- Ray Dalio discusses the relationship between money and power throughout history
- He explains the concept of the "big cycle" and how it governs the rise and fall of empires
- The conversation delves into the impact of capitalism on wealth and opportunity gaps
- Dalio uses the example of the Dutch Empire to illustrate the evolution of power and influence through currency, military strength, and inventiveness

- The piece discusses the rise and fall of empires, focusing on the Dutch, British, American, and Chinese empires.
- It emphasizes the importance of objective measurements in analyzing the health and strength of countries.
- The United States is highlighted as having a high level of debt and internal conflict, while China is seen as economically competitive but lacking the world's reserve currency.
- Internal conflict can lead to revolutionary changes and new beginnings, but it is a complicated calculation to determine the overall impact of such conflicts.

- The video discusses the impact of short-term civil wars and different types of conflict
- Education and innovation are important measures for societal stability and economic growth
- The trajectory of the American empire is concerning, with indicators such as financial stability and education levels showing decline
- The importance of being financially sound and strong in order to maintain a healthy economy
- There is a momentum to societal degradation, making it difficult to reverse negative trends

- The speaker discusses the challenges of debt and the importance of strong leadership in addressing economic issues.
- They emphasize the need for bipartisan cooperation and the potential risks of not working together.
- The speaker also addresses the potential for war with China, including the issues surrounding Taiwan and the different types of warfare.
- They discuss Xi Jinping's leadership in China, including economic reforms and the changing relationships with other countries.

- China is experiencing changing relationships and a shift towards more centralized control
- The leadership is surrounded by supporters and there is jockeying for power at the top
- China's approach to freedom and individualism is different from that of the United States
- The Chinese government controls aspects like video games and data for the "common good"
- China has achieved significant economic and social progress, but both democracy and autocracy have vulnerabilities
- There is concern about the acceptance of election results in the 2024 elections in the United States

- The speaker discusses the growing trend of skepticism about election results and the rise of populism in politics
- He compares the vulnerabilities of democratic and autocratic systems, highlighting the lack of flexibility in autocratic systems
- The speaker also discusses the human nature of individuals in power, the cycle of empires, and the emergence of conflict and nationalism
- He reflects on the leadership of Vladimir Putin in the context of Russia's transition from communism to a market economy

- The speaker discusses the leadership and position of Russia's leader, who is popular and seen as a strong leader.
- Russia is a significant military power and has a strong alliance with China.
- The speaker emphasizes the importance of understanding and respecting different cultures and perspectives in international relations.
- They also discuss the complexities of doing business with different countries and the need for empathy and mutual understanding.

Ray Dalio discusses the historical relationship between money and power, emphasizing the concept of the "big cycle" governing the rise and fall of empires. He uses the Dutch, British, American, and Chinese empires as examples. The conversation highlights the impact of capitalism on wealth and opportunity gaps, and the importance of objective measurements in analyzing the health and strength of countries. The trajectory of the American empire is concerning, with indicators such as financial stability and education levels showing decline. The speaker also addresses the potential for war with China, the leadership of Xi Jinping, and the changing relationships with other countries. There is concern about the acceptance of election results in the 2024 elections in the United States, reflecting a growing trend of skepticism and the rise of populism in politics. The discussion emphasizes the vulnerabilities of both democratic and autocratic systems, the human nature of individuals in power, and the importance of understanding and respecting different cultures in international relations.

- The speaker discusses the dangerous "enemy mentality" in society
- Henry Kissinger is praised for his ability to see things from others' perspectives
- The speaker discusses the evolution and potential of Bitcoin as a form of alternative money
- The speaker prefers gold over Bitcoin for certain reasons
- The speaker does not believe Bitcoin will surpass the value of gold

- The speaker discusses the limitations of using gold as a measure of value and the potential for its price to increase. 
- Elon Musk's plan to put a Dogecoin on the moon is seen as symbolic and a reflection of his ability to think outside the box. 
- The importance of writing down principles and using them to make decisions is emphasized. 
- Advice is given to young people to know themselves, follow their passion, and use personality tests to understand themselves and others. 
- A five-step process for achieving goals is outlined, including knowing your goals, understanding and diagnosing obstacles, and designing a way to overcome them.

