(dramatic music) - [Ray Dalio] The changing world order.

 The times ahead willbe radically different from those that we'veexperienced in our lifetimes, though similar to many times before.

 How do I know that? Because they always have been.

 Over my roughly 50 years ofglobal macroeconomic investing, I've learned the hard way that the most importantevents that surprised me, did so because they neverhappened in my lifetime.

 These painful surprises led me to study the last 500 years of historyfor similar situations where I saw that they had indeedhappened many times before with the ups and the downs of the Dutch, British, and US empires.

 And every time they did, it was a sign of the changing world order.

 This study taught me valuable lessons that I'm going to pass along to you here in a distilled form.

 You can find the comprehensiveversion in my book, Principles for Dealing withthe Changing World Order.

 Let me begin with a storythat brought me to this point, about how I learned toanticipate the future by studying the past.

 In 1971, when I was a young clerk on the floor of the NewYork Stock Exchange, the United States ran out of money and defaulted on its debts.

 That's right.

 The US ran out of money.

 How? Well, back then gold was the money used in transactions between countries.

 Paper money, like the dollar,was like checks in a checkbook in that it had no value other than it could be exchanged for gold, which was the real money.

 At the time, the UnitedStates was spending a lot more money than it was earning by writing a lot more ofthese paper money checks than it had gold in thebank to exchange for them.

 As people turned these checksinto the bank for gold money, the amount of gold in theUS started to dwindle.

 It soon became obvious that the US couldn't keep its promises for all the existing paper money, so people holding dollarsrushed to exchange them before the gold ran out.

 Recognizing that the US was going to run out of real money, on Sunday evening, August 15th, President Nixon went ontelevision to tell the world that the US was breaking its promise to let people exchangetheir dollars for gold.

 Of course, he didn't say it that way.

 He said it more diplomatically, without making it clear that the United States was defaulting.

 - [President Nixon] Thestrength of a nation's currency is based on the strengthof that nation's economy.

 And the American economy is by far the strongest in the world.

 Accordingly, I have directedthe secretary of the treasury to take the action necessary to defend the dollaragainst the speculators.

 I have directed SecretaryConnally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in theinterest of monetary stability and in the best interestof the United States.

 - [Ray] I watched in awe realizing that money as weunderstood it was ending.

 What a crisis! I expected the stock marketto plunge the next day, so I got on the exchangefloor early to prepare.

 When the opening bell rang,pandemonium broke out, but not the kind I expected.

 The market was up - way up - and went on to rise nearly 25%.

 That surprised me because I never experienced acurrency devaluation before.

 When I dug into history, I discovered that the exactsame thing happened in 1933 and had the exact same effect.

 Then, paper dollars werealso linked to gold, which the US was running out of because it was spendingmore paper money checks than it had gold to exchange for them.

 And President Rooseveltannounced on the radio that he would break the country's promise to exchange dollars for gold.

 - [President Roosevelt] Itwas then that I issued the proclamation providing forthe national bank holiday.

 And this was the first step in the government's reconstruction of our financial and economic fabrics.

 The second step, lastThursday, was the legislation promptly and patrioticallypassed by the Congress confirming my proclamationand broadening my powers so that it became possible in view of the requirement of time to extend the holiday andlift the ban of that holiday gradually in the days to come.

 This law also gave authority to develop a program.

.

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 - [Ray] In both cases,breaking the link to gold allowed the US to continuespending more than it earned simply by printing more paper dollars.

 Since there was an increasein the number of dollars without an increase inthe country's wealth, the value of each dollar fell.

 As these new dollars entered the market without a correspondingincrease in productivity, they went to buy lots ofstocks, gold and commodities, and hence caused their prices to rise.

 As I studied more history, I saw that the exact same thing happened many, many times before.

 I saw that since the beginning of time, when governments spent muchmore than they took in taxes and conditions got bad, they ran out of moneyand they needed more.

 So, they printed more, a lot more, which made its value fall and made the prices of most everything, including stocks, goldand commodities rise.

 That's when I firstlearned the principle that when central banks print a lotof money to relieve a crisis, buy stocks, gold and commodities because their value will rise and the value of paper money will fall.

 This printing of money isalso what happened in 2008 to relieve themortgage-driven debt crisis, and in 2020 to relieve thepandemic-driven economic crisis.

