Ray Dalio (Bridgewater Founder) – Principles for Dealing with the Changing World Order (Mar 2022)

Chapters

Abstract

Navigating the Shifting World Order: Insightful Perspectives on Global Leadership, Technological Rivalry, and the Future of US-China Relations

In an era marked by significant geopolitical and economic shifts, Ray Dalio’s “The Changing World Order” and Henry Kissinger’s analyses offer profound insights into the complexities of modern global leadership. This article synthesizes their perspectives, emphasizing the crucial factors that define today’s international dynamics: the financial strength of nations, societal cohesion, the rise of China, government deficits, and the evolving international order. With a particular focus on US-China relations, technological competition, and the implications of artificial intelligence (AI), this piece underscores the necessity of strategic dialogue and careful navigation to avert potential conflicts and foster a mutually beneficial global future.

Understanding the Current World Dynamics

1. Global Financial Strength and Challenges: Dalio’s research indicates that excessive debt and money printing, common in current economic policies, weaken a nation’s financial stability. This, in turn, can lead to periods of disorder and civil unrest.

2. Societal Cohesion: The growing polarity and populism in societies, as Dalio and Kissinger note, hinder the ability to work towards common goals, crucial for a country’s strength.

3. China’s Ascendancy: China’s economic rise poses a unique challenge to the United States. Dalio stresses the importance of a cooperative approach between these two powers to avoid conflict.

4. Government Deficits and International Order: The trend of governments running deficits by printing money is risky and can lead to currency devaluation. This dynamic is reshaping the international order established by the United States post-World War II.

5. Leadership and Its Evolution: Post-World War II, the US’s predominant leadership is now being questioned, given its financial situation and internal conflicts. This shift is crucial in understanding the current geopolitical landscape.

6. Ray Dalio’s Motivation for Writing “The Changing World Order”: Dalio recognized the need to study phenomena beyond his lifetime to understand current events and effectively handle his responsibilities. He identified three significant simultaneous occurrences: the accumulation of debt and printing of money to finance it; internal conflicts arising from wealth and political gaps, reaching levels unseen since 1900; and the rise of China as a great power challenging the United States. Dalio delved into the study of history to gain a comprehensive understanding, examining the rise and decline of reserve currencies and the rise and fall of dynasties in China.

7. Henry Kissinger’s Perspective: Kissinger’s research in geopolitics and history revealed patterns similar to those identified by Dalio. While the rise and decline of societies may not coincide precisely in terms of years, the overall patterns exhibit significant correspondence. Kissinger acknowledges Dalio’s findings on the rise and decline of countries, like the Dutch, which he had not previously studied from a geopolitical perspective. Both Dalio and Kissinger agree that the rise and decline of nations is a relevant subject for our time, given the current global situation.

The Dynamics of Power Transition

1. Static vs. Rising Powers: History shows that the outcome of a confrontation between a rising and a static power depends on their relative strength and resolve. The US-China dynamic is a contemporary example of this.

2. Dalio and Kissinger on Power Dynamics: Both experts acknowledge that America, despite its relative decline, remains strong. China, learning from historical cycles, is practical in its approach to rise as a global power.

3. Deng Xiaoping’s Economic Reforms: Under Deng Xiaoping, China embraced a mix of capitalism and economic growth, changing its global stance and strength. Deng’s policies involved allowing Western-style capitalism to develop in certain areas and focusing on gaining economic power before gaining influence.

4. America’s Global Leadership: Challenges and Opportunities: Currency and financial strength are crucial for global leadership. Printing money and creating debt devalue the currency, diminishing its value and causing inflation. Social and political cohesion is also essential; financial problems and polarity can lead to increased populism and lack of compromise, resulting in disorder and even threats to the political system. China’s economic growth poses a challenge to America’s global dominance, necessitating a win-win relationship to avoid conflict. Government deficits and printing money benefit some individuals but hurt others, devaluing bonds and assets and causing investors to sell them, leading to a risky dynamic where the central bank must print more money to fund both the deficit and the funding gap. The devaluation of reserve currencies, like the dollar, is not just relative to other currencies but also in terms of rising prices of goods, services, and financial assets, reinforcing inflation and leading to further devaluation. The current international order was built by the US after World War II due to its economic dominance, but as other countries become richer, the US’s position is challenged, requiring adaptation and negotiation.

5. Static Powers and Rising Competitors: Kissinger discusses the dynamic between static powers and rising competitors. When a static power is still strong and purposeful, it can quell a rising power’s challenge. The example of World War I is given, where Germany’s position was improving relative to Britain’s, but they underestimated Britain’s determination to maintain its supremacy. The British defense minister once visited Berlin and offered some concessions to Germany, but Germany miscalculated the situation.

Technological Dimension

1. Modern Warfare and Technology: With advanced technologies, the nature of warfare has changed, making victories unpredictable and damages immense. This necessitates a new kind of dialogue focused on preventing conflicts.

2. AI and Technological Competition: AI holds vast potential but also risks. Dalio and Kissinger emphasize the need for a comprehensive understanding of these technologies to ensure they are used responsibly.

3. China 2025 and Tech Dominance: The race for technological supremacy, as seen in China’s industrial policies and the US’s initiatives, could lead to upliftment or threats, depending on management.

4. Technological Dimension: Modern Warfare and Technology: Advanced technologies have changed the nature of warfare, making victories unpredictable and damages immense, necessitating a new kind of dialogue focused on preventing conflicts. AI and Technological Competition: AI holds vast potential but also risks. Dalio and Kissinger emphasize the need for a comprehensive understanding of these technologies to ensure they are used responsibly. China 2025 and Tech Dominance: The race for technological supremacy, as seen in China’s industrial policies and the US’s initiatives, could lead to upliftment or threats, depending on management.