- The piece discusses a looping process of diagnosing, designing, implementing, and producing better results
- Evolution is seen as a direction toward improvement, with man's capacity to adapt and invent being the greatest force
- There is hope for the future of human civilization, with the potential for expansion into the cosmos
- The importance of confronting painful truths is emphasized, with the opportunity to choose healthy truth over comfortable delusion

The text discusses the "enemy mentality" in society and praises Henry Kissinger's ability to see things from others' perspectives. It also talks about the evolution and potential of Bitcoin, preferring gold over Bitcoin for certain reasons. The limitations of using gold as a measure of value and the potential for its price to increase are mentioned. Elon Musk's plan to put a Dogecoin on the moon is seen as symbolic, and the importance of writing down principles and using them to make decisions is emphasized. Advice is given to young people to know themselves, follow their passion, and use personality tests to understand themselves and others. A five-step process for achieving goals is outlined, and the text discusses a looping process of diagnosing, designing, implementing, and producing better results. Evolution is seen as a direction toward improvement, with hope for the future of human civilization and the importance of confronting painful truths.

Ray Dalio is an investor, author, and founder of Bridgewater Associates. Please support this podcast by checking out our sponsors:
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EPISODE LINKS:
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Books & resources mentioned:
Ray's books: https://amzn.to/3swN5uw
Ray's free personality test: https://principlesyou.com/

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OUTLINE:
0:00 - Introduction
0:42 - Money or power
4:18 - Big Cycle
24:11 - Collapse of the American Empire
32:38 - War
35:45 - Xi Jinping
41:49 - Importance of freedoms
47:52 - Democracy's vulnerability
51:17 - Communism's vulnerability
58:18 - Vladimir Putin
1:02:23 - Understanding China
1:09:51 - Henry Kissinger
1:13:24 - Bitcoin
1:20:12 - Elon Musk and Dogecoin
1:22:09 - How to take notes
1:25:52 - Advice for young people
1:29:58 - Hope for humanity

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The following is a conversation with Ray Dalio, his second time on the podcast.

He is a legendary investor, founder of Bridgewater Associates, author of a book I highly recommend called Principles, and also a new book called Principles for dealing with a changing world order that looks at the geopolitics of today, especially US and China, through the lens of history, providing a fascinating model for the rise and fall of empires that can be applied to the analysis of our world today.

To support it, please check out our sponsors in the description.

And now, here's my conversation with Ray Dalio.

When you look at the history of the world, as you have done in

your new book, Principles of Dealing with the Changing World Order.

What is more important, more impactful, money or power?

They support each other and they compete with each other.

Those who have money have power, a certain type of power.

That power has to do with all that they can buy, but it also has the ability to influence those with political power.

So, And so you see this throughout history, this symbiotic relationship, you know, for example, between the royal families, the nobility, and the church.

So you see that group of people supporting each other in various ways and then wrestling around with each other for the money and power among that group.

So the dynamic that's quite classic is you could look at the parties in power back in the 16th, 17th centuries.

You would look at royal families, nobles, and the church if you're in Europe.

And then you would look at agricultural land, and there was a certain dynamic.

And that varies over time, it changes, as those people get thrown out and technology changes.

So when we evolved, when the society evolved, so that it would produce goods and services and you have something like the Industrial Revolution, the first Industrial Revolution, they have machines and you have the talent of people that are off the farms.

And then you have a struggling for power, you see that power mix change.

And so we don't see that same power mix anymore, but you still see the same dynamic.

You see those with money dealing with those who have political power around those assets that are considered most valuable to particularly the productive assets that produce money.

And political power is usually centered around nation state.

So the major locus of power is the nations?

Yes, in 1668, after 30 years of war, there was the development of nation states.

Before then, we had, it was really the development of countries as we know it, that there were borders, and that within those borders, those who had control got to control it, and there were not to be intrusions in those borders, and that's how we established the nation state.

And then of course within each country, there is levels.

There is a central level, and then there is a, typically a province or state level down below, and then there's a municipal level, so they each have different levels of power, and it's the coordination of those that determines how the country is run.

You write that the quote, archetypal big cycle governs the rising and declining empires and influences everything about them, including their currencies and markets.

The most important 3 cycles are the ones you mentioned in the introduction.

The long-term debt and capital market cycle, the internal order and disorder cycle, and the external order and disorder cycle.

There is an order by a, order I mean a system, how the system works.

So there's an internal order, that is the internal governance system and it's usually set out in a constitution or some agreements.

And then there's the world order, how the world system.

So for example, in 1945, at the end of a war, which is basically a fight for determining the world order, the winners of the fight got together and created the world system as we now know it.

44, they created the Brenton Woods Monetary System that determined the money, pretty much.