 And it almost certainlywill happen in the future.

 So, I suggest that you keepthis principle in mind.

 These experiences gave meanother principle, which is, to understand what is coming at you, you need to understandwhat happened before you.

 That principle led me to study how the roaring twenties bubble turned into the 1930s depression, which gave me the lessons that allowed me to anticipate and profit from the 2007 bubble turning into the 2008 bust.

 All these experiences led me to develop an almost instinctual urge to look to the past for similar situations to learn how to handle the future well.

 Changing orders.

 (man whistles) (machine beeping) Over the last few years, three big things that hadn'thappened in my lifetime prompted me to do this study.

 First, countries didn't have enough money to pay their debts, even after loweringinterest rates to zero.

 So their central banksbegan printing lots of money to do so.

 Second, big internal conflicts emerged due to growing gaps in wealth and values.

 This showed up in political populism and polarization between the left, who want to redistribute wealth, and the right, who want todefend those holding the wealth.

 And third, increasing external conflict between a rising great powerand the leading great power, as is now happening withChina and the United States.

 So, I looked back.

 I saw that all these had happenedtogether before many times and nearly always led to changingdomestic and world orders.

 The last time this sequencehappened was from 1930 to 1945.

 What exactly is an order? You might ask.

 It's a governing system forpeople dealing with each other.

 There are internal orders forgoverning within countries, typically laid out in constitutions.

 And there is a world order forgoverning between countries, typically laid out in treaties.

 Internal orders change atdifferent times than world orders, though whether withinor between countries, these orders typically change after wars.

 Civil wars within countries, international wars between countries.

 They happen when revolutionary new forces defeat weak old orders.

 For example, the US internal order was laid out in the constitution in 1789 after the American Revolution, and it is still operating today, even after the American Civil War.

 Russia got rid of its oldorder and established a new one with the Russian revolution in 1917, which ended in 1991 with arelatively bloodless revolution.

 China began its currentinternal order in 1949 when the Chinese CommunistParty won the civil war.

 You get the idea.

 The current world order commonly called the American world order, formed after the alliedvictory in World War II when the US emerged asthe dominant world power.

 It was set out in agreements and treaties for how global governanceand monetary systems work.

 In 1944, the new world monetary system was laid out in theBretton Woods Agreement and established the dollar as the world's leading reserve currency.

 A reserve currency is a currency that is commonly acceptedaround the world, and having one is a key factor in a country becoming therichest and most powerful empire.

 With a new dominant power andmonetary system established, a new world order begins.

 These changes take place in atimeless and universal cycle that I call the big cycle.

 I'll start with a quick overview, then give you a more complete version and then direct you tomy book if you want more.

 As I studied the 10 most powerful empires over the last 500 years and the last three reserve currencies, it took me through the rise and decline of the Dutch empire and the guilder, the British empire and the pound, the rise and early decline in the United Statesempire and the dollar, and the decline and riseof the Chinese empire and its currencies, as well as the rise anddecline of the Spanish, German, French, Indian, Japanese,Russian, and Ottoman empires, along with their significant conflicts as measured in this chart.

 To understand China's patterns better, I also studied the rise and fall of Chinese dynasties and theirmonies back to the year 600.

 Because looking at allthese measures at once can be confusing, I'll focus on the fourmost important ones, the Dutch, British, US and Chinese.

 You'll quickly notice the pattern.

 Now let's simplify the form a bit.

 As you can see, they transpiredin overlapping cycles that lasted about 250 years with 10 to 20 year transitionperiods between them.

 Typically, these two transitions have been periods of great conflict because leading powers don'tdecline without a fight.

 So, how am I measuring an empire's power? In this study, I used eight metrics.

 Each country's measure of total power is derived by averaging them together.

 They are education, inventiveness and technology development, competitiveness in globalmarkets, economic output, share of world trade, military strength, the power of their financialcenter for capital markets and the strength of theircurrency as a reserve currency.

 Because these powers are measurable, we can see how strong eachcountry is now, was in the past, and whether they're rising or declining.

 By examining the sequencesfrom many countries, we can see how a typical cycle transpires.

 And because the wiggles can be confusing, we can simplify it a bit to focus on the pattern ofcause-effect relationships that drive the rise anddecline of a typical empire.

