Short summary: 2 min
Long summary: 47 min
Book reading time: 13h27
Book published in: 2021
- A country gains power when it encounters favorable economic and social conditions that enable the development of its economy and military.
- This country directs the world order once it becomes more powerful than all the other countries (shown by winning a war).
- Once the country peaks, the population gets lazy. It borrows money instead of working hard. The country loses its economic and military edge. It becomes decadent.
- The shift from one world order to another happens when a new rising power becomes stronger than the decaying one.
- The decaying power often engages and loses a war against the rising power.
- The whole cycle starts again.
What Principles for Dealing with The Changing World Order Talks About
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Principle for Dealing With the Changing World Order is a book written by Ray Dalio. It narrates the rise and fall of countries through an economic and social lens. It explains that at any moment in time, one country is more powerful than all the others and directs the world order. This order changes every 200 years or so as the leading country loses its power while another one rises.
I was looking forward to reading the book because it promised a glimpse into the political and economic changes of the future.
It didn’t disappoint in this regard. In fact, it over-delivered.
After reading Nassim Taleb’s Incerto, I adopted Taleb’s conclusion that predicting the future was futile because it was too random and too different from the past.
This book demonstrates the opposite. Because history is a cycle, we can anticipate what’s to come provided we know where we are in the cycle.
History as a cycle (instead of history as a straight line) is not a farfetched idea.
Humans have a hard time learning the lessons of their elders. Pushed by envy, jealousy, and laziness, they make the same mistakes – and so the whole thing starts again, in a never-ending…well, cycle.
Because Ray Dalio shows how history repeats over lifetimes, this book is one of the most important books ever written.
It’s a blueprint for the development of an empire, and a manual against its decadence.
It’s a book every politician in the world should read.
Yet, it’s not without default. The book is too long, too specific at times, and too repetitive. The author introduces too much of what he is about to say.
For example, Dalio wrote an entire chapter to present parts I and II, only to give a detailed explanation of these two parts in the subsequent chapters.
Some parts, like the part about Chinese culture and history, were completely irrelevant and painful to go through (especially for a book that promised to take you through economic cycles, not Confucianism.)
Like most books, the most important part is the first 20% of the book. The rest is interesting, but not as much as the beginning.
About this Summary
Throughout the book, the author dispenses his principles. I highlighted them in red in the summary.
Also, Ray Dalio made a video illustrating the thesis of his book.
I watched it, and would recommend you do too, before or after reading the summary (it is below).
I also wrote a short summary if the long-form summary is too long for you.
So, should you buy the book?
If you’re a history and economics freak like I am, definitely yes.
But if you’re merely interested, the video and both summaries will be more than enough.
Short Summary of Principles For Dealing With the Changing World Order
Two cycles govern the rise and fall of nations and empires.
The first one is the long-term debt cycle. In the beginning, debt levels are low, borrowers borrow money, they invest and create wealth so the productivity, wealth, and standards of living of the country rise.
When the country peaks economically, the population becomes lazy and decadent. People no longer borrow to invest and create. They borrow to consume and rest. As a result, the country becomes less innovative and its power declines until the high level of debt triggers financial and socio-economic crises, and sometimes, wars.
This leads the country to collapse and the cycle starts again. Low levels of debt, etc.
The second cycle is the Cycle of Internal Order. It looks at how people behave with each other. Do they respect the law? Do they help each other? Are they well educated? Do they work hard?
When people are poor, they are willing to work hard to become rich and improve their lives. When they’re already rich, they’re not willing to do so. They become lazy and entitled. The country loses economic power, people become poorer, and start to fight over resources.
The country declines and sometimes, disappears.
These two cycles (which happen simultaneously on top of each other) influence the World Order Cycle. Whichever country is the strongest establishes its own World Order. When this country declines while another one rises, the World Order is up for a change.
The World Order switch happens when the upcoming country is clearly stronger than the former country, which often happens when the former country loses a war against the upcoming one.
This is how the two Internal Cycles influence the External Cycle, the World Order.
All nations have risen and fallen in the same way by doing the same things.
This is why nations that rise, eventually fall.
Table of Content
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Summary of The Changing World Order Written by Ray Dalio
- Chapter 1: The Big Cycle in a Tiny Nutshell
- Chapter 2: The Determinants
- Chapter 3: The Big Cycle of Money, Credit, Debt, and Economic Activity
- Chapter 4: The Changing Value of Money
- Chapter 5: The Big Cycle of Internal Order and Disorder
- Chapter 6: The Big Cycle of External Order and Disorder
- Chapter 7: Investing in Light of the Big Cycle
Part II: How the World Has Worked Over the Last 500 Years
- Chapter 8: The Last 500 Years in a Tiny Nutshell
- Chapter 9: The Big Cycle Rise and Decline of the Dutch Empire and the Guilder
- Chapter 10: The Big Cycle Rise and Decline of the British Empire and the Pound
- Chapter 11: The Big Cycle Rise and Decline of the United States and the Dollar
- Chapter 12: The Big Cycle Rise of China and the Renminbi
- Chapter 13: US-China Relations and Wars
Summary of Principles For Dealing With the Changing World Order Written by Ray Dalio
The decline of an empire (USA) and the rise of another one (China) have never happened in our lifetime. But they have happened many times before in a series of events called a Big Cycle, lasting roughly 250 years.
The Big Cycle produces swings between:
- Peaceful and prosperous times
- Depression, revolutions, and war periods
- The swinging in the cycle from one extreme to another is the norm, not the exception.
