The Froogal Stoodent: The Changing World Order: A Froogal Stoodent review

The Changing World Order: Where We Are and Where We’re Going by Ray Dalio – Notes and Quotes

Eighth in a series of book reviews by The Froogal Stoodent

If you’ve read my review of Life and Work Principles, you know Ray Dalio is the founder of a hedge fund, Bridgewater Associates.

If you’ve watched his viral video, “How the Economic Machine Works,” you know Dalio has been sharing insight about economic matters for years.

For example, this video explains that while money is money, debt is also money. To explain this, imagine using a mortgage—which is debt—to purchase a house. The seller of the house accepts money from the bank, and the bank is accepting your promise to pay. So your promise to pay (mortgage debt) becomes the bank’s asset, and that promise enables you to purchase a house.

On a broader scale, expanding the amount of debt in circulation can cause some of the ups-and-downs of the so-called ‘business cycle.’

Well, The Changing World Order expands on that 30-minute video, by explaining these and other principles in greater detail, and also highlighting some of the broader world implications for the future. In fact, he and his team have created a video specifically to go along with this book, too.

Dalio made his unedited, working version of this book publicly available during 2020, when many businesses and organizations were closed down. This is the version I read, so it probably won’t be exactly the same as the final published version. Indeed, I identified places where a sharp editor would rephrase things, or insert punctuation, to make the point clearer and more easily readable.

And, of course, since I read this as a web page, there was no pagination, so I’ll have to simply specify the chapter instead of the usual page numbers.

But polished or not, Dalio’s insights are certainly helpful! So let’s dig in.

While my final conclusion about Dalio’s Life and Work Principles was that it was mainly meant for founders and executives, this book is much more broadly useful, at least to small fries like us. The Changing World Order is meant to explain big-picture economics, mostly by studying the rise and fall of some of the greatest empires in world history.

Dalio’s writing style still isn’t a breezy read like a novel, and I have no doubt that plenty of people would find this book too boring to read. Personally, I find it pretty interesting, but then, I’m still an academic at heart. So even if you don’t find it interesting, at least this book is very useful for someone who seeks a more nuanced understanding of how money works.

I highly recommend this book! It’s probably the single best overview of money, history, and political economics that I’ve found to date. Dalio does a masterful job of understanding the different forces at work, and then distilling them into a single, comprehensive overview of where we’ve been, where we are, and where we’re going.

As with my review of Bogle’s Clash of the Cultures, I’ll use extended quotes here, because Dalio doesn’t include a lot of pithy one-liners. But there’s plenty of good information nonetheless.

“What you are now reading came about because of my need to understand important things that are now happening that hadn’t happened in my lifetime but have happened many times before that.”

—The Changing World Order, Introduction

A succinct explanation of Dalio’s motivation for studying—and writing about—all this economic and historical stuff.

“The country that gets to print the world’s primary currency (now the US) is in a very privileged and powerful position, and debt that is denominated in the world’s reserve currency (i.e., US dollar-denominated debt) is the most fundamental building block for the world’s capital markets and the world’s economies. It is also the case that all reserve currencies in the past have ceased to be reserve currencies, often coming to traumatic ends for the countries that enjoyed this special privilege.”

—The Changing World Order, Introduction

“More specifically, in 2008-09 like in 1929-32, there were serious debt and economic crises. In both cases, interest rates hit 0% which limited central banks’ ability to use interest rate cuts to stimulate the economy, so, in both cases, central banks printed a lot of money to buy financial assets which, in both cases, caused financial asset prices to rise and widened the wealth gap. In both periods, wide wealth and income gaps led to a high level of political polarization that took the form of greater populism and battles between ardent socialist-led populists of the left and ardent capitalist-led populists of the right. These domestic conflicts stewed while emerging powers (Germany and Japan in the 1930s) increasingly challenged the existing world power. And finally, just like today, the confluence of these factors meant that it was impossible to understand any one of them without also understanding the overlapping influences among them.”

—The Changing World Order, Introduction

“When the richest get into debt by borrowing from the poorest, it is a very early sign of a relative wealth shift [between countries]. For example, in the 1980s, when the US had a per capita income that was 40 times that of China’s it started borrowing from Chinese who wanted to save in US dollars because the dollar was the world’s reserve currency…Similarly, the British borrowed a lot of money from its much poorer colonies, particularly during WWII, and the Dutch did the same before their top, which contributed to the reversals in their currencies and economies when the willingness to hold their currency and debt suddenly fell.”

