It shouldn’t be a surprise to learn that Ray Dalio continues to share with the world his wisdom about lessons learnt from history, where we are and what to come.
He recently did an interview with TED titled “what coronavirus means for the global economy” and also started to share a great series on LinkedIn “The changing world order“. Reading the first chapter “The big picture in a tiny nutshell” will give you a lot of context behind Ray’s comments on TED. So I encourage you to read the article first before watching the TED talk.
Since I wrote this post, Ray released a few more articles in the series. He did a few interviews on Bloomberg, Goldman Sachs, Bridgewater Associates‘ channel. So I decided to update this post with my thinking on his latest articles.
If you follow the news, especially over the past 3-5 years, the word “unprecedented” is used in many situations. Every day, there seems to be something new. Every other month, a leader somewhere does something unprecedented. Too much noise can distract us from the larger themes and that is one key thing Ray reminds us, by helping to distill key insights over the past 1500 years about how different empires/countries rose and fell.
A lot of other people have presented a similar graph before. As you can see, China (the red line) has always been a big empire/country with strong standing in the world, except for the period from 1800 – about 1970. Many other empires rose and fell through history and it is perfectly normal.
If we zoom into the last 500 years, this is what the graph looks like.
It is clear that the US (an incredibly young country) is in a strategic competition with China over the past 30+ years. Will this lead to hot war between the US and China in the next 20-50 years? Graham Allison has a book about this dynamic “Destined for War: Can America and China Escape Thucydides’ Trap?”. It is a good read and I recommend it.
Was the US at its “empire peak” back in 1950 – 1960?
Looking at the above graph, one can’t help but wonder whether the US has passed her prime and now in a slow decline relative to China? Is the decline reversible?
Well, Ray confirmed his thinking for us in his article The Big Cycle of the United States and the Dollar, Part 1. The US Empire peaked around the 1950s (in relation to other countries, not about its absolute power). Ray wrote, “At that time, the gap between the US and the rest of the world was at its greatest and the US dollar and the US world order became dominant.“
Below is an over simplification of the typical rise and decline of empires.
And in his latest article, “The Big Cycle of the United States and the Dollar, Part 2“, Ray went one step further and said that the “US is roughly 75% through that cycle, +/- 10%“. Obviously this has massive implications on geopolitics, world order, currency status, personal finance, etc.
What are the key factors contributing to an empire’s rise or fall in wealth and power?
Ray and his team look at 8 types of power: 1) education, 2) competitiveness, 3) technology, 4) economic output, 5) share of world trade, 6) military strength, 7) financial center strength, and 8) reserve currency.
Overall, it seems that for each empire, a big cycle of rising and declining is about 250 years. Ray will tell you that this is an estimation and obviously each specific case can be a bit different.
Below is the graph of these 8 major type of powers for the US.
Education, Innovation and Technology are the two leading indicators.
So I am looking forward to seeing the next article from Ray in this series. I hope that Ray can share the individual country profile (US and China) with regard to the 8 factors above.
The US education curve
Also, given that education is such an important factor, it will be good to deep dive into education and unpack it a bit more. How did Ray and his team come up with the “education curve” for the US and China and other countries? What are the key components within the Education score? A few facts that we know about education are:
- The US’ PISA score has been stagnated over the past 20 years. (PISA score is probably the world’s most comprehensive and reliable indicator of 15-year-old student capabilities. PISA 2018 scores and insights are here).
- Students in the US rank 15th in reading, outside the top 30 in maths, outside of the top 15 for science.
- US universities consistently rank top of the world according to QS ranking.
- Hundreds of thousands of Chinese students studying abroad every year. Stats from China Ministry of Education are here.
The US innovation curve is still going very strong
In contrast with the education curve, US innovation is still going very strong, relative to China and other major countries. Again it will be good to understand how Ray and his team came up with this curve, the underlying components, and data sets.
It also begs the question of whether these trends can be changed, improved?
Jul 2020, since this post came out, Ray released three more articles
- “The big cycles over the last 500 years“: My comments on it are here.
- “The Big Cycle of the United States and the Dollar, Part 1“: my comments are here.
- “The Big Cycle of the United States and the Dollar, Part 2“
How to apply Ray Dalio sharing to your personal finance?
Given Ray’s sharing about the changing world order, the rise and fall of empire, which relates to asset price, currency reserve status, value of gold, etc, how we can apply his teachings to personal finance?
His main recommendation is diversification. I wrote more about this topic in “How to apply Ray Dalio’s sharings to your personal finance“:
- Basic level: pay your debt, especially those with 10%+/year interest rate
- Be a bit more defensive in your approach, given the continued volatility
- Diversification in asset class, geography, currency
- Build a simple personal finance dashboard