The Changing World Order - Ray Dalio

Question 1

What were the last 3 reserve currency empires?

Answer 1

Dutch, British, American (now)

Question 2

What is the most important force that causes the world’s total wealth, power, and living standards to rise over (a relatively long period of) time? What are the factors that drive this force?

Answer 2

Productivity, or output per person.

Key factors:

1) Education
2) Inventiveness
3) Work ethic,
4) Economic systems to turn ideas into output.

Question 3

What are the most important of the 17 forces that cause large shifts in wealth and power in 2021?

Answer 3

1) Debt Cycle 2) Money and Credit Cycle 3) Wealth Gap Cycle 4) GLobal geopolitical cycle

Question 4

What are the biggest factors that contribute to turbulent historical perids, including booms/busts/revolutions/wars? What makes these better or worse?

Answer 4

1) Money and Credit Collapses 2) Big wealth gaps 3) Fighting over wealth and power 4) Severe acts of nature

The strength of the country. Large savings, low debts, and strong reserve currency can withstand economic collapses better than those who don’t.

Question 5

How long do economic crisis and war periods typically last?

Answer 5

2-3 years

Question 6

Describe Characteristics of the Rough Estimates of Relative Standing of Great Empires. (see charts)

Answer 6

1. China was dominant for centuries, though it entered decline in 1800’s
2. Netherlands became a world power in the 1600’s
3. UK followed similar path to the Netherlands, peaking in the 1800’s
4. US rose to become worlds super power, now in relative decline while China is catching up once again.

Question 7

What are the 8 key measures of wealth and power?

Answer 7

1) Education (first to accelerate, first to decline)
2) Technology (second to accelerate, third to decline)
3) Competitiveness (third to accelerate, second to decline)
4) Military strength (fourth to accelerate)
5) Economic Output
6) Share of world trade
7) Financial center strength (second to last to decline)
8) Reserve currency (last to decline)

Question 8

What does it mean to be a reserve currency?

Answer 8

Central banks and large financial institutions hold the currency as a reserve. This allows countries and businesses to do business using the same currency, reducing exchange rate risk.

Question 9

What precipitates the relative decline of a countries wealth and power?

Answer 9

Reduced competition from rising incomes, copying, and rich working less hard.

High levels of indebtedness from excesses related to having reserve currency and printing too much money.

Large wealth, values, and political gaps. Rich leave and take money, poor want to overthrow system.

Poor education and infrastructure

Struggle to maintain overextended empire

Rivals perceiving domestic issues and challenging at time of weakness.

Question 10

What are the steps that produce fundamental strength and rising wealth/living standards in countries on the rise?

Answer 10

Low levels of indebtedness

Small wealth, values, and political gaps

People work effectively together to promote prosperity

Good education and infrastructure

Strong and capable leadership

Peaceful world order dominated by one world power

Question 11

What percent of global transactions take place in the USD, Euro, and all others?

Answer 11

55% USD

25% Euro

20% All others (remnimbi growing quickly, 2-3% in 2020)

Question 12

What are the stages in the cycle of a reserve currency?

Answer 12

1) Out of a massive restructuring, a new global economic leader emerges. The worlds transactions become primarily dominated in that currency (reserve) to reduce transaction costs and FX risk.
2) That country now has exceptional borrowing and spending power because while it controls the supply of money, there is an almost insatiable demand.
3) As that country continues to borrow well beyond it’s means, it’s debts grow massively relative to it’s income and devalues the currency so no one wants to hold the currency as a store of wealth (reserve).

Question 13

Countries that don’t have reserve currencies find themselves in desperate need of these reserve currencies when…

Answer 13

1) The have a lot of debt denominated in the reserve currency that they can’t print their way out of
2) They don’t have much savings in the reserve currencies that they can use to pay debt and allow for smooth trade transactions
3) They lose the ability to earn the currency

Question 14

What happens when central bank stimulus no longer goes into lending that fuels increases in economic demand?

Answer 14

Monetary Inflation. The stimulus goes into other currencies and inflation hedge assets, causing the currency used in the stimulus to decline.

