Over the last 1-2 years I have been reading some books about history and some others about patterns in history that can be observed that can help us understand our future better (ex: the book Why Nations Fail and this blog I wrote about how history can help us predict our future) . I have started to have this strong belief that the world is changing in ways most people alive today have not experienced.
The Changing World
As our attention span shortens, we seem to feel like we have seen it all and things like war and pandemics are events of the past. Yet the last 2 years have taught us that is not the case. Another book by Peter Turchin called War and Peace and War talks about the rise and fall of empires and using historical data to model this as a statistical science. This also ties into Nassim Taleb’s philosophy around being Anti-fragile where we plan for black swan events because it is not the probability of the event but the potential impact of such events that matter.
Earlier this year while reading the Foundation series I felt like the galactic empire’s decline draws some great parallel to the decline of US empire. So when the book by Ray Dalio called the Principles of dealing with the changing world order caught my attention, I felt like I had to read it.
The Principles of Changing World Order
I read it earlier this year in March 2022 and I have to say it’s one of the best books I have read. The amount of research, data and work that has gone into this book is amazing. And the way it clearly explains some really dense concepts is truly unbelievable. The book was published in Nov-2021 and it feels almost prescient in the war we see today between Russia and Ukraine. The book broadly talks about the rise and fall of empires, some examples of the same, explains why it happens and focuses on certain take-aways around the financial aspects of these changes. He has come up with a set of parameters that he measures to understand the power index of various empires and by measuring the trend lines of this overall power index you can see the rising and declining empires.
There is a lot of detail in the book and he talks about the big 5 parameters to watch out for as well as the 18-20 indicators he looks at. I won’t go into all of them but there were a few key things that have stayed with me.
In the rise of an empire are the seeds to its downfall
This learning has seared itself in my memory and it seems to contain so much wisdom. The things that make an empire rise usually also contain the seeds of the reasons that will eventually lead to its decline. For example: educating your population is key factor to the growth of a country but eventually higher standards of living, higher wage bases, higher baselines means the same country cannot compete and is outcompeted for cost of labor by other cheaper alternatives. Another example: The more a country grows, the more its military might but then you also have to pay large sums of money to maintain the same might where other countries can use the same money to pay for other things outside of defence.
The Ascent of China
If you read the book with an open mind and see the value creation that has happened in China and how China is taking a lead in a lot of key things, it’s hard not to believe that China is on the ascent and will rival US for the major super power in next 10-50 years. China has brought 100s of millions of people out of poverty in last 30 years, it has improved quality of life for vast majority of its population in the same time, it has invested in technology, military, science, space, digital payments etc. It is going to continue getting fruits of the long term investment it is putting in and is already considered the #2 superpower. The data and signals point to China’s continued ascent and US’s gradual decline and a potential crossing of powers in next 10-20 years. Hence this changing world order period is going to be increasing tumultuous and uncertain.
Note: These are not 100% sure outcomes but what the probabilities and data suggest. This also has nothing to do with whether you are pro/anti the country or its politics.
Currencies fail, mostly
As per the book only 20% of the 750 currencies that have existed since 1700 still remain and every single one of them has been devalued. What that means is that eventually the currency you hold will be devalued. The wisdom of my parents generation was to hold cash or put money in safe fixed deposits. This will no longer be a good idea in the coming world. Real inflation is already higher than interest rate. Any money being held with banks is getting devalued fast.
Not only this but we tend of think of stock markets as usually going up. But if we take the period since 1900s that include WW1 and WW2 etc, we will find that a lot of wealth gets wiped out in wars. Japan’s stock market went sideways for almost 30 years. Most of the big companies of 1950s no longer exist. Hence even assuming that you keep money in good stocks may not stand the test of time.
Sooner or later, currencies get devalued, wealth gets wiped out and the world order changes and restarts. One way to protect yourself is to hold productive assets like home, gold and other companies / indexes. Individual companies may die but index funds that own good companies generating real productive value will maintain that value irrespective of currency devaluation.
The losing battle to maintain anything old
I have always found this interesting but the book puts front and center. It is hard to maintain old things and it only gets harder to maintain them. I am not talking the few unique hand crafted things or art but general purpose items tend to live as per law of entropy. Things move towards disorder. The state of the art bridge or tunnel is a money guzzling maintenance object in 50 years. Building vast military bases is great, maintaining them after 30 years requires the biggest defence budget. It’s not going to get any cheaper.
This is why it’s easier to tear down old things and rebuild new things instead of maintaining the old thing. Maintaining the power of the world’s biggest superpower is expensive and will continue to become even more so. Hence, the same power that led to the empire’s growth will come back to bite it and take a bigger share of its revenues to just maintain.
Why it matters?
Go read the book with an open mind if you want to learn more. I spent some time reflecting on what this means and what are some of the possible outcomes of future and used that information to change my investing strategy. However one thing I do believe now more than ever is that the world is changing. Things that have held true in the 70 years of peace and prosperity since WW2 may not play out the same in next 70 years. Technology will not just go up only. In general things will get better with time, but the road will have a lot more ups and downs in the coming decades. The big challenges we face as humanity like Climate change, space infrastructure setup, curing diseases will require new solutions and the world in 20 years will be very different.
The final parting thought: when the book was written we didn’t know about a war in Europe. Yet 4 months later, we have had an ongoing war in Europe. As part of the sanctions, US government essentially flipped a digital switch and said all the US dollar reserve held by Russia are no longer theirs. This will make every nation that holds US debt take notice and perhaps start taking gradual preventative action. No country wants to be so beholden to power of another nation to flip a switch and wipe their wealth. This is just one of the small trends that will play out over the coming decades and together I think will bring about a new world order.
What is this new world order? How it impacts us? Who will be winner? I don’t have answers to these questions but the best I can do is continue to learn more about the world and plan for probabilities that no matter what happens, my savings do not become worthless.