the United States, who determined how the new orders would work. This led to the establishment of the US-led monetary, political and geopolitical orders. We are now in a new stage 5, the phase immediately preceding disruptions. The main signs of stage 5 as it progresses towards stage 6 are:

• Large and rapidly rising public debts and geopolitical conflicts generate concerns about the value and security of money, especially reserve currency, driving a movement away from fiat currencies and toward gold.
• Great inequalities in income, wealth and values ​​within countries, which lead to the rise of right-wing populism and left-wing populism and to irreconcilable differences, which cannot be resolved with compromises and the rule of law.
• The transition from a world order with a dominant power and relative peace to a world order marked by conflict between great powers.

Throughout history, these conditions have typically led to financial problems and conflict rather than respect for the rules. They were especially challenging for democracies, because democracies are based on the right to dissent and compliance with rules. Thus, when disagreements are deep and there is no widespread belief in the rules-based system, democracies experience disorder and autocratic leaders gain power. For example, in the 1930s, four major democracies, Germany, Japan, Italy, and Spain, became autocracies.

When these conditions have combined with great inequalities in wealth and values ​​and with poor economic conditions, they have typically produced disorder, conflict, and, in some cases, civil wars. There is nothing new in this dynamic. Plato wrote about this in The Republic in 375 BC

Today, we are seeing:

• large debts, deficits and devaluations of fiat currencies led by the dollar, in addition to the rise in the price of gold;
• growing political and ideological polarization and populism within countries, now called MAGA and WOKE in the United States, resulting from large and growing differences in wealth and values, which manifest themselves in developments typical of pre-civil war periods, such as the president’s sending of troops to cities and related conflicts, such as those in Minneapolis, in addition to the questioning of whether elections will be able to take place normally;
• the deterioration of the multilateral, rules-based international order established after 1945, as well as alliances such as NATO, and the rise of a new type of world order more similar to various orders of the period before 1945, when there were conflicts between great powers and gunboat diplomacy-type geopolitical movements, such as what we have seen involving Greenland, Venezuela, Iran and its allies, and China and Russia and their allies.

When I look at these historical and contemporary dynamics, I think it is indisputably clear that what is happening now is more analogous to the pre-1945 period than the post-1945 period that we have become accustomed to, which distorts most people’s expectations and causes them to be shocked by what is happening. At the same time, nothing is predestined. Is there any chance that our leaders, individually and collectively, will not be confrontational and can bring people together to do the hard and smart things needed to deal with these challenges well enough to beat the odds. Considering human nature as it is, I’m not optimistic.

Since we all, in some way, have to bet on the future, I hope this Big Cycle perspective helps you as it helped me.