Our Current Economic Chaos Is Part Of A Repeating Cycle
One of the greatest investors of our time explains how global orders rise, then fall, and what to expect in our future
“To understand what is coming at you, you need to understand what happened before you.”
— Ray Dalio, The Changing World Order
In the financial world, it’s often said that past performance is not an indicator of future returns. Although a historian may say the opposite. They tend to see pieces of the past within the present, which indicates possibilities for the future.
Ray Dalio occupies both worlds: investment and history.
In his recent educational video The Changing World Order, the billionaire attributes part of his investing success to studying the past rises and falls of empires, along with boom-bust cycles. He sees their shadows today. In fact, he claims we’re going through one of these stages right now.
Dalio’s interest in the past first started as a young clerk on Wall Street when the United States “ran out of money and defaulted on its debts” in 1971. But we don’t recognize it this way. We refer to August fifteenth of that year as the day the dollar was removed from the gold standard.
Dalio reminds us the notes used to be convertible into gold, but the country spent more than their supply. He expected a crash on Wall Street the next day. But surprisingly the market shot up about twenty-five percent.
It made no sense. But soon Dalio found this reaction wasn’t unique. Franklin Roosevelt had also halted the exchange of dollars for gold in the 1930s, and the market boomed in response as well.
However, this was only the first of many similarities. As he studied empires throughout history, a recurring cycle started to appear throughout time. He calls it the “Big Cycle,” and it may sound familiar.
The Big Cycle: The Rise And Fall Of A Global Order
The cycle starts with a conflict, usually a war, which establishes a new leading world power, and a global order around them. This is followed by a time of relative peace. This is due to a mixture of war fatigue, and a lack of a strong enough challenger to dislodge the leader.
The period of peace encourages people to borrow and invest, which creates a financial bubble. The leading empire’s share of world trade continues to expand until their currency becomes the dominant medium of trade. Then, that currency becomes the reserve currency.
Foreign nations and colonies all trade to get that currency. This causes the economic bubble to grow. More money is borrowed and invested with the inflows into that country, leading some to become extraordinarily wealthy. Resentment grows.
Eventually the country spends way more than it takes in and the bubble starts to burst. They print money to hold things together. Then, prices go up. The resentment now grows to conflict between haves and have nots. A revolution occurs, which may be violent or nonviolent.
While the internal battle goes on, the nation’s global power diminishes. Outside rivals take advantage of this. Eventually one gets strong enough to displace the global leader — usually in a war — and the cycle begins again.
Dalio says Big Cycles vary, like the lifespans of random individuals. But they usually overlap in periods of two hundred fifty years, with a twenty- year period of conflict in between cycles.
In his video he focuses on three cycles: the Dutch, British, and the American Empires.
The Past Three Big Cycles: The Rise
To simplify things, Dalio limits the video to the past five hundred years or so, in which three empires rose and declined in these cycles. He starts with the Dutch. Their cycle began eclipsing the Hapsburgs’ empire.
In their growth cycle, a string of strong leaders and education (school and morals) created a hungry group set on strengthening the nation. Eventually technological breakthroughs followed. For the Dutch, they created better ships capable of traveling the globe, and a new form of economics (the first publicly listed company and stock market.)
This led to Amsterdam being the world’s financial center, as London was for the British, and NYC for America.
The Dutch mixed politics, economics, and military in their Dutch East India Company, likewise the British did the same with their British East India Company. America’s military industrial complex followed along.
But running an empire is expensive. The Dutch were forced to fight war after war with rivals defending colonies and trade routes. So did their British replacements.
America today is following suit with over seven hundred bases in eighty countries, and its shipyards literally can’t produce destroyers quick enough to keep up with demand.
Dalio notes as the empire spends more than it takes in, they use their status with their reserve currency to print more money. While it looks strong, the nation begins to decline.
The End Of A Cycle
Eventually due to a mixture of internal decadent spending and external conflict, the debt becomes unmanageable and the bubble bursts. Given a choice of default or printing money, more cash is cranked out.
Dalio says this totally deflates the currency. The Dutch Guilder lost much of its value after the Fourth Anglo-Dutch War and internal excess, while the Pound got crushed after the two World Wars and massive spending, making England lose their top status even though they won both conflicts.
Dalio points out the US is following the previous empires cranking out massive cash to cover the dot com bust, the mortgage crisis, the pandemic, internal programs, and endless wars.
But this currency suicide isn’t unique. Dalio says about seven hundred fifty currencies have existed since the 1700s, but only twenty percent of them exist now.
When the Dutch Guilder devaluated, their empire crashed, and England took their place, starting a new cycle. When the Pound burst after World War II, America took England’s place with a new world order based on the Bretton Woods Agreement.
And today? Well, BRIC Nations (Brazil, Russia, India, China, and South Africa) recently met to discuss creating a new currency to replace the plunging dollar. The only thing missing is a massive war to end the cycle, and there are many parallels today to the beginnings of WWI.
But Dalio says a traditional ending may not be inevitable.
Undoing The Downward Cycle
Rome first minted its Denarius coin in 211BC, and its value was based on its ninety-nine percent silver purity. As prosperity increased, the empire spent lavishly. Instead of controlling outflows, they mixed other metals into the coins, so they could mint more.
As the silver content went down, Roman leaders preferred to improve their techniques for blending metals to fool merchants, instead of controlling budgets. By 260AD the Denarius was only five percent silver, and the government itself wouldn’t accept it for payment of taxes.
Dalio mentions this is a repeating story, but we have the benefit of history, and know how this tale usually ends.
He thinks it will be difficult, but the Big Cycle could be extended or reversed if a government could focus on spending less than it takes in. Unfortunately, it also depends on the civility of the public.
Although it beats the alternatives: civil strife and war between an older and newer global power hammering out an alternative world order. These result only in pain.
As for us, Dalio recommends investing any free money into commodities and stocks because they go up in value as cash goes down.
Personally, I’d also recommend Dalio’s video The Changing World Order. This article doesn’t do it justice, and it might be enough of a warning to wake up those sleep walking through the end of a Big Cycle.
-Originally posted on Medium 5/4/23