Question 15

What causes an inflationary depression?

Answer 15

Stimulus goes into other currencies and inflation hedge assets at the same time there is weak demand for goods and services. The financial economy is inflating, while the real economy is deflating.

Question 16

How long do the short term and long term debt cycles typically last?

Answer 16

Short term, 8 years (last 2008)

Long term, 50-75 years (last WWII)

Question 17

When do long term debt cycles typically start and end?

Answer 17

Starts when debts are low after previously existing excess debt has been restructured in a way to leave CB’s with excess stimulant available.

Ends when debts are high, interest rates can’t be adequately lowered, and creation of money and credit increases financial asset prices more than actual economic activity.

Question 18

Why does the move from gold backed currency to fiat currency happen?

Answer 18

More money in the system, beyond what is available to be backed by gold, is stimulative to economic growth. It also removes a built-in control to avoid overprinting and money production.

Question 19

When watching whether or not there is a potential debt crisis, what are two merics to focus on?

Answer 19

The amounts of both debt and money that exist relative to the amount of hard money (eg gold)

The amounts of goods and services that exist (GDP)

Question 20

When watching for a banking crisis, what is the best metric to focus on?

Answer 20

Bank withdrawals and the total amount of money in the banks (private or government). Governments however can print to make more money (potential devaluing fx), but private banks can’t.

Question 21

What is quantitative easing?

Answer 21

When the fed buys government bonds or other assets to inject money into the economy and expand economic activity. The fed buys these assets in the open market, typically from large banks and institutions that then have additional capital to lend and stimulate the economy.

Question 22

What metric predicts debt defaults and or devaluation (if too much money is printed)?

Question 23

Why should we not rely on the government to protect us financially?

Answer 23

Each leader comes in at different points in the cycle, and acting in their own interest is typically at odds with what is best in the long run. When you can manufacture money and credit, and give it to people to make them happy, it is very hard to resist the temptation to do so.

Question 24

Define debt monetization. What are the pros and cons?

Answer 24

When a government issues debt, and the central bank buys the debt with money it has or creates. Also called quantitative easing. The pros are the government now has more money to spend on stimulus, and the debt is held by the central bank

Question 25

After a debt crisis, when money has been devalued significantly and/or debt has been defaulted on, what do governments typically do to restore confidence in the currency?

Answer 25

Peg the currency to a more stable reserve currency (USD) or allow holders to make conversions to hard money (gold).

Question 26

What are the three types of monetary systems that have existed for thousands of years?

Answer 26

Hard money (metal coins) - maximizes credibility, minimizes credit

Paper money (claims on hard money)

Fiat money (claims backed by government) - maximizes credit, minimizes credibility

Question 27

Why did the hard money system (pre-Bretton woods) end in the fiat system?

Answer 27

Claims on hard money to the actual hard money arises

Question 28

What was the Bretton Woods monetary system?

Answer 28

System of payments based on the dollar, which defined all other currencies in their relation to the dollar, which was convertible to gold. It broke down when the claims on the gold overwhelmed the actual gold held by the US Treasury.

Question 29

What are the three stages of monetary policy stimulus?

Answer 29

MP1 - Decreasing interest rates

MP2 - Debt monetization, quantitative easing (buying bonds and assets to get money into the system)

MP3 - Fiscal stimulus, direct injections into the economy through government spending.

Question 30

What are the four ways policy makers can bring down debts and debt-service levels relative to income that are required to service debts? Which is most common?

Answer 30

Austerity

Debt Defaults and Restructurings

Transfers of wealth via taxes

Printing money and devaluing it (most common)

Question 32

When did the Dutch empire last? Why did it begin and end?

Answer 32

1625 when it eclipsed Spain as global empire to 1780 when it lost it’s empire to the British.

Began with technology (ships), excellent education, military power, and financial strength (first reserve currency and stock exchange).

