Book Review: Ray Dalio's The Changing World Order

            I think Ray Dalio’s The Changing World Order is a very important book.  It was unlikely in the first place that it would be published – it is clearly the effort of tens if not hundreds of people over six-plus years (this project is a follow-up to his last book, Big Debt Crises) -  and, since it’s focused on markets, there is value in not sharing it.  

            Above all, The Changing World Order is a systematic attempt to learn about economics and politics from the historical record.   As the architect of the biggest hedge fund in the world, Dalio is in the business of using history to predict the future. In the book, he ventures far into this dangerous territory, arguing that dominant powers arc along long-term cycles, and that the cycles of growth and decline are to some extent quantifiable and predictable. 

            To simplify, Dalio argues that there are roughly one hundred year cycles, which proceed as follows:

1)    New order begins and new leadership consolidates power

2)    Resource-allocation systems and government bureaucracies are built and refined

3)    Peace and prosperity

4)    Excesses in spending and debt, and the widening of wealth and political gaps

5)    Bad financial conditions and intense conflict

6)    Civil wars/revolution

It’s worth a digression to note just how fraught this enterprise is.  The idea that history proceeds along predictable cycles was very much in favor among historians in the first half of the century – when Oswald Spengler’s The Decline of the West and Arnold Toynbee’s A Study of History were widely read – but it then fell about as far out of favor as it is possible to fall.   It was not surprising that, when the generational history The Fourth Turning, which seems to have had some influence on Dalio’s work, became a bestseller in the late 90s, it was written not by a historian but by a sociologist and a playwright. 

            A near neighbor to the Dalio analysis is Ken Rogoff and Carmen Reinhart’s This Time is Different: Eight Centuries of Financial Folly.  Both books show, in impressive detail, how periods of excess – where, broadly speaking, the financial claims on wealth grow to far outstrip an economy’s actual wealth production capacity – give way to periods of crisis, when it becomes evident that holders of financial claims do not have what they think they have.   Both books argue that these cycles proceed in somewhat predictable ways.   In the end, though, the Dalio analysis is superior.  Rogoff and Reinhart, in an attempt to get larger sample sizes, were quick to lump together secondary powers along with major world powers.   Dalio argues that the dominant power of the day – the power that controls its own currency, is the dominant trading power, and has the most political power – has an economic trajectory that is fundamentally different than any secondary power and therefore must be analyzed separately.  

             There is much practical financial advice in this volume.  Dalio notes the dangers of looking at markets from too narrow of a historical lens.  For example, many market participants think that the ex post real S+P return from the last eighty years is a decent proxy of what it might be going forward.   Dalio would say that looking return of the returns of the most successful country during its ascendency tells you little, and moreover he would point out that countries in a similar position to the US have had a poor record in maintaining the value of their currencies.  

            To potential readers, I would say to not let the tendency for sweeping generalizations deter you.  There is much to be learned from this book!