Translation: Wall Street News
Recently, Ray Dalio, founder of Bridgewater Associates, pointed out in a column in Time that the world is on the brink of chaos. The five major forces of debt/money, internal and external conflict, changes in nature, and technological progress promote each other and constitute the so-called big cycle.
Dalio pointed out that in the next 18 months, the US Treasury may have to sell a large number of bonds, the debt/financial situation may deteriorate, and the United States is heading towards a "civil war."
The following is the original article:
I am a global macro investor who has been betting on what is going to happen for over 50 years. Over a long period of time, I have experienced various events and cycles in various places, which has led me to study how these events and cycles work. In the process, I have learned that I need to study history to understand what is happening and what may happen.
I learned through several painful mistakes early in my career that the biggest things that surprise me do so because they have never happened in my lifetime but have happened many times throughout history. The first one happened on August 15, 1971, when I was working as a clerk on the floor of the New York Stock Exchange and the United States defaulted on its debt commitments and allowed people to exchange paper money for gold. I thought this was a big crisis and would send stock prices down, but they went up a lot. I didn't understand why because I had never experienced a big currency devaluation before.
When I looked back in history, I saw the exact same thing happen on March 5, 1933, when Roosevelt broke his promise to have people turn in their paper money for gold, and stocks went up. That prompted me to research and learn why -- which is that money can be created, and when it's created, its value goes down, which makes the price of things go up.
This experience led me to study the rise and fall of markets, economies, and countries, which I continue to do. For example, I studied how the debt bubble of the 1920s turned into the financial collapse of 1929-33, which led me to predict and profit from the 2008 financial crisis. In this way, I learned that it is crucial to take a longer-term view and understand the mechanisms behind historical rhythms.
A few years ago I saw three major events occur which had not occurred in my lifetime but which occurred during the 1930-45 period. These three events were:
The largest amount of debt, the fastest rate of debt growth, and the largest amount of central bank money printing and bond buying since 1930-45.
The largest disparities in wealth, income, values, and the largest amount of populism since 1930-1945.
The biggest international great power conflict since 1930-45, most importantly between the United States and China.
Seeing these three events, which had never happened on such a scale in my lifetime, prompted me to study the rise and fall of markets, economies, and nations over the past 500 years, and China’s history over the past 2,100 years.
This research tells me that these three forces – the debt/money force, the internal conflict force, and the external conflict force – reinforce each other in large cycles that make up what I call the Grand Cycle. These cycles are driven by logical cause and effect relationships. Most importantly, studying the past 500 years of history tells me that:
The financial conditions described above have repeatedly been shown to be leading indicators of major financial crises that lead to major shifts in the financial order.
The levels of political and social disparity described earlier have repeatedly been shown to be leading indicators of major conflicts within countries that lead to dramatic changes in the domestic order.
The great power conflicts described earlier have repeatedly been shown to be leading indicators of international conflict, leading to major changes in the world order.
In other words, history shows that painful shifts in big cycles occur when the following conditions occur simultaneously:
1) Creating too much debt, which leads to a debt bubble burst and economic contraction, causing central banks to print a lot of money and buy bonds;
2) Great conflicts within countries made worse by bad economic conditions, due to great conflicts of wealth and values;
3) In times of economic and internal political crisis, major international conflicts may occur as rising world powers challenge existing world powers.
While doing this research, I saw two other big forces at play. They are:
Acts of nature (droughts, floods, pandemics), including climate change.
Learning that leads to the invention of technologies that often bring advances in productivity and living standards. For example, the first and second industrial revolutions, and the computer/AI revolution.
I call these the Five Great Forces. I see how they interact with each other and change in logical ways that create big cycles that produce big changes in the world order. I've come to realize that if one understands and follows each of these forces and how they interact with each other, one can understand most things that change the world order. That's what I do.
Where we are and what might happen in the future:
1. Financial/Economic Power
In the United States, we are now in the middle of what I call the short-term debt cycle, also known as the business cycle. These short-term debt cycles last an average of seven years, with about three years to spare. Since the new monetary world order began in 1945, there have been 12 and a half cycles. So we are now in the middle of the 13th cycle, at the point in the cycle where central banks tighten money to fight inflation, just before the debt and the economy contract, which could happen within the next 18 months.