Dialogue and Strategic Reorientation

1. The Need for Dialogue: To avoid escalation into conflict, both the US and China need to engage in meaningful dialogue, focusing on mutual understanding and managing technological competition.

2. Establishing Red Lines: Dalio, Kissinger, and John Hamrey stress the importance of defining clear limits in technological development and strategic objectives to prevent catastrophic outcomes.

3. Redefining Common Purposes: Kissinger calls for a reevaluation of long-range objectives and domestic debates to address current challenges effectively.

4. Dialogue and Strategic Reorientation: The Need for Dialogue: To avoid conflict escalation, the US and China must engage in meaningful dialogue, focusing on mutual understanding and managing technological competition. Establishing Red Lines: Dalio, Kissinger, and Hamrey emphasize the importance of defining clear limits in technological development and strategic objectives to prevent catastrophic outcomes. Redefining Common Purposes: Kissinger calls for a reevaluation of long-range objectives and domestic debates to address current challenges effectively.

A Future Shaped by Cooperation and Understanding

In conclusion, as the world navigates these complex dynamics, the insights of Dalio and Kissinger highlight the need for strategic thinking, cooperation, and a clear understanding of the risks and potentials of technological advancements. The future of global leadership, particularly in the context of US-China relations, will depend on how these challenges are addressed, emphasizing the need for dialogue, strategic reorientation, and a focus on common interests.

Supplemental Update:

Relative Decline and Absolute Decline: Henry Kissinger emphasizes the distinction between relative decline and absolute decline. A nation can experience relative decline while still maintaining its strength and power, as long as its national purpose and unity remain intact.

Historical Lessons from China: Ray Dalio emphasizes the importance of understanding China’s history of dynastic rises and declines to comprehend its current trajectory. Chinese policymakers and citizens learn lessons from history and apply them to practical decision-making.

Materialism and Historical Patterns: Dalio discusses the concept of materialism, the idea that physical and economic factors drive historical change. He notes that Chinese history exhibits patterns of cycles, with periods of rise and decline, and that these patterns can help inform our understanding of China’s current trajectory.

China’s Pragmatic Approach and Evolving Role: Dalio emphasizes China’s pragmatic approach to policymaking, where leaders learn from past mistakes and adapt to changing circumstances. He highlights China’s evolving role in the world, shifting from a focus on domestic development to a more active engagement in global affairs.

The Importance of Engagement with China: Dalio stresses the importance of engagement with China, particularly for the United States, to manage potential conflicts and promote cooperation. He advocates for a balanced approach that combines competition with dialogue and cooperation, recognizing China’s rise while addressing areas of concern.

China’s Balancing Act: Ray Dalio highlights China’s efforts to balance embracing capitalism and innovativeness with maintaining its Communist Party’s authority and pursuing common prosperity. The country’s unique approach involves a top-down Confucian hierarchical approach, contrasting with America’s bottom-up democratic approach.

Deng Xiaoping’s Pragmatic Approach: Deng Xiaoping’s leadership shifted China’s focus from the Mao era to a more pragmatic economic approach, promoting wealth creation and innovation. He famously stated, “It doesn’t matter whether it’s a white cat or a black cat as long as it catches mice,” emphasizing results over ideology.

Common Prosperity and Sovereignty: The concept of common prosperity involves government intervention in the private sector, setting rules and regulations to achieve a more equitable distribution of wealth. China’s emphasis on sovereignty and its historical experiences, such as the “hundred years of humiliation,” shape its perspective on international relations.

Avoiding Wars and Understanding China’s Perspective: Dalio emphasizes the importance of avoiding military conflicts between China and the United States, considering the devastating consequences of modern technologies. He urges both countries to understand each other’s perspectives and motivations to prevent misunderstandings and escalation of tensions.

China’s Approach to Gaming and Big Tech: China’s common prosperity approach includes regulating industries such as gaming, setting limits on playing time and approving specific games. The government also supports innovative companies through programs like “little giants,” fostering technological advancements and promoting economic growth.

Political Considerations in China: Dalio acknowledges that China’s political system is more autocratic and controlled, with strict adherence to rules and regulations. He emphasizes that the upcoming political changes in China may influence policy decisions and shape the country’s direction.

Deng, Kissinger, and the Dangers of War in a Technologically Advanced World: Deng Xiaoping, China’s leader, understood the need for China to become wealthy before it could gain influence. He allowed for the limited development of Western-style capitalism, leading to China’s economic success. Xi Jinping’s policies are a reflection of China’s increased capabilities and the end of the century of humiliation.

Kissinger’s Views on China: Kissinger acknowledges that China’s hardening stance is due to its growing power and the historical experiences of the century of humiliation. He emphasizes the Chinese approach to policy, which is historic and focused on long-term evolution rather than immediate solutions. Kissinger believes that some level of conflict between China and the US was inevitable due to China’s rise.

The Dangers of War in the Modern Age: Kissinger highlights the unpredictable nature of modern warfare, where the damage caused by war is incalculable, and there is no clear margin of victory. He suggests two possibilities: preparing for war or establishing communication to avoid major technological conflicts. Kissinger emphasizes the need for reflection, elaboration of concepts, and a high level of dialogue to prevent conflict.

Technology and Its Impact: John Hamrey brings up the question of technology’s role in the competition between China and the US. Ray Dalio emphasizes the historical significance of technological innovation and its ability to solve problems and raise living standards. However, Dalio also acknowledges the threatening potential of technologies, such as connectivity and cyber capabilities.

Notes by: Ain