Ray Dalio of Bridgewater Associates: Why is the world on the brink of great chaos?
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Ray Dalio of Bridgewater Associates: Why is the world on the brink of great chaos?
If a person understands and follows each of these forces, as well as how they interact with one another, they can understand most things that change the world order.
Navigating Web3 tides with focused insightsTranslation: Wall Street Insights
Recently, Ray Dalio, founder of Bridgewater Associates, wrote in a Time magazine column that the world is on the brink of great chaos. He identified five major forces—debt/monetary dynamics, internal conflict, external conflict, changes in nature, and technological progress—that reinforce each other, forming what he calls the "Big Cycle."
Dalio pointed out that within the next 18 months, the U.S. Treasury may be forced to sell large amounts of bonds, worsening debt and financial conditions, while domestic tensions in the United States are moving toward a form of "civil war."
Below is the original article:
I am a global macro investor who has spent more than 50 years betting on what’s coming. Over a long period, I’ve experienced various events and cycles around the world, which led me to study how they operate. In this process, I learned that I needed to study history to understand what is happening and what could happen.
Early in my career, I learned through several painful mistakes that the biggest surprises came from things that had never happened in my lifetime but had occurred many times in history. The first was on August 15, 1971, when I was working as a clerk on the floor of the New York Stock Exchange, and the U.S. defaulted on its debt obligations by refusing to allow people to exchange paper money for gold. I thought it would be a major crisis causing stock prices to fall, but instead, stocks rose sharply. I didn’t understand why, because I had never experienced a major currency devaluation before.
When I looked back at history, I saw exactly the same thing had happened on March 5, 1933, when Roosevelt broke the U.S. promise to let people exchange paper money for gold—and stocks rose. That prompted me to study why: money can be created, and when it is, its value declines, causing prices of goods to rise.
This experience led me to study the rise and fall of markets, economies, and nations—a practice I continue today. For example, I studied how the debt bubble of the 1920s turned into the financial collapse of 1929–33, which allowed me to predict the 2008 financial crisis and profit from it. Through this, I learned that viewing issues over longer timeframes and understanding the mechanisms behind historical patterns is essential.
A few years ago, I observed three major developments that had not occurred in my lifetime but had happened during 1930–45. These were:
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The largest debt levels, fastest debt growth rate, and greatest amount of central bank money printing and bond buying since 1930–45.
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The largest gaps in wealth, income, and values, along with the highest level of populism, since 1930–45.
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The greatest international power conflicts since 1930–45, most importantly between the United States and China.
Seeing these three unprecedented developments in my lifetime prompted me to study the rise and fall of markets, economies, and nations over the past 500 years, as well as China’s history over the last 2,100 years.
This research showed me that these three forces—debt/money, internal conflict, and external conflict—reinforce each other in a “Big Cycle,” driven by logical cause-and-effect relationships. Most importantly, studying the last 500 years taught me:
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The financial conditions described earlier repeatedly proved to be leading indicators of major financial crises that transformed the financial order.
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The previously described levels of political and social divides repeatedly proved to be leading indicators of intense internal conflicts within countries, leading to dramatic shifts in domestic order.
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The previously described great-power conflicts repeatedly proved to be leading indicators of major international conflicts, resulting in profound changes in the world order.
In other words, history shows that painful transformations in the Big Cycle occur when all of the following happen simultaneously:
1) Excessive debt creation leads to a debt bubble burst and economic contraction, prompting central banks to print massive amounts of money and buy bonds;
2) Major internal conflicts within a country intensify due to large wealth and ideological divides, exacerbated by poor economic conditions;
3) At a time of economic and domestic political crisis, rising world powers challenge existing ones, triggering major international conflicts.
In conducting this research, I also identified two additional powerful forces at play:
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Actions of nature (droughts, floods, pandemics), including climate change.
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Learning-driven technological inventions, which typically bring progress in productivity and living standards—for example, the first and second industrial revolutions, and the computer/artificial intelligence revolution.
I refer to these as the Five Big Forces. I see how they interact with and influence one another in logical ways, driving the Big Cycle and producing major shifts in the world order. I gradually realized that if one understands and follows each of these forces and their interactions, one can grasp most of what drives changes in the world order. That is what I aim to do.
