Love him or loathe him, Ray Dalio is worth listening to. He is one of the few people to have ‘made it’ that hasn’t grown complacent.
History, as Dalio is keenly aware, is a powerful and pivotal tool. One that can and must be used by those who seek to shape the future. And right now, he’s seeing some troubling signs…
On Wednesday, the Bridgewater founder published his latest thoughts. A piece that he titled ‘The Three Big Issues and the 1930s Analogue’.
I won’t regurgitate the entire article; you can read it yourself if you wish to see his thoughts in full. What I do want to do though, is expand upon the ideas he has put forward. Not just because they are interesting, but because they are at the heart of everything that matters right now.
So, as Dalio sees it, we have three major problems in our world today. They are:
- The long-term debt cycle, which Dalio believes is near its end.
- Widening wealth inequality and the subsequent political fallout.
- A waning power (US) clashing with a rising power (China).
This convergence of calamity is, of course, bad. Our problems are intertwining and coming to a head at the same time. The pointy end of a very long period of prosperity.
All of this, for Dalio, isn’t surprising, though. In fact, he reminds us that this has happened before, commenting:
‘To understand the current period, I recommend that you understand the workings of the 1935-45 period closely, which is the last time similar forces were at work to produce a similar dynamic.’
In other words, without explicitly saying it, Dalio is noting that the last time we faced these issues it lead to the Second World War.
Once upon a time in Germany…
It’s obvious that Dalio is trying to broach this issue delicately. After all, telling people that were at the cold face of problems that cost us some 75 million lives last time isn’t exactly cheery.
Another world war would, obviously, be utterly disastrous. I’m sure we can all agree on that.
How we go about avoiding it though is a far tougher, but important matter.
Before we can even try to solve such a problem though, we need to understand what is different. History is a great tool, but it is not a perfect predictor of the future.
First, let’s cast our minds back to pre-war Germany. The centrepiece of what would become a very bloody conflict.
The rise of Hitler is the obvious cause of the Second World War, but this is just a surface level analysis. To understand the triggers of the war, you need to understand how someone like Hitler can come to power.
Most historians will agree with me in pointing to the Treaty of Versailles as a leading cause. It was a document that effectively levelled all the blame and cost of the First World War on Germany. As the loser of the Great War, they were footed with the bill, to put it crudely.
This economic burden was, in hindsight, remarkably unfair. Germany was put in a position that left its people shamed and poor. And you can only persecute people so long before they’ve had enough.
So, they demanded change. Hitler simply seized upon and used this need for change to mobilise his evil plots. It was extreme, but it offered hope to a populace that was suffering.
This clash of the haves and have nots was key to the Second World War. Conflict is never far from bad economics.
As Dalio notes though, economic distress wasn’t just plaguing Germany. The 1930s was marred by an even bigger financial meltdown: the Great Depression. What Dalio is referring to as the end of the long-term debt cycle.
It was this conflagration of forces that really kicked the angst into overdrive. The catalyst for one of the greatest reordering’s of power ever seen.
And right now, Dalio is pointing out that things are looking awfully similar.
The game has changed
By the end of his article, Dalio will have left many readers unsatisfied.
Pointing out the parallels is important, but understanding what conclusions they lead to is far more imperative. Dalio isn’t silly enough to try and predict the future, though. That’s why he never explicitly mentions war.
Indeed, he makes sure to issue a disclaimer that the past isn’t representative of the future.
It is clear as day (to me anyway) that Dalio is worried about history repeating. And that is an issue that we can’t afford to ignore.
The Third World War has been on people’s minds ever since the end of the Second World War. Primarily because of how it ended.
The two nuclear bombs dropped on Japan weren’t just eye-opening, they were soul-crushing. Humanity had created a weapon to surpass all else. With the single push of a button one person could wipe out an entire country.
From that day forward, we’ve lived in a world of mutually assured destruction. The powers of the world have their guns drawn at all times. If anyone shoots, then someone will retaliate in kind.
Paradoxically, and disturbingly, this has brought us a kind of perverted peace. As the World Economic Forum notes:
‘Since the end of the Cold War, the numbers of armed conflicts have dropped dramatically. Of the 33 armed conflicts listed in 2013, only seven were classed as wars – a 50% reduction since 1989.’
Armed conflict has been on a steady decline. Though, we have seen tensions flare in places like Syria or Ukraine. Crucially, despite these events, the number of causalities hasn’t been rising.
There is fighting, but less people are dying because of it. War has changed.
This is the crucial detail that is the wrench in Dalio’s analysis. I’m sure even he is aware of it. Our modern world doesn’t rely on conflict as we know it…
‘It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.’
Machiavelli said that, and it has never been more apt than now.
We are on the cusp of a new order. That is Dalio’s point.
But where war decided the outcome of this order last time, this time — it will be different. There’ll be conflict, just not as we know it.
The game has changed.
But, alas, I have run out of time to discuss it today. You’ll have to wait for next weekend for part two.
In the meantime, know this. It’s not a time for fear or anxiety. It’s a time to be excited at what comes next, even if we have to break a few things along the way…
Until next week.
Editor, Money Morning
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