We are also in the late and dangerous part of a long-term debt cycle, because the levels of debt assets and debt liabilities are already so high that it is difficult to give lenders-creditors an interest rate high enough relative to inflation that they are willing to hold these debts as assets without making the interest rate unacceptably high and thus hurting the borrowers-debtors. Due to unsustainable debt growth, we may be approaching a major inflection point that will change the financial order. In other words, it seems to me that we may very well be approaching a debt/financial/economic restructuring that will lead to a dramatic change in the financial order.
More specifically, it seems to me that the U.S. Treasury will have to sell a lot of bonds because of the huge deficit, and there doesn't seem to be enough demand for those bonds. If that happens, it will lead to either a significant increase in interest rates, or the Fed printing a lot of money and buying bonds, which will devalue the currency. For these reasons, debt/financial conditions are likely to deteriorate, perhaps very noticeably over the next 18 months.
2. Domestic order forces
In some countries, most importantly the United States, we are seeing a growing share of populist extremists in the population (about 20-25% of the right and about 10-15% of the left) and a shrinking share of moderates in both parties. While moderates in both parties still make up a majority, they are a declining share of the population and are much less willing to fight and win at all costs.
In studying history, I’ve seen this pattern of growing populism and increased conflict on both sides happen again and again, when large disparities in wealth and values coexist with bad economic conditions. At such times, significant portions of the population choose populist political leaders who vow to fight for them and win, rather than compromise. I describe what the United States is in now as stage five of the “internal order cycle” (when bad financial conditions and intense conflict coexist), just before some kind of civil war and change of domestic order. That’s what’s happening now.
Looking ahead, the next 18 months will see an increasingly intense election season, leading to greater political conflict, which could sharpen the divide between left and right. With 33 Senate seats, the presidency, and control of the House of Representatives up for grabs by a number of populist candidates, and with a likely poor economy, the fights will be vicious and a real test of rule-abidingness and compromise, both of which are necessary to make a democracy work. You can see a move toward a fight at all costs, and a decline in respect for the rule of law and political institutions.
You can see this dynamic playing out even now, as Trump and his followers go to war with the justice system, or as he and his followers say, the system's war on him. Whichever way you look at it, it's clear that we are headed for a kind of civil war over the next 18 months. The most important war, to me, is between moderates in both parties and the populist extremes, yet moderates in both parties have, for the most part, quietly stayed out of that fight.
3. Changes in Nature
Changes in nature are of course harder to predict accurately, but they appear to be getting worse due to climate change and are likely to be more costly and disruptive over the next five to ten years. In addition, the world will enter the El Niño phase of the climate cycle next year.
4. Technology
What can we expect from technological/human creativity? As with the behavior of nature, it’s hard to know for sure, although there’s no doubt that generative AI and other technological advances have the potential to lead to both massive productivity gains and massive disruption, depending on how they’re used. One thing we can be sure of is that these changes will be massively disruptive.
Exactly how events will unfold I cannot say, but there is no doubt that those who think things will operate in the orderly manner we have been accustomed to over the past few decades will be shocked by the coming changes and potentially hurt.
How well these changes are managed will make all the difference. If our leaders can rise above their tendencies to fight and focus on cooperation, we can surely navigate these tricky times and create a better world for the majority of people.
Presumably, this outcome is the best for everyone, so we should firmly oppose civil unrest and war between nations, keeping it in mind as we work to make cooperative decisions. For example, now that the debt ceiling deal has been passed, it would be great to see Democrats and Republicans come together with a bipartisan group of very skilled people to come up with a practical, long-term bipartisan plan.
I wrote an article many years ago, "Why and How to Reform Capitalism?" that is still relevant today. Having said that, it is probably unrealistic to believe that we can substantially change the course of events, so the most important thing for most people is to imagine the worst-case scenario. If you do that, you will be prepared and will probably be fine.
I should conclude by saying that the most important thing I have learned in my 50 years as a global macro investor is that I can be wrong. For this reason, while I suggest you consider what I share, I also suggest you evaluate it and the situation for yourself.