Principles For Dealing With the Changing World Order

for centuries, it seemed that the rise and fall of empires were difficult to predict. some were so vast and powerful that they seemed almost invincible. surely, their downfalls must have been at the whims of a few bad leaders – or, at least, by strokes of fate. but whether it was the romans, the ottomans, or the egyptians, one thing has been true of every great empire. all of them eventually came to an end. 

so, while it might be hard to imagine a world without the current american hegemony, history no doubt has different plans. which leads us to ask a number of questions about our current world order. how long will the age of american imperialism last? is it already in decline? and what does all of this mean for you?

well, luckily you don’t have to be bound by fate to the rise and fall of any empire, even if you’re currently a citizen of one yourself. there are things you can do to mitigate your own destiny so that it isn’t tied to such inevitable decline. ray dalio’s principles for dealing with the changing world order takes you on a fascinating journey through the cycles of human history, and offers a lens to understand where we might be headed next – and how you can navigate the turbulence of these changing times. 

in this chapter, we’ll first look to the patterns of past empires, and apply these to our modern age. through the clear parallels that emerge, we’ll then examine how all this links in with your own financial stability, and how you – and your investment portfolio – can tactfully weather any geopolitical, technological, and environmental storms to come.

so, if you’re ready to decode the past to predict the future, then let’s see what history has in store for us. 

what do the dutch, british, and american empires have in common? the first two rose and fell over 250-year periods – and america is fast approaching the same mark. so, here’s the big question: is american power about to decline as well? could it be that the process is already in motion? and is there some grand theory that is predicting the end of american dominance?

well, it turns out, yes – there sure is. the author calls it the big cycle, and it’s not just based on random coincidences. his theory posits that all empires throughout the last 500 years of history have followed similar patterns: they rose, peaked, and then declined. this big cycle alternates between times of peace and prosperity, where innovation and productivity flourish, and times of depression, revolution, and war, which are marked by conflicts over wealth and power.

during times of peace, living standards tend to rise significantly – while the following darker periods usually signal widespread destruction of wealth, life, and institutions. this is something we all want to avoid, but avoidance doesn’t prevent the age of us imperial power from coming to an end. at the end of any empire, few see its downfall coming. that’s the hubris built into empire – it often blinds those inside it to the signs of its decline.

so, what are the internal mechanics of the big cycle theory? it turns out it’s all about understanding shifts in global power and influence over time. this means that the theory doesn’t only herald the decline of one empire, it can also offer a glimpse into what lies in store for humanity going down the line. that’s the real power of this chapter – by equipping yourself with the knowledge of how this cycle works, you’ll be ready to adapt to shifting global power dynamics, particularly as an investor.

so, what are the indicators you should be looking out for to measure a nation’s power? the author identifies eight indicators, and we’ll be touching on each of them in the following sections. these are educational quality, innovation and technological advancement, global market performance, economic productivity, proportion of global trade, military capacity, financial sector influence, and a currency’s dominance as a global standard. it’s with monitoring these eight factors that we begin to see a nation’s current standing in relation to its history – and to see whether it’s ascending or descending.

every decline has to start somewhere, that’s the nature of the big cycle. so the first question we’ll look to answer is how are empires usually born? we’ll examine this in the next section. 

one of the most fertile breeding grounds for new empires are large conflicts, like war. indeed, it’s after such conflicts that strong leaders and their built up military capacity usually emerge and set about reshaping nations. 

take japan’s meiji restoration, for example. in the midst of global colonial conflict in the late 19th century, its revitalized imperial system managed to transform a feudal society into a modern industrial powerhouse within a few decades. along the way, they didn’t just react to external circumstances, they also set about building institutions in order to guarantee long-term stability and economic growth. such power moves are clear signs of nations on the rise.

this brings us to the next of our eight key indicators of an empire: educational quality. there are two aspects to look out for in this regard. the first is the creation of a highly-skilled workforce, and the second the fostering of a culture of innovation. the us is a great example here – after the civil war, the country invested a lot of money in public education, literacy, and skilling up. the resulting knowledge powerhouse laid necessary groundwork for its later ascent as a global superpower after world war ii.

economic productivity is another obvious indicator of a nation’s imperial status – and the british empire during the industrial revolution is a perfect case in point. its innovation and technological advancements in machinery and industry both boosted its economy and positioned it as the dominant trade power at the time. to cement its position, britain also developed complex global financial markets that helped fuel further growth. 