—The Changing World Order, Chapter 1

“When the rich fear that their money will be taken away and/or that they will be treated with hostility, that leads them to move their money and themselves to places, assets, and/or currencies that they feel are safer. If allowed to continue, these movements reduce the tax and spending revenue in the locations experiencing these conflicts, which leads in turn to a classic self-reinforcing hollowing-out process in the places that money is leaving. That’s because less tax money worsens conditions, which raises tensions and taxes, causing still more emigration of the rich and even worse conditions, and so on…When it gets bad enough, governments no longer allow that to happen—i.e., they outlaw the flows of money out of the places that are losing them and to the places, assets, and/or currencies that are getting them, which causes further panic by those seeking to protect themselves.”

—The Changing World Order, Chapter 1

“As a principle, debt eats equity. What I mean by that is that for most systems, when the rules of the game are followed, debts have to be paid above all else so that when one has “equity” ownership—e.g., in one’s investment portfolio or in one’s house—and one can’t service the debt, the asset will be sold or taken away.”

—The Changing World Order, Chapter 2

On several different occasions, Dalio points out how debt makes people, institutions, and countries weak and vulnerable. In Antifragile, Taleb says something similar. Take what you will from this lesson.

“As far as how the economic machine works, the big thing is that money and credit is stimulative when it’s given out and depressing when it has to be paid back. That’s what normally makes money, credit, and economic growth so cyclical.”

—The Changing World Order, Chapter 2

“History has shown us that we shouldn’t rely on governments to protect us financially. On the contrary, we should expect most governments to abuse their privileged positions as the creators and users of money and credit for the same reasons that you might do these abuses if you were in their shoes.”

—The Changing World Order, Chapter 2

“How do governments react when they have debt problems? They do what any practical, heavily indebted entity with promises to give money that they can print would do. Without exception, they print money and devalue it if the debt is in their own currency…This approach of printing money to buy debt (called debt monetization) is vastly more politically palatable…than imposing taxes, which leads taxed people to get angry. That is why in the end central banks always print money and devalue.”

—The Changing World Order, Chapter 2

“So, holding debt (e.g., bonds) is a bit like holding a ticking time bomb that rewards you while it’s still ticking and blows you up when it goes off. And as we’ve seen, that big blowup (i.e., big default or big devaluation) happens something like once every 50 to 75 years. These cycles of debt and writing off debts have existed for thousands of years and in some cases have been institutionalized. For example, the Old Testament provided for a year of Jubilee every 50 years, in which debts were forgiven (Leviticus 25:8-13).”

—The Changing World Order, Chapter 2

“While people tend to think that a currency is pretty much a permanent thing and believe that ‘cash’ is the safe asset to hold, that’s not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out.”

—The Changing World Order, Chapter 3

“Of the roughly 750 currencies that have existed since 1700, only about 20% remain, and of those that remain all have been devalued…In 1850 in what is now Germany, you would have used the gulden or the thaler. There was no yen, so in Japan you might have used a koban or the ryo instead. In Italy you would have used one or more of the six possible currencies. You would have used different currencies in Spain, China, and most other countries. Some were completely wiped out (in most cases they were in countries that had hyperinflation and/or lost wars and had large war debts) and replaced by entirely new currencies.”

—The Changing World Order, Chapter 3

“History has shown that there are very large risks in holding interest-earning cash currency as a storehold of wealth especially late in debt cycles.”

—The Changing World Order, Chapter 3

“Most importantly, this war [the Fourth Anglo-Dutch War of 1780-1784] destroyed the profitability and balance sheet of the Dutch East India Company. While it was already in decline due to its reduced competitiveness, it ran into a liquidity crisis after a collapse in trade caused by British blockades…it suffered heavy losses during the Fourth Anglo-Dutch War and began borrowing aggressively from the Bank of Amsterdam because it was too systemically important for the Dutch government.”

—The Changing World Order, Chapter 4

Hmm…so the company got so big that its government had to bail it out? Gee, why does that sound familiar?…

“Over the years, and at this moment of crisis, the bank had created many more “paper money” claims on the hard money in the bank than could be met so that led to a classic run on the Bank of Amsterdam, which led to the collapse of the Dutch guilder. It also led to the British pound clearly replacing the Dutch guilder as the leading reserve currency.”

