Principles for Dealing with the Changing World Order. Ray Dalio

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What do I love about: How Big Things Get Done?

I have fallen in love with Ray’s collection of principles. In the Principles for Dealing with the Changing World Order, Ray systematically maps out the cycle that all great dynasties have gone through. Despite the fact that this book is quite voluminous, Ray highlights principles through out the book which makes it easy for readers to digest.

What do I not love about: How Big Things Get Done?

The only thing I was weary about was the size of the book. But glad there is a 43min clip that provides you all you need to know;

Who should read: How Big Things Get Done?

Anyone curious and anxious about the future and looking to create financial strategies within the context of the global economy.

Who should not read: How Big Things Get Done?

If you don’t care about how micro and macro-economic factors impact you.

Notes about How Big Things Get Done?

Timeless principles shared in introduction.

The swinging of conditions from one extreme to another in a cycle is the norm, not the exception.
The really big boom periods and the really big bust periods, like many things, come along about once in a lifetime and so they are surprising unless one has studied the patterns of history over many generations.
The future we encounter is likely to be very different from what most people expect.
No system of government, no economics system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.
One’s ability to deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past.
When wealth and values gap are large and there is an economic downturn, it is likely that there will be a lot of conflict about how to divide the pie.
Countries didn’t come into existence until the 17^th century after the 30 years’ war in Europe.

PART I: How The World Works

Timeless principles on how the world works.

Throughout time, the formula for success has been a system in which well educated people, operating civilly with each other, come up with innovations, receive funding through capital markets, and own the means by which their innovations are turned into the production and allocation of resource, allowing them to be rewarded by profit-making.
Countries with large savings, low debts, and a strong reserve currency can withstand economic and credit collapses better than countries that do not have much savings, have a lot of debt and don’t have a strong reserve currency.
History rhymes because its most important events repeat, though never in the exact same way.
Heavy indebtedness with the central bank printing a lot of money, internal conflict stemming from gaps in wealth, values, and politics; and the rise of one or more competing powers that typically leads to the decline of an incumbent empire.
To be successful one must earn an amount that is atleast equal to the amount one spends.
The degree of inventiveness and innovation in a society is the main driver of its productivity.
Throughout time and in all countries the people who have the wealth are the people who own the means of wealth production and in order to maintain it, they work with the people who have the power to set and enforce the rules.
In all countries throughout time (though in varying degrees) people find themselves within “classes” either because they choose to be with the same people like them or because others stereotype them as part of certain groups.
The societies that draw on the widest range of people and give them responsibilities based on their merits rather than privileges are the most sustainable successful because 1)they find the best talent to do their jobs, 2)they have diversity of perspectives, and 3)they are perceived as the fairest, which fosters social stability.
The ability to make money, save it, and put it into capital (i.e capitalism) is an effective motivator of people and allocator of resources that raises peoples living standards. But capitalism is also a source of wealth and opportunity gaps that are unfair, can be counterproductive, are highly cyclical, and can be de-stabilizing. In my opinion, the greatest challenge for policy makers is to engineer a capitalist economic system that raises productivity and living standards without worsening inequities and instabilities.
Having a currency reserve is great while it last because it gives a country exceptional borrowing and spending power and significant power over who else in the world gets the money and the credit needed to buy and sell internationally.
You should not rely on the government to protect us financially.
All currencies devalue or die, and when they do, cash and bonds are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burden.
Typically a country loses its reserve currency status when there is an already established loss of economic and political primacy to a rising rival, which creates vulnerability.
The biggest thing affecting most people in most countries through time is how people struggle to make, take, and distribute wealth and power, though they also struggle over other things, most importantly ideology and religion.

6 stages of the archetypical cycle

Stage 1: when the new order begins, and the new leadership consolidates power

Stage 2: When the resource allocation systems and government bureaucracies are built and refined.

To be successful the system has to produce prosperity for most people, especially the large middle class.

Stage 3: When there is peace and prosperity.

Stage 4: When there are great excesses in spending and debt and the widening of wealth and political gaps.

Stage 5: When there are very bad financial conditions and internal conflict. The classic toxic mix of forces that brings about big internal conflicts consist of 1) the country and the people in the country (or state or city) being in bad financial shape (i.e having big debt and non-debt obligations) 2) large income, wealth and value gaps within that entity and 3) a severe negative economic shock.

History shows that raising taxes and cutting spending when there are large wealth gaps and bad economic conditions, more than anything else, has been a leading indicator of civil wars or revolutions of sometime.
Those places (cities, states, and countries) that have the largest wealth gaps, the largest debts, and the worst declines in incomes are most likely to have the greatest conflicts.
During times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies.
Not knowing what is true because if distortions in the media and propaganda increases as people become more polarized, emotional and politically motivated.
Both giving the freedom to protest and suppressing protests are risky paths for leaders as either path could lead the revolution to get strong enough to topple the system.
To have peace and prosperity, a society must have productivity that benefits most people.

Stage 6: When there are civil wars/revolutions.

Civil wars inevitably happen so rather than assuming it won’t happen here, which most people in most countries assume after an extended period of not having them. It is better to be wary of them and look for the markers to indicate how close one is.
Most civil wars have had some foreign powers participate in attempt to influence the outcome of their benefit.

Self-interest and self-survival, the quest for wealth and power is what most motivates individuals, families, companies, states and countries.
Before there is a shooting war, there is always an economic war.
In war, one’s ability to withstand pain is even more important than one’s ability to inflict pain.
As for investing, sell out of all debt and buy gold because wars are financed by borrowing and printing money, which devalues debt and money, and because there is a justifiable reluctance to accept credit.
All markets are primarily driven by just four determinants: growth, inflation, risk premiums, and discount rates.

PART II – How The World Has Worked Over The Last 500 Years

Wars are devasting financially; that is true for the winners and much more for the losers.
International relations are driven much more by raw power dynamics.
Because spending on military takes government money away from spending on social programs, and because military technologies go hand in hand with private sector technologies, the biggest military risk for the leading powers is that they lose the economic and technology wars.
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.
When there is a great increase in money and credit, it drives down the value of money and credit, which drives up the value of other investment assets.
Greater polarization equals either a) greater risk of political gridlock, which reduces the chances of revolutionary changes that rectify the problems or b) some form of civil war/revolution.
When countries have big internal disorder, it is an opportune moment for opposing countries to aggressively exploit their vulnerabilities.
History has taught us that when there are leadership transitions and/or weak leadership at the same time that there is big internal conflict, the risk of the enemy making an offensive move should be considered elevated.

PART III: The Future

While extrapolating the past is generally a reasonable thing to do, also be prepared to be surprised because the future will be much different than you expect it to be.
Identifying, understanding and adapting to paradigm shifts is essential, even if one cannot anticipate them. Though trying to anticipate them with good indicators that help is important too.
In the markets and in life, to be successfully one should bet on the upside that comes from a)evolution that leads to productivity improvements, but not so aggressively that b) cycles and bumps along the way knock you out of the game.
Peace is profitable and war is costly.
The best way to fight a war is to get strong and show one’s opponent one’s strength so they don’t want to fight violently.
Know all the possibilities, think about the worst-case scenarios, and then find ways to eliminate the intolerable ones.
Put deferred gratification ahead of immediate gratification so you will be better off in the future.
Triangulate among the smartest people possible.