Ray Dalio: "Why the World Is On The Brink of Great Disorder"

Ray Dalio says the leaders' choices will make all the difference.

Ray Dalio, an American billionaire investor and hedge fund manager, has always been one of my go-to sources for finance and economic analysis. Not only does he have an incredible wealth of experience (50+ years in the industry!), but also he loves to share his knowledge in a way that is easy to understand. From a big currency devaluation in the 1970’s to the financial crisis of 2008, Ray Dalio makes surprising parallels that help make sense of modern complexities.

Ray Dalio’s article that was recently published in Times is an excellent read. Here are several key takeaways I would like to highlight.

In the article, Ray Dalio explores the “changing World Order”, and sets expectations based on: a). current facts and b). historical precedent. He argues that approaching the current events from a historical perspective is eye opening because “the biggest things that surprised me did so because they never happened in my lifetime but had happened many times in history.”

From the financial and economic perspective, Ray Dalio says that major debt and economic contractions should be expected within the next 18 months. He believes that “because of unsustainable debt growth, we are likely approaching a major inflection point that will change the financial order”:

“In the U.S., we are now in middle part of what I call the short-term debt cycle and is also known as the business cycle. These short-term debt cycles have lasted 7 years on average, give or take about 3 years. There have been 12 1/2 of them since the new monetary world order started in 1945. So, we are now about half-way though the 13th of the cycles, at the point of the cycle when the central bank has tightened money to fight inflation that is just before the debt and economic contractions which will likely come over next 18 months.

We are also in a late and dangerous part of the long-term debt cycle because the levels of debt assets and debt liabilities have become so high that it is difficult to give lender-creditors a high enough interest rate relative to inflation that is adequate to make them want to hold this debt as an asset without making interest rates so high that it unacceptably hurts the borrower-debtor. Because of unsustainable debt growth, we are likely approaching a major inflection point that will change the financial order. Said differently, it appears to me likely that we are approaching a debt/financial/economic restructuring that will lead to big changes to the financial order.

More specifically. it appears likely to me that because of large deficits the U.S. Treasury will have to sell a lot of debt and it appears there will not be adequate demand for it. If that happens, it will lead to either much higher interest rates or the Fed printing a lot of money and buying bonds which will devalue money. For these reasons, the debt/financial conditions could worsen, perhaps very significantly, over the next 18 months.”

Ray Dalio goes on to offer his opinion on the domestic order forces and the upcoming changes; concluding that the growing emphasis on “fighting” rather than “compromising” will result in a life changing shift in domestic order, possibly even a domestic conflict. It is, indeed, true that as the increasing polarity of not only societal but also cultural norms becomes acutely apparent; it’s safe to assume that the two are failing to co-exist.

On a bigger scale, the article points out that from the international perspective, the odds of a new conflict are escalating and special attention should be devoted to the U.S. - China relations both from an economic and a military perspective:

“There are several issues—Taiwan, chips, dealing with Russia, sanctioning investments—that are being fought over, and both sides are preparing for war. I don’t mean to say that we are destined for war, but I do mean that the odds of some form of a major conflict are dangerously high.”

Let me add some context. As of August 1, 2023, China will apply export restrictions on gallium and germanium metals and several of their compounds. According to the U.S. Geological Survey, the U.S has no current domestic source of these metals. These two metals are key in chipmaking, communications and EVs. Gallium and germanium are widely used in the military industry – for example, in radars, high-power lasers as well as in satellites. Unless an alternative is found at an acceptable price point, a lack of these metals will pose serious challenges to the domestic military manufacturing in the long run.

Last but not least, Ray Dalio believes that technological changes (AI, to be precise) will be greatly disruptive and the outcome is solely dependent on the leaders’ intention.

“How well these changes are managed will make all the difference. If our leaders can rise above their tendencies to fight and instead focus on cooperating, we can certainly navigate these tricky times to create a better world for most people. Presumably, this outcome is best for everyone, so we should be strongly against civil disorder and war between nations, keeping it in the back of our mind so we strive for cooperative decision-making.”

In conclusion, I don’t believe there is a person who would disagree with the fact that the world is rapidly changing. The unipolar reality that we have become accustomed to is transforming into a new system where once-unquestionable absolutes are replaced with previously dubious, if not outright unacceptable, alternatives. While it is true that change is inevitable, it’s worth remembering that change is made of choices…and choices are made of character. Even though the point of no return may not have been reached yet, it would take a substantial amount of said “character” and leadership to turn this ship around.

Read Ray Dalio’s article here.