Where we stand and what might happen next:
1. Financial/Economic Forces
In the United States, we are now in what I call the mid-cycle phase of the short-term debt cycle, also known as the business cycle. These cycles have averaged seven years, plus or minus about three. Since the new monetary world order began in 1945, there have been 12.5 such cycles. We are thus in the middle of the 13th cycle, at a point where central banks are tightening monetary policy to fight inflation, just before a likely debt and economic contraction, which could occur within the next 18 months.
We are also in the late and dangerous phase of the long-term debt cycle because debt assets and liabilities are already high, making it difficult to offer lenders/creditors interest rates sufficiently above inflation to make holding debt attractive, without raising rates so high they damage borrowers/debtors. Due to unsustainable debt growth, we may be approaching a major inflection point that will transform the financial order. In other words, in my view, we are likely nearing a debt/financial/economic restructuring that will lead to a significant shift in the financial order.
More specifically, in my view, due to massive deficits, the U.S. Treasury will have to sell a large number of bonds, and there appears to be insufficient demand for them. If this happens, it will either push interest rates sharply higher or force the Federal Reserve to print large amounts of money and buy bonds, which would devalue the currency. For these reasons, debt and financial conditions could deteriorate, perhaps becoming clearly evident within the next 18 months.
2. Domestic Order Forces
In some countries, especially the United States, we see an increasing proportion of populist extremists among the population (about 20–25% on the right are extremists, about 10–15% on the left). Meanwhile, moderates in both parties are shrinking as a share of the population. Although moderates still constitute a majority, their numbers are steadily declining, and their willingness to compromise or win at all costs has greatly diminished.
In studying history, I’ve seen this dynamic repeat itself: rising populism and intensifying conflict emerge when large wealth and values gaps coincide with poor economic conditions. At such times, a significant portion of the population tends to support populist political leaders who pledge to fight and win, rather than compromise. I describe the current state of the U.S. as being in the fifth stage of the “internal order cycle” (where poor financial conditions and intense conflict coexist), just before some form of civil war and domestic reordering. This is precisely what is happening now.
Looking ahead, the next 18 months will bring an increasingly heated election season, leading to greater political conflict and sharper divisions between left and right. Thirty-three Senate seats, the presidency, and control of the House will be contested by populist candidates, and economic conditions are likely to remain weak, so the battle will be vicious—a true test of adherence to rules and willingness to compromise, both essential for democracy to function. You can already see movement toward no-holds-barred fighting and declining respect for legal and political institutions.
You can see this dynamic playing out even now, such as Trump and his supporters going to war with the judicial system—or as he and his followers say, the system waging war against him. Regardless of your perspective, it’s clear that over the next 18 months, we are heading toward a form of civil war. To me, the most important battle is between moderate factions in both parties and populist extremists—yet moderates are mostly quietly stepping aside from this fight.
3. Changes in Nature
Changes in nature are naturally harder to predict precisely, but due to climate change, they appear to be worsening and could become more costly and destructive over the next five to ten years. Additionally, the world will enter the El Niño phase of the climate cycle next year.
4. Technology
What can we expect from technology and human creativity? Like natural phenomena, it's hard to know exactly, but there is no doubt that generative AI and other technological advances have the potential to bring massive productivity gains and massive disruption, depending on how they’re used. One thing is certain: these changes will be profoundly disruptive.
I cannot say exactly how events will unfold, but there is no doubt that those who assume things will continue operating in the orderly way we’ve grown accustomed to over recent decades will be shocked by what’s coming—and may suffer as a result.
How well we manage these changes will make all the difference. If our leaders can rise above their tendencies to fight and focus instead on cooperation, we can certainly navigate these difficult times and create a better world for most people.
Presumably, this outcome would be best for everyone, so we should firmly oppose internal strife and war between nations, keeping it in mind as we strive to make cooperative decisions. For example, now that the debt ceiling agreement has passed, it would be excellent to see Democrats and Republicans jointly appoint a bipartisan group of highly skilled individuals to develop a practical, long-term bipartisan plan.
I wrote an article years ago titled “Why and How to Reform Capitalism?” that remains relevant today. Having said that, it may be unrealistic to believe we can substantially alter the course of events, so for most people, the most important thing is to imagine the worst-case scenario. If you do that, you’ll be prepared—and may be okay.
Finally, I should say that in my 50-year career as a global macro investor, the most important lesson I’ve learned is that I could be wrong. For this reason, while I encourage you to consider what I’ve shared, I also urge you to evaluate it yourself and assess the situation independently.
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