Ray Dalio: Why is the world on the brink of great chaos?

Recently, Ray Dalio, the founder of Bridgewater Associates, pointed out in a column in Time that the world is on the edge of a major upheaval. The five forces of debt/money, internal conflict, external conflict, natural changes, and technological progress are mutually reinforcing and constitute what is known as the "Big Cycle."

Dalio predicts that in the next 18 months, the U.S. Treasury may have to sell a large amount of bonds, and the debt/financial situation may worsen, while the United States is heading towards a kind of "civil war."

Here is the original article:

I am a global macro investor who has been betting on what is about to happen for over 50 years. For a long time, I have experienced various events and cycles in various places, which has prompted me to study how these events and cycles work. In the process, I have come to understand that I need to study history to understand what is happening and what may happen.

In the early years of my career, I learned through several painful mistakes that the biggest surprises were so surprising because they had never happened in my lifetime, but had happened many times in history. The first time was on August 15, 1971, when I was a clerk on the floor of the New York Stock Exchange. The United States did not fulfill its debt obligations and allowed people to exchange paper money for gold. I thought it was a major crisis that would cause stock prices to fall, but they actually rose a lot. I didn't understand why, because I had never experienced a major currency devaluation before.

When I looked back at history, I saw the exact same thing happen on March 5, 1933, when Roosevelt violated the U.S. commitment to allow people to turn in paper money for gold, and stock prices rose. This prompted me to study and learn why - that is, money can be created, and when it is created, its value goes down, which causes the prices of things to go up.

This experience led me to study the rise and fall of markets, economies, and countries, and I have been doing so ever since. For example, I studied how the debt bubble of the 1920s turned into the financial collapse of 1929-33, which allowed me to predict and profit from the 2008 financial crisis. In this way, I realized that it is crucial to look at things from a longer-term perspective and understand the mechanisms behind historical rhythms.

A few years ago, I saw three big things happen that had not happened in my lifetime, but had happened between 1930 and 1945. These three things are:

• The largest amount of debt, the fastest debt growth rate, and the largest amount of central bank money printing and bond buying since 1930-45.
• The largest wealth, income, and value gaps, as well as the largest amount of populism since 1930-1945.
• The largest international conflicts between major powers since 1930-45, most notably between the United States and China.

Seeing these three events of such magnitude that had never happened in my lifetime prompted me to study the rise and fall of markets, economies, and countries over the past 500 years, as well as the history of China over the past 2,100 years.

This research tells me that these three forces - the forces of debt/money, internal conflict, and external conflict - mutually promote each other in the grand cycle, forming what I call the grand cycle. These cycles are driven by logical causal relationships. Most importantly, research on the past 500 years has told me:

• The previously described financial conditions have repeatedly been proven to be leading indicators of major financial crises that lead to a transformation of the financial order.
• The previously described levels of political and social disparities have repeatedly been proven to be leading indicators of massive internal conflicts within nations, which result in significant changes to domestic order.
• The previously described conflicts between major powers have repeatedly been proven to be leading indicators of international conflicts that lead to major changes in the world order.

In other words, history has shown that when the following conditions occur simultaneously, painful transformations in the grand cycle occur:

1. Excessive creation of debt leading to the bursting of the debt bubble and economic contraction, resulting in central banks printing money and buying bonds on a large scale;

2. Large internal conflicts within nations intensify due to adverse economic conditions, stemming from conflicts of wealth and values;

3. Rising world powers challenge existing world powers during economic and internal political crises, leading to major international conflicts.

During this research, I also observed two other significant forces at play. They are:

• Natural events (droughts, floods, pandemics), including climate change.
• Learning from technological inventions, which often bring progress to productivity and living standards. For example, the first and second industrial revolutions, as well as the computer/artificial intelligence revolution.

I refer to these as the five major forces. I see how they interact with each other and change in a logical manner, giving rise to the grand cycle and producing significant changes in the world order. I gradually realized that by understanding and following each of these forces and how they interact, one can comprehend most of the events that alter the world order. That is what I aim to do.

Our current position and potential future events:

1. Financial/Economic Forces

In the United States, we are currently in the middle of what I call the short-term debt cycle, also known as the business cycle. These short-term debt cycles typically last an average of 7 years, with about 3 years of expansion. Since the start of the new monetary world order in 1945, there have been 12 and a half of these cycles. Therefore, we are now in the middle of the 13th cycle, at a point where central banks tighten monetary policy to combat inflation, which is likely to occur within the next 18 months, before the onset of debt and economic contraction.

