Introduction and Context:

The lecture is part of the Council on Foreign Relations CV Star and Co annual lecture series, focusing on the “Rise and Fall of Great Powers: America, China and the Global Order.” The moderator, Dan Kurtzfield, sets the stage by highlighting that the discussion aims to tackle a complex question about the trajectories of major global powers.

Panel Composition:

The panelists are chosen for their diverse expertise. Ray Dalio is the founder and co-chair of Bridgewater Associates and author of a forthcoming book on why nations succeed or fail. Liz Economy is an American scholar of China and the author of “The Third Revolution, Xi Jinping and the New Chinese State.” Paul Kennedy is a historian of international relations, best known for his book “The Rise and Fall of Great Powers.”

Ray Dalio’s Role:

Dalio is highlighted as someone who brings a unique perspective to global economic and political analysis through his experience at Bridgewater. He is noted for his forthcoming book, “The Changing World Order, Why Nations Succeed and Fail,” which aims to offer insights into the forces shaping the future of nations.

Liz Economy’s Expertise:

Well-known in the Council, Economy has recently moved to the Hoover Institution but remains a Senior Fellow for China Studies at the Council. She has authored key texts on China, including one focusing on Xi Jinping’s role in shaping the new Chinese state.

Paul Kennedy’s Contributions:

Kennedy is a Yale professor and renowned historian in international relations. He has written extensively on topics ranging from naval history to the United Nations. His most pertinent work for the discussion is “The Rise and Fall of Great Powers.”

Special Mention:

Hank Greenberg, the chairman and CEO of CV Star, is believed to be in the audience, though this could not be confirmed due to the format of the event.

The setup indicates that the discussion will draw upon a blend of historical, economic, and geopolitical expertise to dissect the complex dynamics governing the rise and fall of major global powers.

Introduction & Panelists:

The Council on Foreign Relations organizes a discussion revolving around the rise and fall of great powers, with specific emphasis on America and China. The panel features Paul Kennedy, a foremost historian on international relations; Liz Economy, an expert on China; and Ray Dalio, founder of Bridgewater Associates, a leading hedge fund. The discussion aims to understand the current dynamics between the U.S. and China.

Paul Kennedy’s Insights:

Paul Kennedy, author of “The Rise and Fall of the Great Powers,” mentions that history continues to evolve. He highlights China’s ascent as a world power since the late 1980s. According to Kennedy, China’s rise in economic, military, strategic, and political influence creates a new set of circumstances for other major powers, including the U.S., EU, India, and Russia. He sees China as the focal point of contemporary global discussions.

Chinese Perspective by Liz Economy:

Liz Economy provides insight into the Chinese viewpoint. She notes that China is in a celebratory mood due to the 100th anniversary of the Communist Party and feels triumphant after faring well in the pandemic. Xi Jinping and other leaders project an image of a rising China in contrast to a perceived declining United States. While they seek areas of cooperation with the U.S., they also expect the U.S. to rectify what they consider missteps by the Trump administration.

Lower-level Chinese Concerns:

Economy also mentions a level of concern among non-elite Chinese scholars and analysts. They worry that the Biden administration might be more effective than its predecessor in building coalitions against China and pushing back on the global stage. These scholars also express some acknowledgment of China’s own foreign policy missteps, like “wolf warrior diplomacy,” offering opportunities for the U.S. to gain an advantage.

The discussion indicates that while China views itself in a strong position, there is recognition at some levels that its relationship with the U.S. is complex and fraught with challenges. The views of other panelists are expected to add more depth to this complex issue.

Economic and Financial Changes:

Ray Dalio emphasizes the financial economic shifts that have global implications, notably hitting zero interest rates and the subsequent money printing and creation of debt. These actions threaten the status of the world’s reserve currency. Dalio indicates that these patterns of creating debt to stimulate the economy and the subsequent effect on the reserve currency are not new; they have historical precedence.

Wealth and Opportunity Gaps:

Dalio draws attention to the rising wealth gap and, in connection, the opportunity, values, and political gaps. These social fissures often come as side-effects of economic shifts and have significant implications for the stability and prosperity of a country or economic system.

Rise of a New Global Power:

The third major point Dalio makes is about the rise of a great power to challenge an existing one—specifically, the rise of China. This trend is not just a geopolitical factor; it’s intimately tied to the economic and social factors Dalio mentioned earlier.

Historical Analogies:

Dalio suggests that the present scenario is most analogous to the 1930s, characterized by a confluence of similar trends. During that period, similar economic, social, and geopolitical factors combined to create internal conflicts and wars.

Interrelated Factors:

The key takeaway is that these factors are deeply interrelated and have been recurring themes throughout history. Dalio suggests looking at these trends not in isolation but as interlocking pieces that contribute to larger cycles, potentially leading to internal conflicts and wars.