 As you can see, bettereducation typically leads to increased innovationand technology development, and with a lag, theestablishment of the currency as a reserve currency.

 You can also see that these forces then declined in a similar order, reinforcing each other's decline.

 Let's now look at thetypical sequence of events going on inside a country that produces these rises and declines.

 In a nutshell, the bigcycle typically begins after a major conflict, often a war, establishes the new leadingpower and the new world order.

 Because no one wants tochallenge this power, a period of peace andprosperity typically follows.

 As people get used tothis peace and prosperity, they increasingly bet on it continuing.

 They borrow money to do that, which eventually leadsto a financial bubble.

 The empire's share of trade grows.

 And when most transactionsare conducted in its currency, it becomes a reserve currency, which leads to even more borrowing.

 At the same time, thisincreased prosperity distributes wealth unevenly.

 So the wealth gap typically grows between the rich "haves"and the poor "have-nots".

 Eventually, the financial bubble bursts, which leads to the printing of money, an increased internal conflict between the rich and the poor, which leads to some form of revolution to redistribute wealth.

 This can happen peacefullyor as a civil war.

 While the empire struggleswith this internal conflict, its power diminishes relative to external rival powers on the rise.

 When a new rising power gets strong enough to competewith the dominant power that is having domestic breakdowns, external conflicts, mosttypically wars, take place.

 Out of these internal and external wars come new winners and losers.

 Then the winners get togetherto create the new world order.

 And the cycle begins again.

 As I looked back, I saw that these causeand effect relationships drove the cycles of rises and declines all the way back to the Roman empire.

 I saw how the stories ofeach one of these cycles blended together with othersbefore, during, and after in the same way as each individualstory blends with others to make the epic 500 year story that is our collective history.

 And like human life cycles, no two are exactly thesame, but most are similar.

 They're driven by logicalcause and effect relationships that progress through stages from birth to strength and maturity to weakness and inevitably decline.

 However, that's like sayinga person's life cycle takes 80 years on average without recognizing thatmany are much shorter and many are longer.

 While age can be a goodindicator of future longevity, a better way is to lookat health indicators.

 One can do that with empiresand their vital signs too.

 I found that by watching theindicators of power change, I was able to see whatstage a country was in, which helped me to anticipatewhat was likely to come next.

 Now, I'll take you throughthe big cycle in more detail.

 Give me 20 minutes and I'll give you thelast 500 years of history and show you the similar patterns across the Dutch, British, USand Chinese empires.

 500 years of big cycles.

 (wind whooshing) I'm going to describe the typical cycle by dividing it into three phases.

 The rise, the top, and the decline.

 The rise.

 Successful new orders that rise,both internal and external, are typically started bypowerful revolutionary leaders doing four things.

 First, they win power by gaining more supportthan the opposition.

 Second, they consolidate power by converting, weakening, oreliminating the opposition so they don't stand in their way.

 Third, they establishsystems and institutions that make the country work well.

 And fourth, they picktheir successors well, or create systems that do that, because a great empirerequires many great leaders over several generations.

 At this stage soonafter winning the fight, there was typically a periodof peace and growing prosperity because the leadership is clearly dominant and has broad support sono one wants to fight it.

 During this phase,leaders within the country have to design an excellent system to raise the country's wealth and power.

 First and foremost, to be great they must have strong education, which is not just teachingknowledge and skills, but also strong character,civility and work ethic.

 These are typically taught in the family, schools and religious institutions.

 That provides a healthyrespect for rules and laws, order within society, low corruption, and enables them to unitebehind a common purpose and work well together.

 As they do this, they increasingly shift fromproducing basic products to innovating andinventing new technologies.

 For example, the Dutch roseto defeat the Habsburg empire and become superbly educated.

 They became so inventive thatthey came up with a quarter of all major inventions in the world.

 The most important of whichwas the invention of ships that could travel around theworld to collect great riches and the invention ofcapitalism as we know it today to finance those voyages.

 They, like all leading empires,enhanced their thinking by being open to the bestthinking in the world.

 As a result, the people in the countrybecome more productive and more competitive in world markets, which shows up in theirgrowing economic output and rising share of world trade.

 You can see this happening now as the US and China are roughly comparable in both their economic outputs and their shares of world trade.

