“The United States is the most powerful country [in the world], but [it is] declining. China is close behind and rising quickly.”
By itself, this quote from Ray Dalio’s fascinating book “The Changing World Order: Why Nations Succeed and Fail” (p. 496) would hardly be news. Many others have made similar claims in the past, including me. What’s different about this particular quote is the sheer amount of data and analysis that lies behind it. As one reviewer put it, the book is “a sprawling, holistic study of how the world has worked over hundreds of years of history.”
Author Ray Dalio is well known in business circles as the founder of Bridgewater Associates, the largest hedge fund in the world, with over $126 billion in assets under management. Dalio retired last year, and published this book (his fourth) near the end of 2021.
Over the course of his career, Dalio became interested in long-term trends in investment booms and busts. He began developing an enormous database of information on the rise and fall of “empires” which dominated world power and wealth. By combining 18 measures of power into a single number, he was able to map out the “big cycles” by which four countries have dominated the world over the last 500 years.
As you can see in the graph above, the Netherlands (through the Dutch East India Company) was the most powerful empire in the world from the 1600s to the mid-1700s, followed by the UK through about 1900, and then the US. China’s graph is the most interesting of these four, since by Dalio’s measures, it was the most influential empire roughly 1500-1625. It declined suddenly in the 1800s due to the effects of European imperialism, including the Opium Wars, the Boxer Rebellion and more. China began rising again after the conclusion of its revolution in 1949, and now threatens the US for the position of number one in the world.
The “big cycles” in the graph above are based on three smaller, underlying cycles that last 50 to 100 years within each country: economics (long-term debt and capital), internal order/disorder, and external order/disorder. The ups and downs in these three sub-cycles can drive stock market booms and busts, and even wars. Given the length of 50-100 years, many people’s entire lives are spent when things are near the top or near the bottom of a cycle.
When examined from a distance, my entire post-war generation has lived near the top of the most comfortable peak in human history. Of course, on a day-to-day basis such events as climate change, nuclear proliferation, Vietnam, Iraq, Afghanistan and the Ukraine, and the death of Miles Davis have hardly felt like we are living near the top. But think big picture. I have never lived through a local war or a famine, and technical advances have made my life longer and more comfortable than for any of my ancestors.
As a result of living near the top, many people my age have become so comfortable taking Hawaii vacations on their credit cards, and so optimistic about the future value of stocks, real estate and other assets, that they have little or no savings to serve as a financial cushion for when the cycle inevitably heads down. (Unless they had parents like mine who passed along their fears from the Great Depression.) This reality has some intriguing implications for record setting levels of national debt in both the US (over 31 trillion dollars) and China (a mere 13 trillion or so). The details of Dalio’s models of economic cycles are complicated enough, that to deliver on my promise of “five minutes of understanding at a time,” they will have to be saved for my next post.
The US score for internal disorder has been increasing for decades, putting our country at an extreme disadvantage. Large numbers of Republicans and Democrats have not started shooting at each other yet, but some days it’s not looking good. China on the other hand, is the very model of internal order. Mind you, I think it would be absolutely horrible to try to live under all China’s authoritarian rules and surveillance. But these measures do increase China’s internal order, and thus the country’s power.
Increasing external disorder is a risk for both countries, as China and the US compete more forcefully in trade, technology, geopolitical influence and the economy. In the worst case, this could lead to military conflict, planned or accidental.
Dalio’s cycles are computed from the values of fifteen “gauges.” The most important ones are education, innovation and technology, cost competitiveness, military strength, trade, economic output, markets, and reserve currency status, which he classifies as the “eight key measures of power.” There are also seven “additional determinants of power” including geology (such as natural resources), infrastructure, and acts of nature (like Covid).
For the latest data on each element, Dalio provides annual updates which can be downloaded for free from his web page at www.economicprinciples.org. (This webpage also includes links to many other resources and presentations, all free.) As of this writing, Dalio’s most recent update is entitled the Country Power Index 2022. It summarizes the latest power and wealth data on 24 countries and adds details on how each of the gauges is calculated (p. 52-54).
For example, one gauge that is rising rapidly for China is “innovation and technology,” based on such variables as its share of global patents, R&D spending, and its large number of technology researchers. The US is still number one on this gauge, but China is quickly catching up. In fact, China is currently ahead of the US on only 2 of the 8 key measures of power: trade, as measured by China’s percent of global exports; and cost competitiveness, measured by variables such as “productivity adjusted labor costs.” As Dalio (p. 6) summed it up, “The eight major measures of power [for the US] are very strong today but are… falling slowly… [In addition], the US is in an unfavorable position in its economic and financial cycles… Internal disorder is a high risk… [and] external disorder is a risk… [Thus, the US is] a strong power in gradual decline.”
If China continues to rise while the US falls, the risk of conflict over a new world order will rise. The graph below summarizes 18 forces that determine the rise and fall of empires:
For a quick intuitive overview of how you would rate the US-China standings, just check off which of these 18 points best apply to the US today in your opinion, and which apply to China. If you accept the validity of the list, you will certainly conclude, as I did, that China is on the way up, and the US is at the top in some ways and headed down in the rest.
Dalio argues that all this adds up to trouble for the US, and for the world. “Wealth, values, and political gaps are now larger than at any other point during my lifetime (p. 12) … There are great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right… The most recent analogous time was the period from 1930 to 1945. This [is] very concerning to me.” (p. 2)
As I’ve written before, an understanding of the potential for conflict, and how to avoid it, is greatly complicated by cultural differences between the US and China, including their “political patience.” In his book (p 379), Dalio puts it this way “While most Americans focus on particular events, especially those that are happening now, most Chinese leaders view current events in the context of larger, more evolutionary patterns… Americans are impulsive and tactical; they fight for what they want in the present. Most Chinese are strategic; they plan for how they can get what they want in the future.”
One recent example of this difference appeared in a New York Times opinion piece by Nobel Prize winning economist Paul Krugman entitled “China’s Future Isn’t What It Used To Be.” In the piece, Krugman quotes several sources to support this, notably two studies that recently pushed back their estimates of when China will become number one in the world. One now projects that to happen in 2035 (vs. its previous projection of the mid 2020s), and the other projects says China at number one is “at least several decades” away (vs. its previous projection of 2033).
To mainland Chinese, delays of a few years or decades do not define “the future.” They are a mere blip on the screen in terms of 100-to-400-year cycles.
But at the end of the day, Dalio concludes (p. 485): “The fact that the US is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both to Americans and to non-Americans who depend on them. At the same time, in its 245-year history the US has shown a great capacity to bend without breaking. The greatest challenges it faces are internal ones: can it remain strong and united, or will it continue to allow division and internal struggles to lead to decline?”