Political Risks:

Liz highlights the first major risk as political discontent that could challenge Xi Jinping’s leadership. This discontent may stem from entrepreneurs feeling constrained by the party’s demands and a middle class eager for political representation. Instances like the death of Dr. Li Wenliang prompted calls for freedom of speech, indicating a simmering desire for civil liberties.

Economic Weaknesses:

The second risk is related to systemic issues in the Chinese economy that are possibly underappreciated. She mentions rising levels of Chinese debt and a mismatch in labor demand and supply. Despite claims of eradicating absolute poverty, there are 600 million people in China living on $140 per month or less. Additionally, social indicators like skyrocketing divorce rates and plummeting birth rates might be pointing toward economic pessimism among the Chinese populace.

Internal Party Discontent:

Liz refers to a letter circulating within the Standing Committee of the Politburo that calls on senior leaders to challenge Xi Jinping. While the significance of this letter is not clear, it suggests that Xi Jinping’s institutional control does not necessarily equate to legitimacy, hinting at possible fissures within the party’s top leadership.

International Pushback:

The last risk area she identifies is international pushback against China, not just from the United States but from Belt and Road countries as well. According to global polls, China’s image is weak, with only 10-15% of people desiring China to be a regional or global leader. This points to a potential area of concern for Chinese leadership.

Conclusion:

Liz concludes that while China may project an image of strength and success, there are underlying vulnerabilities—political, economic, and global—that could unexpectedly surface. These issues suggest that the current narrative may conceal complexities and challenges that China faces internally and internationally.

Economic Outlook:

Ray Dalio maintains that the risks to the Chinese economy are not significant in the broader context. He suggests that China has strong income and balance sheet positions, and its debt is denominated in its local currency. Moreover, the debt-to-GDP ratio of China is at 250%, while the United States is at 350%. This indicates that China has a relatively stable economic foundation.

Global Financial Power:

Dalio highlights China’s increasing role as a global financial center. Historically, major reserve currencies and empires have been the largest trading countries with developed financial centers. In China’s case, it has been gradually opening up its financial markets to foreign investors, increasing from only 2% accessibility in 2015 to 60% now. This has shifted the balance of payments, as international investors diversify away from being overly dependent on the dollar.

Internal Challenges:

While Dalio doesn’t see significant vulnerabilities in China’s economic system, he acknowledges that internal issues might exist. However, he believes that the overall growth and innovation in China indicate a robust economy.

Historical Pattern of Rising Powers:

Both Dalio and an additional speaker agree that China closely follows the macro pattern of a rising power both economically and militarily. China’s growth is set to have a significant impact on the global distribution of power and influence.

Military Expansion:

Another speaker brings attention to China’s aggressive expansion of its naval capabilities. China has been consistently launching new modern ships every year, surpassing the rate of other countries, including the United States. This naval expansion is part of China’s broader strategy to shift global naval strategic balances.

Global Contender:

Following its economic and military expansion, China is considered by the speakers to be a rising contender for the number one position in global affairs. The country’s actions reflect a consistent and substantive effort to shift global balances, regardless of its diplomatic relations with other nations.

Declinism and Renewal:

The conversation starts with the concept of “declinism,” as described by Sam Huntington, which suggests that fears of decline spur renewal in the United States. This premise is applied to the challenge presented by China, with varying opinions on what “getting our act together” could entail—increased military spending, healthcare reform, or other policy measures.

Historical Perspective on Declining Powers:

The second speaker agrees with Huntington’s premise, arguing that major powers like the United States take a long time to relinquish their top position due to various strengths—diplomatic, positional, and geo-strategic. Even historically declining empires like the Ottoman Empire had moments of reform to preserve their status. Therefore, the debate on how the U.S. can maintain its position is not new but essential.

Economic and Military Indicators:

The same speaker notes that if we measure relative economic and military indicators, the scales are gradually tipping towards Beijing. This steady shift underscores the need for the United States to seriously consider strategies for maintaining its position.

Addressing Economic Deficits:

Ray Dalio points out that the United States is spending more than it’s earning, signaling a deficit problem that is difficult to resolve. He says the solutions aren’t easy: cutting spending could have its own downsides, and becoming more productive is easier said than done. Dalio also mentions that the U.S. will need to sell a large number of bonds globally, which could be challenging as the world already has an excess of U.S. bonds.

Imperative for Change:

The overall conversation highlights the imperative for the United States to critically evaluate its position and implement changes, especially on the economic front, to maintain its global standing. Given the gradual shift of economic and military power towards China, these discussions are timely and crucial.

Wealth Gap and Spending:

Ray Dalio discusses the complexities of the internal economic landscape in the United States, particularly focusing on the wealth gap. He questions whether there’s a collective agreement on how money should be spent productively and how it should be redistributed.