Ended with

1) significant debts to finance wars (Dutch East India Company)
2) lost technology (industrial revolution in Britian).
3) Loss of military power vs. Britian as it spent its money on domestic indulgences
4) Large wealth gap, decrease in work ethic and increase in government spending

Ultimately were invaded and conquered by France.

Question 33

What is the typical time in advance of an actual war that economic wars begin?

What was the cause of the economic wars between the Dutch and British?

Answer 33

The British would only allow British ships to import goods to England, the Dutch lost profits not being able to supply British ports.

Question 34

When was the British Empire? Why did it begin and end?

Answer 34

1820 to 1920

Began after a series of European wars where it set the new world order with its allies (UK, Russia, Austria, Prussia), and leveraged it’s navy and industrial revolution (1760) technology, and financial acumen to become an economic powerhouse.

Ended when;

1) Debt burdens too great from costly wars (WWI, WWII)
2) Empire was overextended and unprofitable
3) Loss of reserve currency status to the USD as the dollar became the standard

Question 35

What was the period of the 1870’s to the early 1900’s called in the U.S., England, and France?

Answer 35

Gilded Age,

Victorian Age,

la Belle Epoche

Question 36

When did the economic wars start before WWII and why?

Answer 36

Started in the early 1930’s as Germany and Japan extended their influence and competed for resources with other countries.

Question 37

When and what was the Bretton Woods monetary system, and when and why did it end?

Answer 37

In 1944, in Bretton Woods NH, it was decided that over 40 countries would peg their currency to the dollar and the US would guarantee convertibility to gold. US had 2/3 of worlds gold and most powerful military.

It ended in 1971 when the U.S. released the convertibility to gold after it’s credit (money supply) grew too great for convertibility risk.

Question 38

How long after WWII did it take for the British pound to lose reserve currency status?

Answer 38

20 years, starting at the beginning of WWII. The pound restricted convertibility into dollars (of which there was a severely limited supply), and ultimately devalued multiple times. It remained a reserve so long partially because it was able to convince it’s former colonies to maintain the pound as a reserve with guarantees it would convert to dollars at at least 90% of it’s value.

Question 39

Briefly describe the economic conditions leading up to WWII?

Answer 39

American banks suffered defaults, US Govt imposed tarriffs. Decreased global demand.

Famine in the U.S. and Russia led to additional economic contraction.

Germany had WWI debts restructured in 1930, and was hit particularly hard from the depression leading to the autocratic Hitler providing order to chaos.

Japan was hit very hard by the depression in the early 1930’s, leading to an autocratic right wing regieme.

Both Germany and Japan went after the

Question 40

What was the timeframe of the deflationary depression in the U.S., what were the actions taken by the government to stop it, and what was the outcome?

Answer 40

1929 - 1933 the U.S. failed to act, printing money to inflate the economy out of depression. In 1933 under Roosevelt the US govt finally acted through monetizing debt and fiscal stimulus. By 1936 the stock market was up 200%.

Question 41

What actions did Hitler take to build the German economy in the 1930’s?

Answer 41

Privatized state-owned businesses, and encouraged growth paid for by debt printed by the government, that was then paid for by earnings from the profitable companies.

Focused in increasing living standards for Germans (Voklswagon, autobahn).

As a result, German equities rallied 70% between 1933 & 1938.

(Example where if one is stimulating by lending in ones own currency and that money is going to increase productivity that can then be used to pay debt service that can be very positive)

Question 42

What was the Truman Doctrine?

Answer 42

Quoted from his 1947 speech - “I believe that it must be the policy of the United States to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures”

Question 43

Why did the U.S. end the Bretton Woods agreement and what was the result?

Answer 43

Ended as claims on gold outstripped actual gold backing the USD. Observing the amount of gold the U.S. had caused conversions of claims (money) to gold, and increased withdrawals.

The result was a massive devaluation of the USD against the Duetschemark and the Yen as those two economies were increasingly competitive with the U.S., and an inflationary increase in the U.S. stock market. Stock market rises because before the devaluation, there was too much debt that needed money to ease the debt burden.

Question 44

What drove the 1971 up and down debt cycle?

