Introduction to Ray Dalio and Context:

Ray Dalio, the founder of Bridgewater Associates and author of the book “Principles for Dealing with the Changing World Order,” is a featured speaker at DevEx World. His book delves into the cycles of history and its relevance to the modern world, particularly in global development.

Three Major Current Events:

Dalio identifies three new critical developments: 1) creation of enormous debt and its monetization; 2) internal conflict due to wealth and income gap; 3) the rise of China as a comparable power to the U.S. These three conditions existed in the period from 1930 to 1945 and are evident again today.

Historical Perspective:

Dalio studied 10 major empires over the past 500 years, as well as various Chinese dynasties, to understand recurring patterns and cycles. He asserts that these patterns are caused by specific cause-effect relationships and aren’t merely coincidental.

Financial Conditions and Debt:

Today’s economic landscape is shaped by unrestricted credit and debt creation, which leads to inflation. Central banks are tightening monetary policy to remove buying power, setting up a stagflation environment, a pattern Dalio notes has repeated throughout history.

Populism and Internal Conflict:

Dalio attributes the rise of populism to disenfranchised groups wanting a fighter rather than a compromiser. This internal conflict threatens existing systems and can transform democracies into autocracies, as evidenced by the 1930s.

Geopolitical Tensions and Types of Warfare:

In the absence of a global judicial system, great powers engage in various forms of warfare, including trade, technology, geopolitical influence, economic, and potentially military war. Dalio observes that the U.S. and China are already involved in several of these conflicts. Economic sanctions can escalate to military conflicts, as happened with Japan and the U.S. leading up to Pearl Harbor.

Relevance to Global Development and Institutions:

Institutions like the World Bank and IMF were set up post-World War II to handle global development issues. The historical cycles and conflicts Dalio discusses could herald a new inflection point that affects these institutions and could reshape the world order.

Implications for the Future:

Dalio emphasizes that understanding these cycles and conditions is crucial for decision-making today. While not necessarily predicting military conflict, he stresses that we are at a stage where significant shifts in global power and order are possible.

Reserve Currency Risks:

Ray Dalio begins by highlighting that the risk associated with the U.S. dollar is not an isolated issue but is shared among all three major reserve currencies: the U.S. dollar, the Euro, and the Japanese yen. These currencies face similar dilemmas due to excessive national debts and the complex choices surrounding monetary policies.

Debt and Currency Devaluation:

Dalio explains that when there is too much debt, countries have limited options: either repay the debt with money that maintains its value or print more money, leading to currency devaluation. This scenario resembles the economic conditions of the 1930s, when countries shifted to gold as it doesn’t depend on money printing and has intrinsic value.

Fiat Currencies and Economic Contraction:

He further states that all major reserve currencies are now fiat currencies, meaning they aren’t backed by a physical commodity like gold. Printing money to manage debt is often seen as a better alternative to paying back in “hard money,” which could lead to economic contraction and a depression-like situation.

Advice to Emerging Economies:

Dalio suggests that finance ministers in emerging economies should think about diversifying their reserves, including considering gold. They should understand their liabilities and payment obligations and perform sensitivity analyses for currency devaluation and inflation. He emphasizes that holding debt will result in a loss of buying power due to inflation.

Historical Perspective:

Dalio mentions that he studied 750 currencies over a few hundred years and found that all currencies eventually get devalued or die, often connected to the debt cycle. Countries have historically broken pegs to commodities like gold and resorted to printing money.

Impact on Social Goals:

When asked about the impact on social objectives like health and education in emerging economies, Dalio suggests that these countries should be cautious about their growth and development prospects. The devaluation of their currencies could affect the stability of the global economy, which in turn could have implications for achieving their societal goals.

Three Pillars of Evaluation:

Ray Dalio emphasizes three fundamental factors that he considers essential for evaluating an individual, company, or country’s investment worthiness. These are a strong income statement and balance sheet, internal harmony and productivity, and the risk of international war. He stresses that these aspects are paramount when deciding where to invest money.

Importance of Education:

Dalio mentions that a well-educated population is crucial for productivity and harmony. Education correlates with income and civility, and a lack of it can lead to internal conflicts that are counterproductive.

