Financial Principles And The Changing World Order

The world order is changing in important ways that have happened many times before in history, though not in our lifetimes. They are driven by a persistent set of conditions that takes those conditions in a swing from one extreme to the opposite extreme.


A quote by Ray Dalio"I learned that the biggest thing affecting most people in most countries through time is the struggle to make, take, and distribute wealth and power, though they also have struggled over other things too, most importantly ideology and religion. I believe that we are now seeing an archetypical big shift in relative wealth and power and the world order that will affect everyone in all countries in profound ways"



Ray Dalio added that naturally, as a global macroeconomic investor, the economic and market behaviors in this paradigm are top of mind. I think one should consider minimizing one’s ownership of cash and bonds in dollars, euros, and yen (and/or borrowing in these) and putting funds into a highly diversified portfolio of assets, including stocks and inflation-hedge assets, especially in countries with healthy finances and well-educated and civil populations that have internal order.


Ray started by taking us through the typical cycle at the point that the new order is created. After revolutions and wars a new order—i.e., a new system run by new leaders—is created. For example, the last world order to be created came after WWII, in 1945. At that point in the cycle there is a dominant power, and nobody wants to fight the dominant power, so this part of the cycle is typically peaceful and, if managed well, prosperous. It is economically rewarding, which leads people to borrow and bet on it continuing, leading to over-indebtedness. Because economic opportunities are naturally distributed unevenly, large wealth gaps develop. Also, with time, competitors emerge and grow in power. Over-indebtedness and declining competitiveness eventually lead to financial problems at the same time as there are large wealth and political gaps. This produces more internal conflict and people demanding more money, which leads governments to create more debt and print a lot more money, which weakens the currency and raises inflation. As the dominant power weakens and other powers get strong enough to challenge it, there are greater internal and external conflicts that lead to revolutionary changes in who has what wealth and power. That ends the old order and leads to the next new order. That is now happening.


Ray highlighted that knowing how things have changed in the past leads me to consider the possibility that something similar might happen in the future. That is a big advantage relative to being unaware. For example, there are numerous examples in history of revolutions, wars, and acts of nature leading to violent events in which virtually all wealth is wiped out or confiscated. Knowing this, I am constantly looking for leading indicators of the same things happening again, and having leading indicators of these things, even if they aren’t perfect, puts me in a better position to protect myself than remaining blissfully unaware and unprepared for what might happen.


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