Answer 44

End of Bretton Woods and delinking of the USD to gold. The inflationary period in the 70’s, breaking the back of inflation through tight monetary policy, and th resulting strength in the dollar all started with the 1971 decision to delink the dollar.

Question 45

What is the U.S. and China’s share of global exports over time? (1960, 1980, 2000, now).

Answer 45

Exports are the main revenue source between countries.

Question 46

What is the trade balance as a % of GDP in the U.S. over time?

How does the U.S. finance the defecit?

Answer 46

The U.S. finances the defecit by running down it’s reserves/savings and building up a lot of debt owed to foreigners.

Question 47

What are gold reserves by country over time (in total, and as % of GDP).

Answer 47

Question 48

How much reserves (measure of savings) do the worlds leading countries have? Does this put the U.S. at a disadvantage?

Answer 48

Yes it does put the U.S. at a disadvantage, but the ability to print money gives the reserve currency holder the most valuable economic power a country can have. If the U.S. loses reserve currency status, it would be very vulnerable.

Question 49

Who would be the winners and losers if the U.S. loses it’s reserve currency status?

Answer 49

Losers - those countries holding reserves in USD and private sector holders of US debt assets (bonds).

Winners - Those with debt denominated in dollars and those with non-dollar assets.

Question 50

Share of Global GDP by country (PPP adjusted)

Answer 50

China is growing rapidly, and is already a larger % of global GDP than the U.S. on a PPP adjusted basis.

Question 51

What are the guiding philosophies for Chinese leaders?

Answer 51

Confucian

Taoist

Legalist

Marxist

Question 52

What is Confucianism?

Answer 52

Seeks to bring about harmony by having people know their roles in the hierarchy and know how to to play them well, from the family to the ruler and subjects. All are expected to be kind, honest and fair. Values harmony, education, and meritocracy.

Question 53

What is Legalism?

Answer 53

Favors conquest and unification of “all under heaven” as soon as possible by an autocratic leader. Kill or be killed jungle world, strict obedience to emperor must exist. Analog to fascism.

Question 54

What is Taoism?

Answer 54

Laws of nature and living in harmony with them are of paramount importance. Seeking the balance of opposites.

Question 55

Primary difference between Chinese and U.S. government styles?

Answer 55

China is run top down, like a family, optimizing for the collective.

U.S. is run bottom up, optimizing for the individual.

Question 56

What are China’s philosophies on wars and how have they typically been fought?

Answer 56

Win not by fighting, but by quietly developing power to the point where it’s greater than the opponent, and have opponent capitulate without fighting.

Most of China’s wars have been internal, external wars have been for relative power, security, and trade. Never for occupation. China is self sufficient in resources and land, rarely has occupied distant states.

External countries where China wields power typicaly paid tribute to China and in return receive guarantees of peace and trading opportunities, retaining culture.

Question 57

What are the two things currencies are used for and what is the test of the real value of a domestic currency?

Answer 57

Domestic and international transactions. For domestic transactions, governments can get away with poor policy (fiat) as they have monopoly over supply/demand, international transactions show the real value (if none they won’t be accepted).

Capital controls that prevent the free exchange of one’s domestic currency internationally reduce international demand and are not typical of reserve currencies. When you see capital controls, run out of that currency!

Question 58

When do you want to run out of fiat currencies?

Answer 58

During debt crisis and wars - they will be printed to fund payments and will lead to devaluation and high inflation.

Question 59

Describe the following over time;

CNY vs. USD

CNY vs. Gold

Chinese Inflation (Y/Y)

Chinese Real Growth (Y/Y)

Answer 59

Question 60

What is the total number of college graduates in China vs. U.S. in science, engineering, and math?

Answer 60

China is 3x the U.S. However, Chinese Universities are not as high quality.

However only 1 Chinese University (Tsinghua at no 36) is in the top 50 in the world vs. 29 of the top 50 in the U.S.

Question 61

What was the cause of the decline in Chinese civilization from 1840-1949?