Volatility and Savings:

Dalio adds that in times of income volatility, a solid savings rate and diversified reserves become especially important. These savings provide a safety net, allowing for more flexibility and resilience.

Shift in Resource Allocation:

Dalio observes a significant shift in how resources are allocated. While economic factors used to be the main consideration, geopolitical issues now play a more substantial role. This shift has led to populist movements, protectionism, and nationalism, affecting where capital flows.

Decline of Globalization:

He contends that the world is moving away from globalization toward self-sufficiency, driven by political tensions and the risks of trade and foreign exchange controls. This shift makes domestic production and control over commodity exports more important for countries, potentially leading to inflation but also becoming a part of a “new world order.”

Internal and External Conflicts:

Dalio suggests that both internal and external conflicts will significantly influence resource allocation, even within countries. These conflicts are increasingly ideological, illustrated by people moving from one state to another for ideological and economic reasons.

Power of Ideological Forces:

Lastly, Dalio points out the growing influence of ideological forces in society. He takes the hypothetical example of Elon Musk buying Twitter, arguing that control over such platforms could have more societal impact than institutions like the Supreme Court. Ideological factors are now significant drivers in economics and politics.

Through these points, Dalio outlines a complex landscape of shifting priorities and variables, from economic fundamentals to geopolitical considerations, that are shaping investment strategies and societal changes.

Probability of Civil Conflict:

Ray Dalio estimates a 40% chance of the United States experiencing “irreconcilable differences” that could lead to a form of civil war. In such a scenario, Dalio imagines that neither political party would accept losing, and central governance, including Supreme Court decisions, could be ignored by state and local governments. This kind of conflict could lead to societal fragmentation and possibly escalate to physical warfare, although Dalio does not believe it would go as far as shooting.

Underlying Indicators:

Dalio mentions that this 40% estimation is not arbitrary; it’s based on leading indicators and statistics. However, he acknowledges that the sample size may not be large enough to provide high confidence. The January 6th incident at the U.S. Capitol, according to Dalio, should not have been a surprise and aligns with patterns observed in populist movements.

International Conflict:

Dalio also puts the odds of an international conflict involving the United States at around 40%. He cites contentious and potentially irreconcilable issues, such as the Taiwan situation, as potential flashpoints that could escalate to a higher level of conflict.

Role of Bipartisanship:

Dalio emphasizes the importance of a strong bipartisan middle ground to mitigate these risks. He believes that one of the main political issues is the representation of extreme points of view within the two main parties, which can exacerbate societal divisions and conflict risks.

Contextual Note:

Dalio highlights how conversations about these serious issues were less common years ago, indicating a noticeable shift in the societal climate. He suggests that the future is not set in stone and that it’s up to the public to shape it.

Political Polarization:

Ray Dalio points out that while the majority of Americans are politically moderate, political parties have become more extreme. He suggests that a strong middle ground, possibly in the form of a middle political party, could work together to solve pressing issues such as education and infrastructure.

Prospects for Democracy:

Dalio expresses concern about the state of democracy in the context of rising global populism and inequality. He points out that internal conflicts within democracies can lead to anarchy and put the rule of law and respect for democracy at risk.

Historical Perspective:

Drawing from Plato’s Republic, Dalio discusses the cyclic nature of governance forms. He cites the 1930s as an example, when Germany, Italy, Spain, and Japan transitioned from democracies to autocracies due to internal conflicts. He explains that these conflicts often result in the rise of a “benevolent despot,” which eventually gives way to a corrupt and inefficient despot, sparking revolution and potentially a return to democracy.

Risks to Democracy:

Dalio concludes that one of the key risks to democracy is the inability to make effective decisions due to internal conflicts. He suggests that this risk is very real and aligned with historical patterns, indicating that democracy is not a guaranteed stable form of governance.

Need for Structural Changes:

Dalio indicates that addressing the various issues the U.S. faces might require significant efforts, including potentially constitutional amendments. These changes are needed to tackle obstacles to productivity and societal well-being, underscoring the importance of a strong, cooperative middle ground in politics.

