Principles for Dealing with the Changing World Order

Dalio studies the rise and decline of reserve currency empires, principally the Dutch, the British and the American, plus Chinese dynastic history, and proposes a repeating cycle he calls the big cycle. He argues that the pattern is driven by the interaction of a long-term debt cycle, an internal order and disorder cycle driven by wealth gaps, and an external cycle of competition between a rising power and an incumbent.

His method combines historical narrative with quantitative indices he constructs for education, innovation, competitiveness, military strength, trade share, financial centre status and reserve currency status, plotted across five hundred years. He argues that these indicators rise and fall in a consistent sequence, with reserve currency status the last to be lost because it persists long after the underlying strength has gone.

The stages he describes run from a new order after conflict, through peace and prosperity, debt accumulation, excess and bubble, debt crisis, money printing, internal conflict driven by wealth gaps, and finally external war, followed by a new order. His conclusions for the current period are that the United States sits in the late stage, that internal wealth gaps and political polarisation match the historical pattern, and that the competition with China follows the standard rising and incumbent power dynamic.

Historians criticise the compression of very different societies into one template, the constructed indices whose components are chosen by Dalio, and the confidence with which the pattern is asserted. The argument cannot be falsified in any specific period. Dalio's forecasting record from this framework has been mixed. Read it for the debt cycle mechanics and the indicator framework rather than as prediction.

Founder and former co-CIO, Bridgewater Associates 1975-2022

Principles and the debt-cycle template are primary sources that a large secondary literature now builds on.

Bridgewater Associates