 As countries trade more globally, they must protect their trade routes and their foreign interests from attack.

 So they develop great military strength.

 If done well, this virtuous cycle leads to strong income growth, which can be used to finance investments in education, infrastructure,and research and development.

 They must also develop systemsto incentivize and empower those that have the abilityto make or take wealth.

 In all of these cases, themost successful empires used a capitalist approach to develop productive entrepreneurs.

 Even China, which is run bythe Chinese Communist Party, used a form of this capitalist approach.

 (cash registers ringing) Deng Xiaoping, whenasked about this, said, "It doesn't matter if it'sa white cat or a black cat, "as long as it catches mice.

" And "it's glorious to be rich.

" To do this well, they mustdevelop their capital markets.

 Most importantly, theirlending, bond and stock markets.

 That allows people to convert their savings into investments, to fund invention and development and share in the successes of those who make great things happen.

 The Dutch created the firstpublicly listed company, the Dutch East India Company, and the first stock market to fund it, which were integral parts of the system that produced massive wealth and power.

 As a natural consequence, thegreatest empires developed the world's leading financial centers for attracting and distributingthe world's capital.

 Amsterdam was the world's financial center when the Dutch were preeminent, London when the British were on top, New York is now, and China is quickly developingits financial centers.

 Most importantly, thecapitalists, the governments and the military must work together.

 Not only did the Dutch work well together, they were one in the same.

 The Dutch East India Company was granted a trademonopoly from the government and had its own officiallysanctioned military to go out into the globalmarkets to make and take wealth.

 The British followed with theBritish East India Company and had a similar coordination of their government, businessand military operations.

 The US Military IndustrialComplex followed suit, as does the Chinese system today.

 As the country becomes the largest international trading empire, its transactions can bepaid with its currency, making it the preferredglobal medium of exchange, and because their currency is so widely accepted and frequently used, people around the worldwant to save in it, making it the preferredstore hold of wealth.

 And thus the world'sleading reserve currency.

 The guilder was the world'smain reserve currency when the Dutch led world trade.

 The pound was when the British led.

 And the dollar has been since the US led.

 Naturally, China's currencyis increasingly being used as a reserve currency.

 Having a reserve currencyenables the empire to borrow more than other countries.

 That advantage is huge.

 Think about it.

 People all over theworld are eager to save and hence lend back theircurrency to the empire.

 Countries without a reservecurrency don't have that.

 And when the empire runsout of its own money, remember the United States in 1971, they can always print more.

 The exorbitant privilege afforded by the empire's reserve currency leads borrowing to increase and the beginning of a financial bubble.

 This series of cause andeffect relationships, leading to mutually supportive financial, political and military powers, bolstered by the borrowingpower of a reserve currency, have gone together sincehistory began to be recorded.

 All the empires that becamethe most powerful in the world followed this path to the top.

 While in the top phase, most of these strengths are sustained, embedded within thefruits of their success are the seeds of their decline.

 As a rule, as people in these rich andpowerful countries earn more, that makes them moreexpensive and less competitive relative to people in other countries who are willing to work for less.

 At the same time, people inother countries naturally copy the methods and technologiesof the leading power, which further reduces theleading power's competitiveness.

 For example, British ship builders had less expensive workersthan Dutch ship builders.

 So, they hired Dutch designersto design better ships that were built by lessexpensive British workers, making them more competitive, which led the British to riseand the Dutch to decline.

 Also, as people become richer, they tend not to work as hard.

 They enjoy more leisure, pursue the finer and lessproductive things in life, and at the extreme, become decadent.

 Values change fromgeneration to generation during the rise to the top from those who had to fightto achieve wealth and power to those who inherited it.

 (boy groans)(boy blows raspberry) They're less battleheartened, steeped in luxuries and accustomed to the easy life, which makes them morevulnerable to challenges.

 The golden era of the Dutch empire (glasses clink) and the Victorian eraof the British empire (glasses clink) were such high prosperityperiods like this.

 As people get used to doing well, they increasingly bet onthe good times continuing and borrow money to do that, which grows into the financial bubbles.

 Naturally, the financialgains come unevenly.

 So, the wealth gap grows.

 Wealth gaps are self-reinforcing because rich people usetheir greater resources to reinforce their powers.