Delicate Balance in Governance:

Ray Dalio emphasizes that all forms of governance, be it democracy or autocracy, face inherent challenges and risks. He describes governance as a “delicate balance” that, if not maintained well, can lead to instability.

Comparing U.S. and China:

Dalio identifies that while the U.S. faces the risk of chaos and internal fighting due to its democratic setup, China also has its own set of political differences and viewpoints despite being an autocracy. Both nations are susceptible to instability, albeit from different angles.

Political Seasons and Leadership Change:

Dalio points out that political seasons, such as the upcoming leadership change in China’s Politburo, are critical moments that test the stability of a system. How these transitions are managed can have a significant impact on the country’s political balance.

The “Mandate of Heaven”:

Dalio introduces the concept of the “Mandate of Heaven” in the context of Chinese governance. If governance is perceived as over-controlling and not balanced, it leads to the loss of this “mandate,” triggering turbulence and potential changes in the domestic order.

Universal Risks:

Dalio concludes that risks to governance—whether of chaos in democracies like the United States or of the loss of the “Mandate of Heaven” in autocracies like China—are universal. The nature and dynamics of these risks may differ, but they are present in all systems of governance.

Philanthropy’s Adequacy:

Ray Dalio opines that philanthropy is “woefully inadequate” for solving the major social issues we face. Even with significant contributions towards education, the scale of the problem outweighs the impact that can be made through charitable efforts alone.

Educational Inequality:

Dalio gives the example of Connecticut, one of the richest states in the U.S., which also has a significant wealth gap. He mentions that 22% of high school students are either disengaged or disconnected, which he defines as failing classes or having a high absentee rate. He links this issue to the different resources available in wealthy versus poor districts, citing a stark difference in per-student spending between Greenwich and Bridgeport, Connecticut.

Consequences of Inadequate Education:

Dalio outlines the ripple effects of a failing education system, emphasizing how it leads to a cycle of crime and incarceration. He indicates that not addressing this adequately not only fosters inequality but also wastes potential talent that could come from anywhere.

Principles in Philanthropy:

For his own philanthropic activities, Dalio emphasizes the importance of making it a family activity. He and his family focus on the impact they want to make, rather than the monetary value. Because philanthropy doesn’t offer the same measurable outcomes as business investments do, they focus on the social impact, ranging from community betterment to environmental concerns.

Challenges in Impact Measurement:

Dalio notes that unlike in business where profitability is a clear metric, philanthropy lacks a universal unit of measurement for success. Therefore, it’s crucial to think about the impact and the methods of giving, which can vary from simply writing a check to creating an organization dedicated to a cause.

In summary, while Dalio sees philanthropy as an essential endeavor, he does not view it as a complete solution to the systemic problems of educational inequality and social issues. He suggests that a much larger, perhaps even constitutional, intervention may be required to break the cycle of inequality.

Criteria for Decision-making:

Ray Dalio discusses how success can be measured by applying a series of rules and criteria. This system helps in allocating resources and identifying what is special and needs to be built upon. He emphasizes the importance of maintaining a balance between following the system and allowing for freedom.

Family and Community:

Dalio also talks about the joy derived from family activities and shared events. For him, this approach to life and work brings his family closer together. This might be viewed as a component of his broader philosophy for making decisions and measuring success.

Impact Investing:

Dalio addresses the concept of impact investing, where profit and positive social impact are both considered. He questions how to accurately measure the “second bottom line,” which is the social impact. He points out that it’s not just about potential returns but also about the ability to measure the impact that makes it challenging.

Challenges in Scaling Impact Investing:

Dalio admits that while impact investing is promising, it’s in its early stages and difficult to scale. The rigor in definitions and measurements are still lacking, which adds to the complexity of adopting this approach broadly.

Final Remarks and Educational Resources:

Dalio mentions his book, “Principles and Principles for Dealing with a Changing World Order, Why Nations Succeed and Fail,” as a detailed resource. He also highlights an animated video on YouTube as an accessible way to grasp his ideas.

The presentation offers a look into Dalio’s systematic approach to life and investing, emphasizing the emerging but complex area of impact investing.