We are also in the late and dangerous phase of the long-term debt cycle because the levels of debt assets and debt liabilities are already high, making it difficult to offer lenders - creditors a sufficiently high interest rate relative to inflation to incentivize them to hold these debts as assets without raising rates to an unacceptable level that would harm borrowers - debtors. Due to unsustainable debt growth, we may be approaching a significant turning point that will alter the financial order. In other words, in my opinion, we are likely approaching a restructuring of debt/finance/economy, which will result in significant changes to the financial order.

More specifically, due to the massive deficit, the U.S. Treasury will have to sell a large amount of bonds, and it seems that there may not be sufficient demand for these bonds. If this situation occurs, it will lead to a substantial increase in interest rates, or the Federal Reserve printing a large amount of money to purchase bonds, which will devalue the currency. For these reasons, the debt/financial situation may deteriorate, perhaps becoming very apparent in the next 18 months.

2. Domestic Order Forces

In some countries, most notably the United States, we see an increasing proportion of populist extremists among the population (approximately 20-25% of the right-wing and 10-15% of the left-wing are extremists), while the proportion of moderate factions within the two parties is shrinking. Although the moderate factions still constitute a majority, their proportion in the population is continuously decreasing, and their willingness to strive for victory at any cost has greatly diminished.

In studying history, I have observed this growing polarization and escalating conflicts between the two sides occurring repeatedly when there is a significant wealth and values gap coupled with a poor economic situation. During such times, a considerable portion of the population tends to choose populist political leaders who pledge to fight for them and win, rather than compromise. I describe the current state of the United States as the fifth stage of an "internal order cycle" (when poor financial conditions and intense conflicts coexist), which precedes a kind of civil war and domestic order change. This is what is happening now.

Looking ahead, the next 18 months will witness an increasingly intense election period, leading to greater political conflicts that may sharpen the divisions between the left and the right. Thirty-three seats in the Senate, the presidency, and control of the House of Representatives will be contested by some populist candidates, and it is highly likely that the economic conditions will be unfavorable. Therefore, the struggle will be vicious, posing a real test for adhering to rules and compromise, both of which are necessary conditions for the functioning of a democratic system. You can see a trend towards a fight at any cost, while respect for the law and political institutions will decline.

You can already see this dynamic playing out, such as the battle between Trump and his followers against the judicial system, or as they put it, the system waging war against him. Regardless of which perspective you take, it is evident that we are heading towards a kind of civil war in the next 18 months. For me, the most significant war is the one between the moderate factions of the two parties and the populist extremist factions, although the moderate factions mostly remain quietly on the sidelines in most cases.

3. Changes in the Natural World

Predicting changes in the natural world is certainly more difficult, but due to climate change, they seem to be worsening and may have greater costs and destructiveness in the next five to ten years. Additionally, the world will enter the El Niño phase of the climate cycle next year.

4. Technology

What can we expect from technology/human creativity? Just like the behavior of nature, it's hard to say for sure. However, there's no doubt that generative artificial intelligence and other technological advancements have the potential to lead to significant increases in productivity and massive disruptions, depending on how they are used. One thing we can be certain of is that these changes will be tremendously disruptive.

I cannot predict how events will unfold, but it's undeniable that those who expect things to continue operating in the orderly manner we've grown accustomed to over the past few decades will be shocked and possibly harmed by the upcoming changes.

How we manage these changes will make all the difference. If our leaders can transcend their tendencies to engage in conflict and instead focus on collaboration, we can certainly navigate these challenging times and create a better world for the majority of people.

It is speculated that this outcome would be the best for everyone, so we should strongly oppose internal strife and war between nations and keep that in mind as we strive to make cooperative decisions. For instance, now that the debt ceiling agreement has been reached, it would be great to see the Democrats and Republicans come together and form a bipartisan group composed of highly skilled individuals to propose a practical, long-term plan.

I wrote an article years ago titled "Why and How to Reform Capitalism?" which remains relevant today. That being said, it may be unrealistic to believe that we can substantially alter the course of events, so it's most important for the majority of people to imagine the worst-case scenario. By doing so, you'll be prepared and may come out unscathed.

Lastly, I must say that the most important thing I've learned during my 50-year career as a global macro investor is that I could be wrong. For this reason, as I suggest you consider the insights I've shared, I also encourage you to evaluate them and the situation for yourself.