All great nations go through cycles of rise and decline. With this in mind, Ray Dalio develops a framework based on key indicators to evaluate where in its cycle a nation is. Using this framework, he makes the case that the United States is on the decline from it's peak, and that China will be the next dominant global power.

This book is dense with insights about how societies function, how great nations are created, how power dynamics shift over time, etc. I'd consider this essential reading for anyone curious about how the world works.

My Notes

Ray Dalio believes everything is deterministic, which is what influences him to have the view that you can create models of things based on concepts, then model them in computers to make accurate predictions.

The determinants of history and the success or failure of a nation:

• The three big cycles

  • debt, money, capital markets, & economic cycle

  • internal order & disorder

  • external order & disorder

• The eight key measures of power

  • Education

  • Innovation & technology

  • Cost competitiveness

  • Military strength

  • Trade

  • Economic output

  • Markets & financial center

  • Reserve currency status

• Additional determinants

  • Geology

  • Resource-allocation efficiency

  • Acts of nature

  • Infrastructure & investment

  • Character, civility, & determination

  • Governance & rule of law

  • Gaps in wealth, opportunities, & values

• Individual dynamics to pay attention to

  • Self-interest

  • Desire to gain wealth and power

  • Learning from history

  • Multigenerational psychological cycle

  • Time frame of decision making

  • Leadership

  • Openness to global thinking

  • Culture

  • Class relationships

  • Political left/right

  • Prisoner’s dilemma

  • Relationships

  • Balance of power

  • Peace & war cycle

There are 3 types of money that nations rotate through using at different stages

1. Hard money (like gold & silver) with direct value

2. Backed money (ex: paper money backed by gold)

3. Fiat money, completely unbacked and trust based

The debt and money cycle always progresses as follows:

1. Countries have little debt and most money is type 1 “hard” money

2. Then, claims on hard money (aka type 2 “paper” money) get created for efficiency

3. The countries starts to use debts because of the efficiency boost

4. Debts start to build up, people begin to default, and more debts exist than economic growth

5. Money gets unlinked from hard money and becomes trust based type 3 “fiat” money, which eventually leads to the debasement of the currency

6. Eventually, the system needs to get reset back to using “hard” money

The nation that controls the global reserve currency is in a position of massive power, as they can control what countries money flows into. However, because they can print money to payoff debts and alleviate bad debt situations, the temptation always pushes them to eventually devalue their own currency.

Currently, the United States is the default global reserve currency, but it’s on the decline, and Dalio believes that the Chinese renminbi is the currency fit to be the next global reserve currency.

Nations also go through a cycle of internal order & disorder involving rise to power, consolidation, and internal conflict. Different types of leaders tend to rise to power and succeed at different stages.

1. The new order begins and the new leadership consolidates power (ex: August Caesar). This is the first stage of the internal order cycle after recent disorder and requires consolidation to regain organization

2. Resource-allocation begins and government bureaucracies are built (ex: Lee Kuan Yew, Deng Xiaoping). This is the beginning of where systems are built to increase efficiency and produce prosperity.

3. There is an extended period of peace and prosperity (ex: JFK, Bismarck, LKY). This is where the wins of the previous organization pay off and the nation enters a period of success with high ambitions, economic growth, technological advancement, etc. This is the stage nations would ideally stay in.

4. The period of excesses (ex: Louis XIV, Nero). Where the success from the period of prosperity leads to decadence, increases in consumption of luxury goods, decreased productivity, excess borrowing, etc. This harms the economy and country as a whole, and is the beginning of it’s decline - partly due to complacence, arrogance, and laziness.

5. Bad financial conditions and internal conflict develop. Typically the nation will have excess decadence, high wealth inequality & class warfare, heavy bureaucracy, loss of rule following, etc.

6. Finally, this leads into internal conflict, revolution, and civil war once violence starts to break out or tensions build, leading to the victors restarting the cycle and creating a new order.

The cycle of external order & disorder is similar, except with relations between different countries. These wars often decide the global order - for example the world wars establishing the United States dominance in the world.

By examining all these indicators, Ray Dalio has concluded that the United States is showing all the signs of a power on the decline & in stage 5 of the cycle:

• High wealth inequality

• Increasing polarization in politics and a move toward populism on both extremes

• Large debts and continuous printing of money which leads to an inevitable devaluation of the currency

• Downward movement in the US dollars reserve currency status (although it still owns 55% of the global reserve currency market)

Meanwhile, he believes that China is on the ascendant with increasing quality of education, increases in technology and economic growth, not as much debts, a currency prepared to be the next global reserve currency.

It’s not inevitable that China will overtake the United States, but he believes that it’s more likely that not that the world order may change with the US on the decline and China on the rise in the next few decades.

I often take the political & economic stability of the United States for granted, but this book reminded me of how temporary that could be.