 For example, they give greaterprivileges to their children, like better education, and they influence the politicalsystem to their advantage.

 This causes the gaps in values, politics, and opportunities to grow between the rich "haves" and the poor "have-nots".

 Those who are less well-offfeel the system is unfair, so resentments grow.

 But as long as the living standards of most people are still rising, these gaps in resentmentsdon't boil over into conflict.

 Having the world's reserve currency inevitably leads to borrowing excessively and contributes to the country building up large debts with foreign lenders.

 While this boosts spendingpower over the short term, it weakens the country's financial health and weakens the currencyover the long-term.

 In other words, when borrowingand spending are strong, the empire appears very strong, but its finances arein fact being weakened.

 The borrowing sustains the country's power beyond its fundamentals by financing bothdomestic over consumption and international military conflicts required to maintain the empire.

 Inevitably, the cost of maintainingand defending the empire becomes greater than therevenue it brings in.

 So having an empire becomes unprofitable.

 For example, the Dutch empireoverextended around the world and fought war afterincreasingly expensive war with the British and other European powers to protect its territory and trade routes.

 The British empire similarlybecame massive, bureaucratic, and lost its competitiveadvantages as rival powers, particularly Germany, soared, leading to an increasinglyexpensive arms race and world war.

 The US has spent abouteight trillion dollars on foreign wars and theirconsequences since September 11th, and trillions more forother military operations and for supporting militarybases in 70 countries, and it still isn't spending enough to support its militarycompetition with China in the area around China.

 In this cycle, the richer countries eventually get deeper into debt by borrowing from poorcountries that save more.

 It's one of the early signsof a wealth and power shift.

 This started in theUnited States in the 1980s when it had a per capita income40 times that of China's, and started borrowing from Chinese who wanted to save in dollars because the dollar was theworld's reserve currency.

 Similarly, the Britishborrowed a lot of money from its much poorer colonies and the Dutch did the same at their top.

 If the empire begins torun out of new lenders, those holding their currency begin to look to sell and get out rather than to buy,save, lend, and get in, and the strength of theempire begins to decline.

 The decline.

 The decline comes frominternal economic weakness together with internal fighting or costly external fighting or both.

 Typically, the decline comes gradually and then very suddenly.

 When debts become very large, and there is an economic downturn, and the empire can nolonger borrow the money necessary to repay its debts, the financial bubble bursts.

 This creates great domestic hardships and forces the country to choose between defaulting on its debts orprinting a lot of new money.

 It always chooses toprint a lot of new money.

 At first gradually, andeventually massively.

 That devalues the currencyand raises inflation.

 For the Dutch, this wasthe financial crisis brought about by financial excesses and paying for the Fourth Anglo-Dutch War.

 Similarly, for the British, it was paying for its financial excesses and its debts from the two world wars.

 And for the US, it's been three cycles of debt, finance, booms,and busts since the nineties with the central bankstepping in each time with stronger measures.

 When the government hasproblems funding itself, when there are bad economic conditions and living standards formost people are declining, and there are large wealth,values, and political gaps, internal conflict betweenthe rich and the poor, as well as different ethnic,religious, and racial groups greatly increases.

 This leads to political extremism that shows up as populismof the left or the right.

 Those of the left seek toredistribute the wealth while those of the rightseek to maintain the wealth in the hands of the rich.

 Typically during such times,taxes on the rich rise and when the rich feartheir wealth and wellbeing will be taken away, they move to places,assets, and currencies they feel safer in.

 These outflows reducethe empire's tax revenue, which leads to a classic,self-reinforcing, hollowing out process.

 When the flight of wealth gets bad enough, governments outlaw it.

 Those seeking to get out begin to panic.

 These turbulent conditionsundermine productivity, which shrinks the economicpie and causes more conflict about how to divide theshrinking resources.

 Populist leaders emerge from both sides and pledge to take controland bring about order.

 That's when democracy is most challenged, because it fails to control the anarchy, and it is when the move toa strong populist leader who will bring order tothe chaos is most likely.

 As conflict within the country escalates, it leads to some form ofrevolution or civil war to redistribute wealth andforce the necessary big changes.

 This can be peaceful andmaintain the existing order, but it's more often violentand changes the order.

 For example, the Rooseveltrevolution to redistribute wealth was relatively peaceful and maintained theexisting internal order, while the French revolution,the Russian revolution, and the Chinese revolutionwere much more violent and led to new internal orders.