—The Changing World Order, Chapter 4

The Bank of Amsterdam tried to print its way out of a crisis, and as a result, people lost confidence in the Dutch currency. Money printer go brr…

“As is typical, with the decline in power of the leading empire and the rise in power of the new empire, the returns of investment assets in the declining empire fell relative to the returns of investing in the rising empire.”

—The Changing World Order, Chapter 4

“In 1929 the Roaring ’20s bubble burst and the global depression followed. It led to virtually all countries having significant internal conflicts over wealth that led them to turn to more populist, autocratic, nationalistic, and militaristic leaders and policies. These moves were either to the right or to the left and occurred in varying degrees…The US and the UK had less severe conditions and much stronger democratic traditions, so they became more populist and autocratic than they were, but not nearly as extreme as other nations.”

—The Changing World Order, Chapter 5

Sounds familiar. Occupy Wall Street? Check. Chatter about the increasing wealth gap? Check. The rise of populist politicians in both major political parties? Check. Increasing discussion about things like wealth redistribution and a universal basic income? Check.

An interesting insight into how economic factors seem to drive political factors.

“In other words, post-war the United States was in one of those great mutually and self-reinforcing Big Cycle upswings. It was popularly believed in the mid-1960s that economics was a science so we could expect economic prosperity and the stock market always went up with wiggles around the uptrend so one should make “dollar cost average” purchases—i.e., buy consistently so that one would buy on the dips as well as the highs. Because of that confident psychology, which was the opposite of the conservative psychology that existed in the 1950s, the stock market hit its high in 1966, which marked the end of the good times for 16 years.”

—The Changing World Order, Chapter 5

“Throughout the prosperous 1960s, the US did the classic things that helped the world to become more dollarized…Global lending of dollars by American banks boomed. However, as is typical, a) those that prospered overdid things by operating financially imprudently while b) global competition, especially from Germany and Japan, increased. As a result, the lending and the finances of Americans began to deteriorate at the same time as its trade surpluses disappeared.”

—The Changing World Order, Chapter 5

And

“These debt cycles are both undesirable and understandable because there is a tendency to favor immediate gratification over long-term financial safety, particularly by politicians. Most people pay attention to what they get and not where the money comes from to pay for it, so there are strong motivations for elected officials to spend a lot of borrowed money and make a lot of promises to give voters what they want and to take on debt and non-debt liabilities that cause problems down the road.”

—The Changing World Order, Chapter 5

Classic human psychology—short-term thinking, leading us to assume good times will last forever, and get scared when they inevitably end. Greed and fear.
These are the kinds of insights that make this book so worthwhile! Dalio describes the inevitably cyclical nature of things, and connects the cycles to the humans that drive them. This kind of rare wisdom is why an advanced investor needs to read the entire book, not just these excerpts.

“I also learned that the value of assets is the reciprocal of the value of money and credit (i.e., the cheaper money and credit are, the more expensive asset prices are) and the value of money is the reciprocal of the quantity of it in existence, so when central banks are producing a lot of money and credit and making it cheaper, it is wise to be more aggressive in owning assets.”

—The Changing World Order, Chapter 5

Spoken like someone who ran a hedge fund and therefore had to make trades relatively frequently.

“[Since 2008], borrowed money was essentially free, so investment borrowers and corporate borrowers took advantage of this to get it and use it to make purchases that drove stock prices and corporate profits up. This money did not trickle down proportionately…the wealth and income gaps are now the largest since the 1930-45 period.”

—The Changing World Order, Chapter 5

“If the US dollar were to lose its reserve status and significantly depreciate in value it would have a devastating effect on the finances of those countries holding those reserves as well as private-sector holders of dollar-debt assets. Who would be the winners? Those with dollar-debt liabilities and those with non-dollar assets would be the big winners.”

—The Changing World Order, Chapter 5

“It struck me as odd that the Chinese, who were earning about one-fortieth of what Americans earned, on average, would be lending money to Americans to buy consumer goods…To me it was a shocking reflection of how much more Americans were willing to get into debt to finance their overconsumption and how much more the Chinese valued saving.”

—The Changing World Order, Chapter 6

“As is classic, periods of prosperity financed by debt growth lead to a debt bubble and a large wealth gap. The bubble burst in 2008 (like in 1929), so the world economy contracted…with economic bad times coinciding with large wealth gaps, populism and nationalism grew around the world.”