Depression and war periods mark the transition from one world order to another. While they create a lot of suffering, they also get rid of the weaker elements and excess (debt, bad behavior, etc).
The Big Cycle includes the long-term debt cycle which lasts 100 years; and the short-term debt cycle which lasts around eight years.
When cycles align, the world order changes.
- The peaceful and depression periods come once in a lifetime, which explains why they always surprise people.
- Our future will likely be very different from our past (but not different from a further past).
- No system of government, no economic system, no currency, and no empire lasts forever. Yet everyone is surprised when they fail.
- Dealing with the future comes from understanding how things change. You can understand how things change by studying how they changed in the past.
There are three forces constantly at play, that influence life.
- The Long-Term Debt and Capital Markets Cycle: debt has never been neither so low (in terms of interest rates) nor so abundant.
- The Internal Order and Disorder Cycle: Wealth, values, and political inequalities are larger than they have ever been since the 1950s.
- The External Order and Disorder Cycle: China is becoming as strong, if not stronger, than the US.
- When wealth and value gaps are large, conflict often ensues.
The author studied the Dutch Empire, the US Empire, and the British Empire at large. Then he looked at the French, German, Chinese, Japanese, Indian, and Russian empires.
He noticed that they all rose and fell in the same way, which will be outlined in the book.
- To see the bigger picture, you can’t focus on the details.
We will therefore remain imprecise.
Part I: How the World Works
Chapter 1: The Big Cycle in a Tiny Nutshell
The biggest thing that impacts people is the struggle to make, take, and distribute power.
Wealthy people are those who own the means of production. They work in symbiosis with politicians to set rules. This happened equally in all empires.
In the long term, fewer people own more and more wealth and power. Then they overextend and fail. This hurts the poor and leads to revolutions and civil wars.
The empire disappears and a new empire takes over, which leads to a new world order, and the cycle starts again.
The Big Cycle governs the rising and decline of empires and influences everything about them.
The next three important cycles are:
- The Long-Term Debt and Capital Markets Cycle
- The Internal Order and Disorder Cycle
- The External Order and Disorder Cycle
These cycles don’t change, because human nature doesn’t change: we still deal with fear, greed, and jealousy as we did since the dawn of time.
What changes is technology. Countries still rise and fall, but in the long term, people are getting richer.
Why? Because of evolution.
Evolution is the single force that persists across time – and across all of these empires.
To quote the author: evolution is the upward movement toward improvement that occurs because of adaptation and learning. It evolves in cycles: people get richer, then poorer, then richer, then poorer, etc.
Wealth rises over time due to human productivity. The more we produce, the richer we get.
Productivity in a system depends on the capacity of said system to turn ideas into economic outputs.
Evolution drives the trend up. As time goes by, we produce more, so our wealth increases.
Learning and productivity don’t cause major big shifts in society. They are not the cause that lead to important events.
So, what is?
Booms, busts, revolutions, and wars. These are driven by the cycles we have talked about.
- Throughout time, the formula for success has been a system in which people would borrow money, innovate, and turn these innovations into means of production, then reap the profits.
Capitalism, while responsible for creating enormous wealth, also created gaps in wealth and overindebtedness that have led to economic downturns, depressions, etc.
All fights that ever happened, happened due to fighting over wealth and power. These events, and natural events, have been the ones that influenced the course of history the most.
Countries that fail in these moments are weak countries.
- Countries with large savings, low debts, and a strong reserve currency can resist better than those with low savings, huge debts, and no reserve currencies.
Past Big Cycle Shifts in Wealth and Power
Throughout history, various groups of people (tribes, countries, etc) have gathered power. When they got more power than anyone else, they became world leaders and established a world order.
When they lost their wealth and power, the world order changed.
Empires’ power and wealth can be measured with the help of eight determinants.
- Innovation and technology
- Economic output
- Share of world trade
- Military strength
- Financial center strength
- Reserve currency status
These determinants usually rise and decline at the same time.
The Big Cycle starts with a new order, then follows with the rise, the top, and the decline, until a new world order is established.
The rise is the period of building. It happens because of:
- Low debt
- Low social-economic inequalities and low value and political gaps
- People work together
- This includes the government, businesses, and the military
- Education and infrastructure are good
- There is innovation and invention
- People are open-minded
- There is good leadership
- Strong characters and work ethics taught in schools, families, or religious institutions.
-> the country becomes more productive and competitive -> shares of world trade rise -> military strength increases.
The result is that people in the country earn more, hence become less competitive. The technology is copied by other countries, so innovation declines. Since people are richer, they get lazier. People borrow more, thinking that it will help them do better.
This is when we’ve reached the top. The top is characterized by:
- High debt
- High social-economic and value gaps
- Conflict between people
- Bad education and low-quality infrastructures
- Struggle between countries
The decline comes with economic weakness and social conflicts.
It happens when, internally:
- Debt becomes large, the country may default so it prints excessively.
- Great internal conflicts between the poor and the rich -> political extremism.
- The rich get taxed -> they flee.
These internal changes don’t necessarily lead to a new world order. They need to be aligned with external characteristics such as:
- Another great power rising
- A conflict emerges and weakens even more the declining power
- Poverty increases
- The decline is achieved when those that own the debt of the former empire which was the world reserve currency, sell those debts.
A Preview of Where We Are Now
In 1950, the US was at its peak. 75 years later, we are in the decline period.
It’s likely that the upcoming events (in a few years) will be traumatic for many people.