Ray Dalio: I’ve studied 500 years of history and fear we’re entering the most dangerous phase of the ‘Big Cycle’
Most people are shocked by what’s unfolding in the world right now. I’m not. I’ve seen this movie before.
As a global macro investor for over 50 years, I’ve had to study the cause-and-effect relationships that drive history in order to place my bets. What I found is that all monetary orders, political orders, and geopolitical orders rise, evolve, and collapse in a repeating pattern I call “the Big Cycle”—typically lasting about 75 years, give or take about 30.
I believe that the times ahead will be radically different from what most people have gotten used to—that they will be more like the tumultuous pre-1945 era than what we have experienced since the end of World War II.
We Are Now in Stage 5
In my book Principles for Dealing With the Changing World Order, I described six stages of the Big Cycle. Stage 6 is the breakdown—the period of great disorder. Stage 5 is what immediately precedes it. That is where we are now.
I find that how I see things now is much different from how most other people see things because of our different perspectives. My perspective has been shaped by being a global macro investor who has to bet on what the future will be like. In pursuit of doing that well, I have found it invaluable to study the cause/effect relationships that repeatedly drove global macro events over the last 500 years.
With that perspective, watching what is happening now is like watching a movie that I have seen many times before because events are transpiring in the same ways as I have seen them transpire many times before. This perspective has been invaluable for me in placing my bets, so, at this stage in my life, I want to pass it along in the hope that it can help others prepare for what’s ahead.
In contrast to my perspective, it seems to me that most people are surprised by what’s happening because nothing like it has happened in their lifetimes and because they are paying more attention to the events of the day than to how monetary orders, domestic political orders, and international geopolitical orders evolve over time.
This Is Not New—It Just Feels That Way
In my exploration of history, I saw that all monetary orders, domestic political orders, and international political orders began, evolved, and broke down in a Big Cycle progression. For example, I saw how the monetary, political, and geopolitical orders broke down in the 1929-1945 period of great disorder, how new orders were created in 1945, and how these new orders evolved to bring them and circumstances to where they now are which is similar to where they were in the 1929-39 period. I also saw how big acts of nature (droughts, floods, and pandemics) and the inventions of powerful new technologies had big impacts on the monetary orders, political orders, and geopolitical orders to influence the Big Cycle, and vice versa.
The evolutions of these orders through their Big Cycles were almost all driven by essentially the same cause/effect dynamics. For example, throughout this 500-year period and across countries, I repeatedly saw how big debt/monetary cycles were driven by how debts and debt service payments rose relative to incomes. This squeezed out spending until that caused debt service problems and spending constraints.
I saw that when this happened at the same time there were large amounts of debt assets (bonds) and debt liabilities (debt) outstanding, as well as large budget deficits that required larger debt asset sales (i.e., bond sales) than there was demand for, the resulting supply/demand imbalance led the value of the debt and/or currency to fall.
I also saw how periods of great domestic and international conflicts—particularly, pre-war periods—led to creditors fearing that the debtor reserve currency country would devalue or default on its debts, and I saw how that led these creditors and central banks to shift some of their bond holdings to gold to protect themselves against these debts being paid with devalued money or not being paid at all because of capital wars. What is now happening in the markets and with the monetary system is consistent with that template.
Nothing Is Predestined—But I’m Not Optimistic
In Principles for Dealing With the Changing World Order, I described how these cycles transpired and broke down. The big breakdowns 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 the 1929 and ended in 1945 after World War II, when there were clear winners, most importantly the United States, which determined how the new orders would work. That led to the establishment of the United States-led monetary, political, and geopolitical orders. We are now in a new Stage 5, the stage that immediately precedes the breakdowns. The key markers of Stage 5 as it progresses toward Stage 6 are:
- Large and rapidly rising government debts and geopolitical conflicts that lead to concerns about the value of and security of money, especially of the reserve currency, which drives a movement out of fiat currencies and into gold.
- Large income, wealth, and values gaps within countries that lead to the rise of populism of the right and populism of the left and irreconcilable differences that can’t be resolved with compromises and rule of law.
- The movement from a world order with a dominant power and relative peace to a world order that reflects a great powers conflict.
Throughout history, these conditions have typically led to financial problems and conflicts rather than rule following. They were particularly challenging for democracies because democracies are based on the rights to have disagreements and the following of rules, so when the disagreements are great and there is not a broad-based belief in the rule-following 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 were combined with big wealth and values gaps and bad economic conditions, they typically brought about disorder, conflict, and sometimes civil wars. There is nothing new about this dynamic. Plato wrote about it in The Republic in 375 BC.
Today, we are now seeing:
* large debts, deficits, and debasements of fiat currencies led by the dollar and the rise in the gold price,
* growing political and ideological polarity and populism within countries (now termed MAGA and WOKE in the U.S.), arising from large and growing wealth and values differences that are manifest in pre-civil war type developments, such as the president’s deployments of troops to cities and the related conflicts, such as those in Minneapolis, and the questioning of whether elections will be allowed to proceed as normal,
* the breaking down of the post-1945 multilateral, rules-based, international order and alliances such as NATO and the rise of a new type of world order that is more like many pre-1945 world orders in which there were great powers conflicts and gunboat diplomacy-type geopolitical moves such as what we have been seeing with Greenland, Venezuela, Iran and its allies, and China and Russia and their allies.
When I look at these historical and contemporary dynamics, I think that it is indisputably clear that what is happening now is more analogous to pre-1945 times than the post-1945 times that we have gotten used to, which misleads most people’s expectations and causes them be shocked about what’s happening. At the same time, nothing is predestined. There is some chance our leaders individually and collectively will not fight and will draw people together to do the difficult, smart things necessary to handle these challenges well enough to beat the odds. Human nature being what it is, I’m not optimistic.
Since we all have to bet on the future in some ways, I hope this Big Cycle perspective helps you as it has helped me.
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