And because the United States won and had 80% of the world's money, gold was money then, and it had 80% of the world's gold, and it was half the world's economy, and it was the great military power.

The water was built around an American world order so that the United Nations was in New York, the World Bank and the IMF were in Washington and they built that new order.

So classically, you have a war to determine whose rules we're following, and then you have the new order being constructed.

After that, there is usually period of extended peace and prosperity.

And so there's not, and the reason you have the peace is because no 1 wants to fight with the dominant power.

You know you're gonna lose, you've surrendered, there's been the surrendering.

They carve up the world, they say what it's gonna look like, who's gonna control what, and then you come into that period of peace and then prosperity where then there's a working together.

Usually at that point, you've wiped out a lot of the debt, you've wiped out a lot of the issues, the class warfare and so on.

So those great periods, such as the Industrial Revolution in the late 1800s, or what we've experienced in the post-World War II period, are peaceful and prosperous periods led largely by the dominant world power.

Over a period of time, since really 1500, and maybe before, but really 1500 when the Dutch invented capitalism, and what I mean by that, they invented the first capital markets, the first stocks and the first stock market.

That since then, capitalism has been an effective tool for building wealth because it got resources into the hands of inventive people.

That's when we move from agriculture to the importance of inventiveness of people.

They got resources and then they built that prosperity.

In that process of doing that, they create wealth gaps naturally.

Those who make a lot of money make a lot more than those that don't.

And it also produces opportunity gaps because, for example, those who earn a lot of money have that wealth, they have the power to educate their children in a way that others don't, and the gaps grow.

When they go around the world with their competitiveness, they earn a lot of money.

So for example, the Dutch, the Dutch Empire, learned how to build ships that would go around the world.

A key ingredient of this improvement in this cycle is the improvement of education.

And by education, I mean the skills that come from education but also civility, the ability to deal well together.

So the Dutch invented ships that could go around the world and they had military power but they were also very inventive society.

25% of the world's new inventions came from the Dutch.

And so as they went around the world, they also brought their currency and they brought their military.

They needed the currency, they paid for things and that currency and then the more that happens, the more that becomes a reserve currency.

And then they have their military, so they need their military strength.

And so you see it evolve in all of those ways.

But over a period of time, as they become more successful and more expensive, they become more expensive.

And newer countries come along, like the UK, then learn to build ships from a lot the Dutch and could do that less expensively.

And also when they become more expensive, so less competitive, and also the work ethic begins to change.

They believe that since they're richer, they can enjoy life more.

Now you start to see the development of the top.

And when you have a world reserve currency, that allows you to borrow a lot of money because those who want to save wanna hold your money and that means that they'll lend you money and so those countries get deeper into debt.

So you see that they gradually lose their competitiveness and they get themselves into financial circumstances which are not good and they have large wealth gaps which set the stage for downturns.

And when they have downturns, the first question is do they have enough money?

So you classically see that the coffers are bare, that they're spending more money than they are earning, and they run out of money in the coffers.

And their granaries are empty rather than stocked so that they give them the buffer.

And as that deteriorates, that worsens conditions.

And if they have a rival power that's also challenging them, they see greater internal conflict over wealth and then they have the problems internally and the problems externally, which usually results in an internal war or an external war that leads to the change in the new world order.

And to you, the Dutch Empire is a good example of that.

The British, what are some of the key examples that you think about in the book of this process that followed the big cycle?

Well, the leading reserve currency empires, but it applies to all the empires, were the Dutch, the British, the American, and the Chinese.

In the book, it was very important for me to not just use words and concepts because that's subjective.

It was very important for me to use actual measurements.

So as you see in the book, you can see every level of this.

You can see where's the education level, what is the military power, each 1 of those, and you can see them back going over the 500 years.

And so you can see the arcs and the composition of those arcs.

And what you see is really, in most countries and most dynasties, you can see that.

But you also can see through those numbers the health of those countries.

Today, there are statistics that are in the book that show what is the level of education, what is the level of economic output, what is the level of military strength, what is the level of a number of different measures of strength, so that you can then compare that.

And I think that because there are objective measures of strength that you could see change, that shows the picture of where we are today.

And I think 1 of the most important things about the book is that it allows people to monitor how those things are transpiring.

I think for policy makers, are your policy makers doing a good job?

And there's so much subjectivity in that.

If those lines on the chart are improving, if your health index is improving, then you're moving toward a better life.

Also, it was used to create a model for the future.

In other words, there are cause-effect relationships.