in the 19th century, international trade was more often than not conducted in british pound sterling. it’s not a stretch to say that for a time, the currency acted as a global reserve and standard, and that this wouldn’t change until the us dollar took over after the second world war. the benefits of producing the world’s reserve currency are many, but in terms of imperial expansion, one aspect jumps out: the ability to easily borrow money and therefore gain significant influence in the financial sector. this further fuels economic expansion, and it seems like the good times will never end. 

this is where the seeds of an empire’s downfall are sown, however – as people get used to prosperity, they become complacent. we’ll see how this sequence of unfortunate events continues in the next section. 

empires don’t only follow patterns while ascending to power – the same can be said with their decline. often, this decline starts from within. take the roman empire, for instance. it's a well-known fact that it saw its decline begin with increased decadence and inequality. this weakened its internal social cohesion, and made it weak when confronted by the subsequent external threats it faced. 

the modern american empire is going through a similar period of prosperity coupled with complacency. when wealth and comfort become the norm, society’s start to lean on luxury and leisure, and it’s clear that this is very much the case in the us today. consumerism and entertainment are now placed front and center of the american lifestyle, and this shift is weakening the very work ethic and spirit of innovation that once fueled the nation’s initial success. this is particularly the case with young americans, who are inheriting wealth in record numbers, meaning they have much less motivation to create and innovate themselves.

these lifestyle changes are resulting in record levels of household debt in america. coupled with huge military spending, the american national debt is increasing to record numbers. and what’s the typical result of such huge sums of unfunded spending? financial instability – and we’ve already seen the havoc that unfolded in 2008 and 2009. when such bubbles burst, the rotten, debt-ridden core of an empire’s economic system is unmasked. 

an empire can only borrow its way out of crisis for so long. this is because financial instability often gets worse when coupled with increasing economic inequality. as the upper classes revel in luxury, the poor continue to get poorer. political division becomes the norm and the ground becomes fertile for populist movements demanding wealth redistribution. 

but here’s the thing – empires in crisis don’t give up power easily. the demands of populists often lie unanswered, and class grievances soon begin to boil over. social unrest becomes the norm. all the while, other nations are catching up, often adopting the leading empire’s technology and economic model. china is a perfect modern day example of this.

at some point, all this instability reaches a final breaking point – with internal and external crises coalescing into a storm that the empire simply cannot weather. this might mean financial collapse, currency devaluation, or even defaulting on loans. internal conflict might start to break out, or even civil war. the nation shifts its focus even further inwards, allowing competing nations more space to increase their dominance. then, when said nations are finally strong enough to mount a challenge to the struggling empire, external conflicts appear on the horizon, and this often means war on a global scale.

the result of all these internal and external conflicts? new empires and defeated nations. the big cycle continues, with one empire falling, and a new power taking its place in the pantheon of imperial history. new leaders emerge, along with new institutions, alliances, global reserve currencies, et cetera. the cycle goes on, seemingly forever.

now that you understand this process of imperial history-making, let’s pivot to understanding the status of empire in the world right now, and to where our present situation might lead.

it will come as no surprise to anyone tuned into the news that the us-china rivalry is dominating all things ‘empire’ nowadays. so, barring an act of divine intervention, it’s almost certain that the coming decades will be shaped by the interplay of these two powers. 

of course, there are other nations that are also on the rise. india, for example, has just surpassed china’s population. its tech sector is also growing rapidly. the eu also remains a major player. but it’s developing nations that act as a potential wildcard here – taken together, they’re the ones truly driving global growth nowadays. indeed, it’s altogether possible that we’ll witness big changes in economic dynamics and resource distribution over the next decades due to a rising global south.

but for now, let’s take a look at the us and china. to get started, let’s not beat around the bush – the us is going through a tough time right now. as we alluded to earlier, political tensions and economic inequality are problems as american as apple pie nowadays, and there is no end to them in sight. such challenges bring to mind similar patterns faced by many empires of the past. 

it’s not all bad news, though – the country’s strengths are undeniable. when it comes to innovation, eight of the world’s top ten tech giants are american as of 2023. and its military power is still unmatched. in fact, american defense spending is still larger than the next nine countries put together, and that includes china. to top it all off, the us dollar is still the world’s primary reserve currency, with just about 60 percent of all global currency exchange reserves being measured in it. this just goes to show the clout of american power, at least for now.