 This internal conflictmakes the empire weak and vulnerable to rising external rivals who, seeing this domestic weakness, are more inclined to mount a challenge.

 This raises the risk ofgreat international conflict, especially if the rival hasbuilt up a comparable military.

 Defending one's self andone's empire against rivals requires great militaryspending, which has to occur as domestic economicconditions are deteriorating and the empire can least afford it.

 Since there is no viable system for peacefully adjudicatinginternational disputes, these conflicts are typically resolved through tests of power.

 As bolder challenges are made, the leading empire is facedwith the difficult choice of fighting or retreating.

 Fighting and losing is the worst outcome, but retreating is bad too asit cedes progress to the rival and signals that the empire is weak to those countries that areconsidering which side to be on.

 Poor economic conditions cause more fighting for wealth and power, which inevitably leadsto some kind of war.

 Wars are terribly costly.

 At the same time, theyproduce the tectonic shifts that realign the new orders to the new realities ofwealth and power in the world.

 When those holding thereserve currency and debt of the declining empirelose faith and sell them, that marks the end of its big cycle.

 Of the roughly 750 currenciesthat existed since 1700, less than 20% now exist, and all of them have been devalued.

 For the Dutch, thishappened after their defeat in the Fourth Anglo-Dutch War, when they weren't able to repay the massive debts they built up during it.

 This led to a run on the bank of Amsterdam and a desperate sell off, forcing massive money printing, which devalued the currency and the empire into irrelevance.

 For the British, thishappened after World War II, when despite their victory, they could not repay themassive debts they borrowed to fund their war effort.

 This led to a series ofmoney printing, devaluations, and selloffs in the British pound as the US and the dollar emerged dominant and created a new world order.

 At the time of this recording, the United States hasn'tyet reached this point.

 While it has massive debt,spends more than it earns and funds this deficit with more borrowing and printing huge amounts of new money, the big sell off indollars and dollar debt hasn't yet begun.

 And while there are greatinternal and external conflicts occurring for all the classic reasons, they've not yet crossedthe line to become wars.

 Eventually out of these conflicts, whether they're violent or not, come new winners who get together and restructure the losers'debts and political systems and establish the new world order.

 Then the old cycle and empire ends and the new one begins and they do it all over again.

 That's a lot of detail I just threw at you to paint a picture of how thetypical big cycle transpires.

 Of course, not all of themtranspire exactly this way, but most largely do, so much so that it seems like thestories of rises and declines stay essentially the same and the only things that change are the clothes the characters wear and the technologies they use.

 So, where are we heading? The future.

 Most empires have their time in the sun and inevitably decline.

 Reversing a decline is difficult because that requires undoing a lot that's already beendone, but it's possible.

 By looking at these indicators,it's pretty easy to see which stage of the bigcycle an empire is in, how fit it is, and whether its conditionis improving or worsening, which can help one estimatehow many years it has left.

 Still, these estimates aren't precise and the cycle can be extended if those in charge payattention to their vital signs and improve them.

 For example, knowing thata person is 60 years old, how fit they are,whether they smoke or not and a few other basic vital signs, one can estimate the person's longevity.

 One can do that with empiresand their vital signs too.

 It won't be precise, but itwill be broadly indicative and give clear direction on steps to take to increase longevity.

 It's most often the case that a nation's greatestwar is with itself over whether or not it canmake the hard decisions needed to sustain success.

 As for what we need to do, it comes down to just two things - earn more than we spend,and treat each other well.

 All other things I mentioned - strong education, inventiveness, being competitive and all the rest - are just ways of gettingat these two things.

 It's easy to measure if we're doing them.

 So like people who want to get fit, let's get on the programand improve our vitals.

 Let's do that individuallyand collectively.

 My goal for sharing thispicture of how the world works and a few principlesfor dealing with it well is to help you recognize where we are and the challenges we face, and to make the wise decisions needed to navigate these times well.

 Since there is a lot more todiscuss and we are out of time, you can learn more in my book Principles for Dealing withthe Changing World Order.

 And I look forward tocontinuing this conversation at economicprinciples.

org and on social media.

 Thank you, and may the force ofevolution be with you.

 (dramatic music)