Resource Allocation:

Dalio touches on the dilemma of “guns and butter,” representing the trade-off between military spending and domestic welfare programs. He points out that the capacity to invest and spend is limited, bringing into question the sustainability of current programs, including those related to military strength.

Societal Cohesion:

Dalio identifies a critical issue: the inability of American society to work cohesively with itself. He suggests that for meaningful progress to occur, there needs to be skilled bipartisan engineering of the economy, a situation he views as improbable in the current political climate.

Need for Systemic Change:

Dalio contends that a sort of revolution is needed, given that the existing system doesn’t provide equal opportunities or the necessary conditions for productivity. He attributes the growing wealth gap to several factors, including technology replacing human labor, and sees a need for re-engineering society to address these challenges.

Lack of Consensus:

Dalio concludes by acknowledging the extreme polarization within the political parties and the societal divide it creates. He expresses skepticism about the likelihood of finding common ground for re-engineering systems like education, which are deteriorating. The overall tone suggests that finding a solution to these multi-faceted issues will not be easy, highlighting the urgency and complexity of the situation.

Optimism in U.S.-China Policy:

The speaker expresses optimism regarding U.S. policy towards China. They believe the Biden administration is well-positioned, inheriting from the Trump administration a reasonable understanding of China’s challenges, such as its growing military and activities in the South China Sea. The Biden administration is noted for its deep bench of China experts, which the speaker believes will be beneficial.

Global Alliances and Institutions:

The Biden administration is credited for its efforts to repair relations with European allies and for rejoining international organizations like the Paris Climate Agreement and the World Health Organization. This is viewed as a shift from the Trump administration’s isolationist policies. The speaker mentions the potential for a new kind of alliance knitting together partners in Europe and Asia.

Policy Leverage and Sustainability:

The speaker appreciates that the Biden administration is cautious in unraveling Trump’s policies, especially tariffs, as it provides them with leverage. They are also optimistic about the U.S.’s capacity for innovation and its ability to stay ahead of China in this respect.

Cooperation with China:

The speaker mentions that the Biden administration has reopened the door for cooperation with China but with the proviso that cooperation will only happen when it serves American interests.

Comparison with China’s Domestic Issues:

Both the U.S. and China face challenges such as wealth gaps and productivity. However, the speaker contrasts the rising living standards in China with the U.S., stating China’s populace is generally more content and optimistic about their economic condition. This is viewed as a critical difference between the two nations, influencing their international behaviors.

Ray Dalio on Wealth Gap and Economic Conditions:

Ray Dalio points out that historically, a bad financial situation combined with a lot of debt and a large wealth gap creates problems. He notes that China’s rising living standards create a different economic and social dynamic compared to the U.S., even though both nations have significant wealth gaps.

Demographic Issues:

Daniel Runde raises concerns about China’s aging population, largely due to the destructive impact of the one-child policy. Speaker 04 concurs, noting the gravity of China’s falling birth rates, despite the shift to a two-child policy and ongoing discussions about lifting all birth restrictions. The consistently declining birth rates could hinder China’s future consumption levels and innovation, as fewer young people will be available to drive economic growth.

Education Gap:

Runde also brings up the issue of education in China, referencing a book titled “Invisible China,” which talks about the urban-rural educational divide. He notes that only about 30% of Chinese citizens have graduated high school. According to some theories, at least 60% of a society needs to graduate high school for a country to move past middle-income status.

Long-term Economic Drag:

Both Runde and Speaker 04 agree that these challenges—demography and education—could act as a long-term drag on China’s economy. These issues could potentially trap China in a state of development similar to Brazil, struggling to progress beyond a middle-income country.

Pension System:

Speaker 04 also briefly mentions an additional concern: China’s pension system. This adds another layer to the demographic problem, as an aging population will put more stress on social welfare systems.

In summary, the segment focuses on the substantial challenges that China faces in terms of its aging population and educational disparities, both of which could have significant long-term impacts on the country’s economic progress.

Adaptive Response to Weaknesses:

Speaker 08 comments on China’s ability to adapt to criticism or identification of its weaknesses. They point out that when external observers identify gaps in areas such as environment or military technology, China has demonstrated a capacity to address these within a few years. This adaptability tends to undermine the narrative that China’s problems will hold it back from surpassing other nations, including the U.S., in global influence.

Technology and Demographics:

Speaker 02 (Ray Dalio) acknowledges the demographic issue but puts it into a larger context. He notes that the issue of technology replacing jobs is a universal challenge that even the U.S. hasn’t figured out. He suggests that demographic problems might not be as significant in a world where technology is causing shifts in employment and income levels.

Historical Context:

Dalio further provides a historical perspective, stating that if one studies the various Chinese dynasties since the Tang dynasty, China has been a leading world power for much of its history. He argues that the period from 1840 to 1949 was an aberration and that China’s current rise is in line with its historical prominence.