Answer 61

Classic big debt cycle decline -

• The Qing dynasty became weak and decadent at the same time the British and other Western countries were becoming strong.
• The financial and monetary systems broke down under debt burdens that couldn’t be paid and printing of money caused devaluation.
• Massive domestic rebellions and civil wars.

Called “The Century of Humiliation”

Question 62

How was Mao’s view of capitalism formed?

Answer 62

The prior 100 years to his rule in China was a brutal forced subjugation to capitalist imperialists (British etc.) that exploited workers for profits. Very different than Americans current narrative on capitalism.

Question 63

Define Marx’s “Dialectic Materialism”

Answer 63

Marx’s system for producing change. Obsering events that transpire, and watching/influencing “contradictions of opposites” that produce “struggles” that, when resolved, produce progress.

Marx meant it to apply to everything.

Question 64

Describe the 3 phases of China leadership following WWII.

Answer 64

1949-1976 - Mao consolidated power, built institutions, followed strict communist system.

1978 - 2013 - After power struggle between gang of four (hardliners led by Mao’s wife) and reformists (Deng), Deng ran China direct or indirectly through ministers until 1997. Collective leadership, opened to outside world, developed capitalist practices. Developed relationship with U.S. to counter main enemy in Russia. Jiang Zemin and Hu Jintao ruled until 2013, continuing in the same direction, growing power that did not seem threatening to U.S.

2013- now - Xi Jinping came to power and accelerated economic reforms, contain debt growth, reforming the economy, and publicly going global (Belt and Road Initiative and Made in China 2025 plan).

Question 65

Between 1979 and 2018, what was the change in China regarding the following metrics;

Real GDP per capita

Share of world GDP

Population below poverty line

Average years of education

Answer 65

Real GDP 25x

Share of world GDP 11x (22% in 2018)

Population below poverty line -86%

Average years of education +3.5 years

Question 66

Desribe RMB total return vs. USD and Gold.

Answer 66

Question 67

What is the key to running a sound currency policy that produces a sound credit system for both borrowers and lenders?

Answer 67

To not have the currency produce any big rises or declines in relation to other leading exchange rates or good and service prices.

Question 68

What are the three primary arguments the U.S. has against China’s handling of it’s economy?

Answer 68

1) Limited access to Chinese markets from foreign companies goods, services, and capital.
2) Direct guidance and resources to Chinese companies from the government.
3) Stealing intellectual property from foreign companies

Question 69

How does a trade/economic war historically worsen?

Answer 69

When a country cuts the other off from essential imports. This could come in the for of China cutting the U.S. off from rare earth elements, or the US cutting China off from essential technologies.

If the U.S. cuts off China from semiconductor or other technologies, it wil lead to a major escalation. However, by 2025 China will likely be an independent Chip maker, so this threat is only viable in the short run.

Question 70

How do Chinese leaders view optimal relationships with other countries historically?

Answer 70

Prefer tributary style relationships, with more control the closer proximity to China.

Question 71

What goes into the decision making for other countries in close proximity to China to align themselves with China or the U.S.?

Answer 71

Economy - China is better to align with

Military - US is better to align with, but it’s decreasing and US win in Asia Pacific is questionable. US support in a hot war also questionable.

Question 72

What is the most important relationship to watch on the geopolitical landscape in the next 10 years?

Answer 72

China and Russia. Historically after WWII, out of US/China/Russia two have aligned to neutralize or overpower the third. Russia has military equipment for China, and China has financing for Russia.

Question 73

What percentage of the U.S. debt is held by China?

Answer 73

4%, or 1 trillion out of 27 trillion

Question 74

Does there need to be an alternative attractive currency for a devaluation to occur?

Answer 74

No. Money can flow into gold, silver, stocks, property.

Question 75

What percentage of global trade, GDP, and trade financing does the U.S. and China have respectively?

Answer 75

Both have around 13% of global trade, US has 20% of GDP, China 19% of GDP, and the RMB is used in 2% of transactions and the USD is used in 50%.

Question 76

When is the best time for opposing countries to aggressively exploit vulnerabilities?

Answer 76

During times of big internal disorder.