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Principles for Dealing with the Changing World Order

Ray Dalio

Working rules for reading where a country sits in its own long cycle of money, debt and power, and for holding your savings in a way that survives what that cycle has historically done to people who assumed it would not.

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This governs the timescale above the news and below history: the multi-decade arc in which a country's money, debt, internal order and standing in the world all move together. Dalio's claim is that this arc repeats closely enough across the Dutch, British, American and Chinese cases to be measured rather than merely narrated, on eight determinants of power that rise together, peak together and decline together. The practical consequence is that events which feel unprecedented while you are living through them usually have a place in a pattern, and that the pattern has consistently been hard on people who kept all their savings in one country's currency.

Do

  • Score a country on the eight determinants instead of reacting to its news. Education, innovation and technology, cost competitiveness, military strength, trade, economic output, financial-center strength, and reserve-currency status. Dalio's point is that these move as a group, so a reading on several at once tells you where in the arc a country actually sits, in a way that any single headline cannot. [Source: "The Big Cycle and the Determinants of Power"]
  • Watch how many economic measures are bad at once, not how bad any single one is. Across nine great powers and roughly 2,200 years of combined history, Dalio finds the five-year likelihood of internal conflict nearly triples once a large share of a country's economic measures are simultaneously below a historical threshold, compared with periods when only a few are troubled. Breadth of distress is the leading indicator; depth in one place is not. [Source: "Internal and External Order and Disorder"]
  • Track the competitiveness gap decades before anyone calls it a confrontation. Britain's decline showed up first in measurements, not battles: by the early 1900s Germany had passed Britain in share of Nobel prizes and world patent applications, had grown manufacturing output from under half of Britain's in 1860 to about 75% by 1900, and was outspending both Britain and France on public education, all of it before the First World War began. [Source: "The Dutch and British Empires"]
  • Read wealth gaps and political polarization as economic data, not as politics. Dalio's own charts show the top 10% share of US income and the top 0.1% share of wealth both widening substantially from the 1970s and 1980s onward, back toward levels last seen near the 1920s, while the share of Congressional votes cast strictly along party lines has climbed back toward its historical peak after a mid-century low. In his framework these are internal-order warning signals, on the same footing as debt levels. [Source: "The American and Chinese Empires"]
  • Judge a power by its worst readings rather than its rank. On Dalio's scorecard of eleven major powers the US leads overall at 0.87 and ranks first on financial-center strength, innovation, education, military strength and reserve-currency status, while ranking worst or near-worst among the same eleven on debt burden, internal conflict, and wealth and opportunity gaps. He treats that specific split, strong externally and weakest internally, as the classic signature of a power at its top rather than one still climbing. [Source: "US-China Relations and the Future"]
  • Check which of the three kinds of money you are actually holding. Hard money maximizes credibility and limits how much credit can be created; claims on hard money expand credit at some cost to credibility; fiat money maximizes credit and minimizes credibility. Dalio's point is that the sequence can also run backward under stress, toward harder money, and that where you sit on it determines what a crisis does to your savings. [Source: "The Changing Value of Money"]
  • Spread savings across countries, currencies and asset classes for the specific reason that governments seize. Dalio does not present diversification as generic prudence. He presents it as the answer to a documented pattern in which governments close markets, freeze or seize assets, and restrict foreign exchange during exactly the crises when an investor most needs liquidity, which is why his prescription spans environments of rising and falling growth and inflation rather than just several stocks. [Source: "Investing Through the Big Cycle"]

Don't

  • Don't file total loss under tail risk. In Dalio's table of worst twenty-year real returns for a 60/40 portfolio, Russia from 1900 and China from 1930 both lost 100% to revolution and war, Germany lost 100% to the Weimar hyperinflation, and Japan, Austria and France each lost more than 90% in their own war-and-currency windows. Even the countries treated as stable have a bad stretch on record: the UK's worst window lost 46% in real terms, and France lost 48% as recently as 1961 to 1981. [Source: "Investing Through the Big Cycle"]
  • Don't assume you will be permitted to keep what you own. During the Second World War the US, UK, Germany and Japan all imposed rationing, production controls, price and wage controls and trade restrictions, three of them took over their own central banks outright, and top marginal tax rates reached 94% in the US, 98% in the UK, 60% in Germany and 74% in Japan, alongside market closures, ownership restrictions and foreign-exchange controls. [Source: "Internal and External Order and Disorder"]
  • Don't assume a reserve currency stays one. Status has already changed hands twice inside the window Dalio studies, guilder to pound to dollar, and each handover tracked its issuing empire's own decline rather than happening quietly on the side. The pound's unwinding took two visible devaluations, a convertibility crisis in the late 1940s and the abandonment of the peg in 1967, after which central banks began selling sterling reserves outright. [Source: "The Changing Value of Money"]
  • Don't expect the change to announce itself as a single event. Dalio's marker for a genuine world-order transition is five things happening together: a debt crisis or restructuring, an internal revolution transferring wealth from haves to have-nots, an external war, a major currency breakdown, and the emergence of a new domestic and international order. Any one of them alone is an ordinary bad decade. [Source: "The Big Cycle and the Determinants of Power"]
  • Don't read market behavior during a crisis as a health signal. How tightly a wartime government controlled prices changed what its market did: German equities rose sharply while the Axis powers were winning early, Japanese equities stayed flat under strict controls even through Japan's own wartime boom, and the freer US and UK markets rallied almost continuously from Midway onward. Every market that had been forcibly closed fell sharply once it reopened. [Source: "Internal and External Order and Disorder"]
  • Don't treat this as a Western pattern that happens to have reached you. Chinese monetary history cycles through the same three money types across the Tang, Song, Yuan, Ming and Qing dynasties and into the Republic and People's Republic eras, and each of those dynasties moves through the same numbered stages of rise and decline before giving way to the next. Dalio reads that as evidence the pattern belongs to money and empire rather than to one civilization's history. [Source: "The American and Chinese Empires"]

The one line

You are standing somewhere inside a cycle that has run before, so measure where your country actually sits on it, and do not keep everything you own inside the part of it that has historically been confiscated.