Everything that happens has reasons, causes, that preceded it, that made it happen.

And so by having all those in numbers, 1 can see the probabilities of certain things happening.

It's not just, you know, Ray's interpretation.

I didn't want to make it Ray's interpretation because I don't know if I'm right.

Yeah, so 1 of the fascinating things in the book, so you have, list these 18 measures, and there's like a little scorecard for the countries of the world today.

So let's say US, China, and Europe, and what it was 20 years ago, and looking at the change from 20 years ago, and that's another indicator to change itself to see where things are headed.

Maybe can you comment on, from a score perspective, how is US and China doing?

And in the 18 measures, what are some measures that stand out to you as particularly important to think about today for the United States, for China?

Financially, what you see in the United States is that we're borrowing a lot more money, creating a lot of debt, and we're printing a lot of money.

And our capacity to do that is very much, is limited, first of all, because when you, when there's a sale of a bond, when the government borrows more than it, borrows money because it spends more than it takes in, you have to sell a bond.

And the world right now has a lot of US dollar denominated bonds because as the world's reserve currency, they sell, so on them.

And they have very bad returns, negative real returns, negative real returns significantly and so on.

So that means that more bonds has to be sold than are bought.

And that means that the Federal Reserve is faced with the choice of having to raise the interest rate to curtail borrowing, which slows the economy and hurts the markets, or by filling that difference and producing money, the debt monetization, which produces an inflation in goods, services, and financial assets.

So in that regard, that's the United States' position.

In China's case, its balance of payments is better.

China has displaced the United States as the world's largest trading country.

In other words, more exports to other countries.

And as a result, it's economically competitive, but it doesn't have the world's reserve currency.

So the United States has the world's reserve currency, but it is risking it because of this imbalance.

So if you look at history, you see that those go slowly, but when they go eventually, they go quickly.

Then there's the issue of internal order.

So I'm just giving you the major ones, but I'll get into some of the other ones too.

Right now, there's a lot of internal conflict in the United States, which affects how well it works.

In China, there's less internal conflict because it's a more autocratic state, but also they've created this bifurcation of what is political and what is economic in terms of producing that prosperity.

So if you stay out of the politics pretty much, and then you're seeing entrepreneurship, you're seeing the finances of new businesses and so on.

And so That internal working, that's subject to different people's interpretations whether they like it or not, but the internal conflict in terms of those kinds of measures

So these measures, I guess you don't want to sort of romanticize any 1 measure or something like that, over-interpret any 1 measure, but is internal conflict always a bad thing?

The way we think about these measures that you've presented, we should be thinking like the higher, the better, the lower, the worse, or I mean, of course, depending on the.

Well, in many cases, the conflict that produces the revolution produces revolutionary changes that lead to resolutions and lead to new starts.

And So their short-term, a short-term civil war is a hellacious experience, and at the same time, it can be the transition to a new beginning.

Also, there are different types of conflict.

Competition, which makes things, makes everything better, is a productive conflict, whereas destructive conflicts are not good over the short time.

So within each measure, the story is complicated.

Yeah, but my measures are sort of clear, meaning how much political conflict, how much social conflict.

In other words, you can measure conflict, you can measure fighting, you can measure crime rates, you can measure lots of different ways of conflict.

So the measures are a composite of different types of internal conflict.

What are some other interesting measures, maybe if you can also mention that for me in particular interest is education and innovation.

Yes, the classic cycle, the most important leading indicator is the quality of education.

Most importantly, broad-based education drawn from the largest population because you can never tell who the talent is going to be, so where are they gonna come from.

So for example, if you look at the Chinese dynasties, the great Chinese dynasties, and the Confucian approach, it was meritocratic of everybody could sit for exams and so on, broad base of drawing in the populations.

And you see that if you go across societies, because that draws on the largest number of population to get education.

And it also, that creates a reality and a perception that the system is fair, equal opportunity, not just 1 of privilege.

And that helps to create social stability.

But education is not just education in understanding facts and so on.

It is education in civility of how to behave together.

And so if they're smart, they understand how to be productive because they work well together and they're productive.

You can see in the lines in the charts, I plotted these, so that you could see in a typical cycle, you could see that education is the long-leading indicator, and then you could see, as you mentioned, that what you see is inventiveness in technology measures then follow, and you see then also competitiveness and world markets follows.

For example, in the early stages of a cycle, the industries that they go into tend to be very basic industry because they have cheap labor, something like textiles and simple manufactured goods and so on.