china, however, is rising in the east. in 2003, it made up a measly four percent of global gdp – but that number has now ballooned to 18 percent as of 2023. it’s investing huge sums of money on global infrastructure projects like the belt and road initiative, which involves 140 countries. and in tech, china is catching up with companies like huawei – a leader in global patent applications in areas such as 5g.

to be sure, there are plenty of potential hiccups china could face on its road to global dominance. first is its rapidly aging population, a legacy of its now defunct one-child policy. this could very much slow down its march toward economic greatness. and its tightly controlled political system might end up stifling innovation and lead to brain drain. that’s not to mention climate-related issues, either. china is the world’s largest co2 emitter, and this could very well end up coming to haunt it down the line.

so, while the us is not quite down and out yet, china certainly remains a force to be reckoned with, and all smart investors should take note. in our final section, we’ll take a look at what all these cycles of empire mean for you – and how you can weather the various storms of global geopolitics.

with the world facing unprecedented challenges and transformations on a global scale, let’s look at where we might be headed next – and how you can navigate the turbulence of these changing times. and while american power seems safe for now, this could quickly change. with this in mind, successful investors need to embrace adaptability on all fronts, whether geopolitical, technological, or environmental. the goal should always be to identify recurring trends – such as the big cycle – while also being ready for unexpected changes.

the first big area you should consider are the tectonic shifts in technological advancement we’re living through at this very moment. ai and automation are flooding into our lives in ways not many could predict, and they’re forecasted to boost global gdp by $15.7 trillion by 2030. this obviously presents huge opportunities and risks for investors. so, consider exposing yourself to companies that are positioning themselves as big players in the ai field. it’s likely this will pay off in the long term, big time.

cryptocurrencies and central bank digital currencies or cbdcs also loom large on the investing horizon. by the end of 2021, crypto market capitalization reached a whopping $2 trillion, a clear sign that it has become a force to be reckoned with in global finance. meanwhile, central banks are catching up fast on the digital currency front – china’s digital yuan pilot, if successful, could alter global trade dynamics in ways it’s hard to fathom. so, make sure to stay on top of these developments, as crypto is one of the fastest-moving sectors around today.

along with these big changes in tech, climate change and clean energy both present huge opportunities and risks. in 2020 alone, $300 billion worth of investment was poured into renewable energy worldwide, with large sums going into funding wind and solar capacities. battery technology is another area to be watched with interest – after all, significant innovation in this sector could very well accelerate the decline of fossil fuel-reliant economics, and open up huge avenues for investors to get in on the hype.

however, it’s not all rosy investment opportunities when it comes to climate change. if forecasting holds true, rising sea levels could displace 140 million people from their homes by 2050, with entire cities and economies being laid to waste. this might even include big coastal players such as miami and shanghai. economists warn that the economic impact of climate change could be a colossal $23 trillion by 2050. as an investor, you should therefore focus on companies developing adaptation and mitigation tech. 

and of course, diversifying your portfolio so that it includes lots of climate-resilient sectors and regions can’t hurt. after all, diversity is king when it comes to investing in a world dominated by uncertainty. so, make sure to stock up on equities, bonds, real estate, and commodities – these have all historically reduced volatility by 20 percent when compared to portfolios with only one asset type. 

lastly, make sure to keep up with your scenario planning – this is key to making sure your portfolio survives major market corrections, or even the next global pandemic. at the end of the day, a healthy mix of growth-fuelled and defensive assets are those that will perform best no matter what the cycle of history throws at us. and all the while, stay vigilant and informed. 

the main takeaway of this chapter to principles for dealing with the changing world order by ray dalio is that all empires, no matter how powerful, follow the same patterns of rise and fall. 

this is the power of the big cycle theory – within it, empires flourish during periods of peace, only to face decline marked by internal strife and external challenges. as the age of american dominance faces growing challenges, particularly from rising powers like china, the signs of the big cycle shifting gears are becoming more evident. these geopolitical shifts suggest that while the us remains influential for now, the future is all but certain. investors should therefore stay adaptable, and focus on emerging technologies, economic trends, and environmental challenges to circumvent these changes effectively.