—The Changing World Order, Chapter 6

“Destiny and the way the wealth cycle works, especially under capitalism, led to the incentives and resources being put into place…that are now causing conflicts, threatening the domestic order, and threatening the productivity that is required for the US to stay strong…Similarly destiny and the way the global power cycle works have now put the United States in the unfortunate position of having to choose between a) fighting to defend its position and its existing world order and b) retreating.”

—The Changing World Order, Chapter 7

This chapter is all about the possibility for conflict—economic conflict, political conflict, or even military conflict—between China and the United States. Dalio inspects each country’s position. Of course, he concludes that the US is just past its peak and that China is ascending. He concludes that China is likely to be stronger than the US in many dimensions by 2030. Though a war is not necessarily inevitable, if one does occur, it is likely to be extremely damaging to both sides.

“History has shown that the successes of all countries depend on sustaining the strengthening forces without producing the excesses that lead to their declines. The really successful ones have been able to do that in a big way for 200-300 years. None has been able to do it forever.”

—The Changing World Order, Chapter 7

“Chinese culture compels its leaders and society to make most decisions from the top down, demanding high standards of civility, putting the collective interest ahead of individual interests, requiring each person to know their role and how to play it well, and having filial respect for those superior in the hierarchy…Their system of governance is more like the governance that is typical in big companies, especially multigenerational companies, so they wonder why it is hard for Americans and other Westerners to understand the rationale for the Chinese system.”

—The Changing World Order, Chapter 7

“The only real rule in international relations is that there are no rules…because internationally there are no mutually agreed-upon laws…What counts most is whether you win or lose. For example, in the American Revolutionary War, when the British lined up in rows for the fight and the American revolutionaries shot at them from behind trees, the British thought that was unfair and the revolutionaries won believing the British were foolish…”

—The Changing World Order, Chapter 7

“The items that are most important in making a great empire are: leadership that is strong enough and capable enough to provide the essential ingredients for success, which include:

Strong education. By strong education I don’t just mean teaching knowledge and skills; I also mean teaching
Strong character, civility, and a strong work ethic, which are typically taught in the family as well as in school. These lead to improved civility that is reflected in factors such as
Low corruption and high respect for rules, such as the rule of law.
People being able to work well together, united behind a common view of how they should be together is also important…
A good system of allocating resources, which is significantly improved by
Being open to the best global thinking…
Greater competitiveness in global markets, which brings in revenues that are greater than expenses, which leads them to have
Strong income growth, which allows them to make
Increased investments to improve their infrastructure, education systems, and research and development, which leads them to have
Rapidly increasing productivity…When they achieve higher productivity levels, they can become productive inventors of
New technologies. These new technologies are valuable for both commerce and the military. As the country becomes more competitive in these ways, naturally they gain
A rising and significant share of world trade, which requires them to have
A strong military to protect their trade routes and to influence those who are important to them outside their borders. In becoming economically preeminent they develop
Strong, widely used currency, equity, and credit markets. Naturally those dominant in trade and capital flows have their currency used much more as the preferred global medium of exchange and the preferred storehold of wealth, which leads to their currency becoming a reserve currency and the building of
At least one of the world’s leading financial centers for attracting and distributing capital and expanding their trade globally.”

—The Changing World Order, Chapter 7

Dalio immediately goes on to point out, however, that:

“At the same time the gaining of these strengths tends to sow the seeds of the cyclical decline that one should watch out for, which shows up in the form of

Becoming less competitive because
Being successful and rich leads one to be copied by emerging competitors and leads to
Working less hard and engaging in more leisurely and less productive activities, especially as
Newer, less battle-hardened generations take the reins from those who had to be stronger and worked harder to achieve success. Also, being the richest and most powerful global power leads to one
Having a reserve currency, which gives one
The “exorbitant privilege” of being able to borrow more money, which leads to
Getting deeper in debt to foreigners…
…both financial bubbles and large wealth gaps…
When there is a lot of economic stress there are greater conflicts between the rich and the poor, at first gradually and then increasingly intensely, which leads to…
increased political extremism…”

—The Changing World Order, Chapter 7

There are even more bullet points in this part, but what I’ve included here is more than enough information to digest! I’ll say it once more—you should definitely read this book for yourself!

“We are now seeing growing disorder in a number of leading countries around the world, most importantly in the United States…Classically this stage comes after periods of great excesses in spending and debt and the widening of wealth and political gaps…”