Unreplicable Economic Model:

Speaker 07 adds that China’s economic model might be difficult for other countries to replicate, especially smaller nations. China’s approaches to tech transfer and intellectual property rights theft are pointed out as strategies that might not be enforceable or feasible for countries with smaller populations or less influence.

Global Obligations and Debts:

Dalio also mentions that, unlike the U.S., China doesn’t have the same level of committed obligations in the form of healthcare or pensions. These commitments are far greater than the debts of the U.S., indicating a financial burden that China currently doesn’t share to the same extent.

In summary, the discussion revolves around China’s demographic challenges, its historical adaptability and successes, and how its unique economic model and lack of certain financial obligations position it in the global landscape.

State Capitalism:

Ray Dalio identifies the system in question as “state capitalism.” This is characterized by top-down autocratic control over political and informational spheres, while still nurturing a form of capitalism that allows for free markets, innovation, and entrepreneurship. Dalio notes that it’s a challenging model to emulate, particularly the balance between control and freedom.

Control and Balance:

Dalio argues that countries constantly grapple with the extent of control they should exert over various systems. Questions also arise regarding whether capitalism is effective in achieving societal goals like wealth distribution. Essentially, it’s a balancing act all countries have to navigate.

Tribute System and Objectives:

According to Dalio, historically, the control exercised by such a system is more through a tribute system rather than imperial conquest. The primary objective is not to take over other nations but to maintain strong domestic and economic systems. This, in turn, influences their global standing.

War and Influence:

Dalio believes that the most effective way to deter war is by displaying strength. The objective is to show the opposition what power you have, reducing their motivation to initiate conflict.

Historical Context and Transferability:

There is a debate on the importance of a system being attractive and transferable to other countries. While some believe that a globally-accepted model is beneficial, the dialogue also suggests that the concept might be outdated.

State Capitalist Models and Transformation:

Other examples of state capitalist models like Taiwan, Japan, and South Korea were cited. These nations eventually transitioned to democracies, raising the question of whether similar transformation pressures would be applicable to other state capitalist countries.

China’s Export of Model:

China’s Belt and Road Initiative is seen as a form of exporting its state capitalist model. The initiative is criticized for lack of transparency, weak environmental and labor practices, and has sparked protests in various participating countries.

Risks and Challenges:

While the system aims to avoid warfare, confrontations still occur, as seen in territorial disputes. The model’s attractiveness is also questioned given the human rights concerns it raises, including repression and forced labor camps.

Final Thoughts:

The discourse suggests that the complexities of balancing control and freedom in a state capitalist model, along with its implications on international relations, are subjects of global consideration. There are inherent risks, challenges, and ethical considerations that accompany the rise of such a model on the world stage.

American Perspective vs. Chinese Continuity:

Ray Dalio presents the idea that while Americans tend to view Deng Xiaoping and his successors as moving China towards free-market capitalism and democracy, and Xi Jinping as a deviation from that path, Chinese leadership sees more of a continuity. According to Chinese leadership, maintaining policy continuity is crucial for their legitimacy.

Deng’s Strategy and Xi’s Extension:

Dalio argues that Deng’s strategy was to “bide time” and “not show strength,” which aligns with Xi’s current strategy. In the Chinese perspective, Xi Jinping could be considered a logical extension of what Deng had in mind: to ultimately make China a dominant force, especially in East Asia and potentially globally.

Differences in Governance Between Deng and Xi:

Another speaker contends that Deng Xiaoping and Xi Jinping have different approaches to governance. Deng was more open to external influence and ideas, whereas Xi is focused on consolidating the Communist Party’s power within China.

The Arc of Power:

Dalio discusses the idea that China’s history can be understood as a series of arcs of rising power. According to this viewpoint, Xi Jinping sees himself as part of a historical trajectory. This arc suggests that as China gains more power, it becomes more assertive, which is a natural progression rather than a change in direction.

Chinese Long-Term Strategy:

There is a consensus that China is playing a long-term game, with the assumption that they will continue to grow stronger globally. This “biding time” strategy could mean that China is willing to wait and develop further before making significant strategic moves.

Internal Political Dynamics:

However, another voice in the conversation warns against viewing China as a monolith. They argue that there are internal debates and differences in China’s political landscape, which could significantly impact its trajectory. This speaker emphasizes the importance of understanding China’s internal dynamics in addition to its global strategy.

Financial Markets and China’s Growth:

Ray Dalio addresses a question regarding the impact of China’s changes on global financial markets. He points out that as China opens up its financial markets and the dollar weakens, there will be a shift in global capital flows. China’s capital markets will increasingly become more attractive to investors, and its financial center could eventually challenge New York, similar to how New York once challenged London.