But as the education rises, then they move up the value chain to greater technologies and so on, which raises incomes and raises productivity.

So yes, those, and as you say, there are 18 different measures like that, but education and then civility and the inventiveness.

So you see it reflected in who's inventing what.

And that corresponds then who's trading with, who's a big trading country, and where's the value of economic output and what are per capita incomes.

Yeah, like you said, the fascinating thing about your book, so there's philosophy, there's wisdom, but there's plots.

It's not just your opinion, it's kind of like you can interpret it any way you like, but you're just giving a lot of your own insights along with the numbers.

If you were to look at the American nation, the American empire, and the trajectory is looking into the future, given these measures.

What is the trajectory that leads to the collapse of the American empire, based on these measures?

What are the concerning indicators, and if those break down further, what does that look like?

Well, all of those indicators are concerning.

Maybe except for 1, which is technology, the technology niche, although even in that area, the United States is improving at a slower rate than is China for various advantages that they have there.

They put out about 8 times as many computer engineers, they have free data, and so on.

But if you look at them, so the financial is a concern, the internal order, disorder, is a concern.

Then if you look at education levels, the United States is in many ways, is losing its educational advantage.

If you were to look at, compare it with China, if you take general public education in the United States, it's deteriorated tremendously, even in comparison to developed countries.

There are scores, PISA scores and so on, and it's something like 38th in the world or something, and that was a big plunge, average public education.

If you look at the best universities in the world, the United States is unique in having the best universities in the world, so there are these privileged spots that are excellent, uniquely excellent.

So when you look at the comparison, education in China is improving rapidly and the quantity is a quantity of educated people in the areas that they're moving in is greater, and the resources that they're putting behind it is greater, and so you see the results are greater, but it's sort of along the lines that I'm dealing with.

If you were to follow through in terms of actual productions, I think you know in terms of technologies, There are some areas that the United States is in a lead.

At the moment, there's some areas that China's in a lead, but China's gaining very quickly.

When I first went to China, 1984, I would bring $10 calculators, and I gave them away as gifts to high-ranking people, and they thought they were miracle devices.

Right now, in terms of areas like quantum computing and AI and many areas, you have a race going on.

And so if you take the trajectory of the competitiveness, not just look at the current level, you have a situation where they're improving at a much faster rate.

This is all good for the world if the world can get along.

And the main thing I think is, in just, how do you have a healthy world and how do you have a strong economy and how do you have a strong situation is be strong.

Be financially sound, earn more than you spend, and be strong in these ways, and pretty much everything will take care of itself.

But you make it sound simple of course, because there's a momentum when things degrade, when the education system degrades, when you start borrowing, when, I mean all of these indicators, once they start going down, it's a, there's a momentum to it, right?

Right, and there are circumstances that you're then in.

It's politically desirable for those to borrow money and spend because their constituencies only look at what they get.

And when they get a lot, they don't pay attention to the balance sheet and how much debt is on the books.

So it's always better to borrow, spend, and then leave the cleanup to the next guy.

You inherited as a new president enters in or new legislators, they have a lot of debt, they have a broken down infrastructure, they don't have enough money to fix that.

And so that's the lay of the land that the prior generations put you in, and there you are.

It's difficult because when you start to think, okay, what's healthy?

Well, that's not so easy because, you know, what does that mean?

Okay, you have this debt that you then monetize and that's why it's classic.

So yes, that's why these cycles occur because what has created before, what happened before created the lay of the land that is then increasingly difficult to deal with.

So what can great leaders do in this moment?

I mean, maybe my sense is leadership is crucial here.

So for example, to do very large projects that invest in the education system, that sort of try to fix the fundamentals, or maybe invest more and more into the innovation and the development of new technologies and so on.

It feels like that just doesn't happen organically.

So you have to have strong leaders that convince the populace of the importance of these ideas.

What we have is a situation where everybody has their opinions and they have to sort of get them exactly right and they all fight with each other about whether their opinions.

So the most important thing is that we become bipartisan so that we don't, and we get over our differences.

I would draw upon members of both parties, the moderates, who are going to be able to work together.

So as then we have 1 country, and then we deal with those in a means that works for the majority of the people in the middle rather than the polarity.

I think our greatest risk is in not being able to do that.

So I would say that's a paramount importance because we have the resources, you know, wealth, real wealth and science and everything has never been better than it is.

But the notion is that it has to work for the majority of people and we have to keep it being productive.

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Ray Dalio: Money, Power, and the Collapse of Empires | Lex Fridman Podcast #251