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Monday, January 31, 2022

Review: Principles for Dealing with the Changing World Order: Why Nations Succeed or Fail

 I was so impressed by Principles that when I couldn't get a copy of Principles for Dealing with the Changing World Order, I used one of my audible credits to get an audio book copy. Audio books are not the ideal medium to manage books with graphs and charts, but at least the audible copy comes with a PDF of the graphs and charts frequently referred to in the narration.

Dalio's book essentially turns all of history into a psychohistory exercise. To massively simplify, there are 3 major cycles in history, and when they coincide you get major events that create massive market/world order disruption. These are the capital/debt cycles, the internal order/disorder cycle and the external order/disorder cycle. For each society/country, these cycles drive the society dynamics.

One interesting thing I didn't know before, is that these capital/debt cycles apparently occur enough in history that before modern times there was a tradition of debt jubilees, where all debts are repudiated on a semi-regular 80 year basis, to reset society. The idea behind the capital/debt cycle is that at the start of a cycle (which usually coincides with a new political order), nobody trusts anyone, so all currency has to be hard (traditionally that means gold/silver). After this initial bootstrapping period, people are willing to trust the strong governments, and switch to currencies that are backed by reserves of real assets. At some point, the amount of money circulating exceeds the actual assets that are backing them, and governments have to switch to fiat money. The interesting point that Dalio makes is that the smaller business cycles are self-reinforcing, and generate inequality as a normal part of doing business. For instance, if you got zero'd out during one of the business cycles, you were poor and would be likely to stay poor. If you got rich during one of the business cycles, the nature of capitalism is such that you can now invest in widely diversified portfolio with better than normal returns, and as time went on that would exacerbate the inequality in the system. Hence, the tradition of a debt jubilee (which obviously hurt the wealthiest in society) to reset the system before social revolution takes everything down. The alternative is what was imposed by FDR in the 1940s, which was to raise taxes heavily on the wealthiest people and also reduce inequality through a war and wealth redistribution programs.

The way these debt cycles interact with the internal political order is that as inequality increases over time, and the general population feels that the world is stacked against them, it gets harder and harder to get agreement on what the correct course of action to take for a country, and then all the virtuous cycles that made a country strong now turn into vicious cycles and send the country into a decline. When things get bad enough there's a revolution or regime change, and the cycle starts anew.

Where the book gets interesting is when Dalio points his lens at the current state of affairs in the USA and China. It's probably not to anyone's surprise that he declares the USA to be a powerful empire in the state of decline (anyone who's read the news probably couldn't disagree), while China is the second most powerful empire rising quickly. The argument is that the USA is in greatest danger when internal disorder is at the highest while there's a rising empire ready to challenge it, and the entire thing collides with a Minsky Moment or war.

The disappointing part of the book comes in the details. For instance, Dalio claims that there's no rational reason why the USA should protect Taiwan from China. (Dalio, to his credit discloses that he's spent a ton of time in China listening to and advising elite Chinese politicians, and apparently has spent no time in Taiwan) Yet not long before that he discusses the importance of microchip development in technology. Dalio is apparently unaware that TSMC is a major manufacturer and supplier of chips, and that a Chinese takeover of TSMC facilities would probably disrupt critical chip supplies to American manufacturers (not to mention military) and that would be a strategic problem for the USA. In fact, the Taiwanese know this, and probably consider this one of the main reasons the USA has no choice but to defend Taiwan in the case of a Chinese takeover. At the very least, the manufacturing specialists/engineers in that country would probably get an airlift out of Taiwan should China initiate a military takeover. In any case, Dalio's dismissing of Taiwan as being irrelevant to American interests seems to be a peculiar blind spot.

Similarly, Dalio seems adamant that China will increasingly dominate the world. I certainly wouldn't want to bet against China, but there are certain demographic issues with China's increasingly aging population while the USA continues to attract immigrants who seem determined to move to the USA whether Americans want them there or not.

From the political point of view, Dalio also frequently parrot Asian dictators' declarations that Asian people "prefer" authoritarian leaders that create good economic conditions and provide social stability. Of course, if this was true, Taiwan would voluntarily give up their Democracy and join China the way Hong Kong voluntarily did so. Oh wait. The Hong Kong transition wasn't voluntary, and the events since the Chinese takeover if anything, would definitely provoke resistance amongst the Chinese people living in Taiwan to voluntarily giving up their Democratic government that has done such a good job managing their economy and protecting them from viral pandemics emanating from their neighbor! Dalio all too often seemed to have the very racist view that Asian people by and large don't care about democracy and would be happy to give up freedom in exchange for a totalitarian government, claiming that the Chinese people view the Tiananmen event favorably in retrospect. Similarly he doesn't even mention the Chinese takeover of Tibet. In another section he dismisses intellectual property theft by companies such as Huawei, saying that if those charges were true, there'd be lawsuits. He ignores the fact that there were indeed lawsuits between Cisco and Huawei, as well as several other lawsuits. Certainly in Silicon Valley, it's quite well known that the bug-for-bug compatibility between certain equipment manufacturers and Cisco are not the result of clean room implementations, and of course, I have first hand knowledge from Chinese employees that source repos in China have copyright messages that originate from US companies.

I'm not going to fault Dalio too much for listening to people who have made him wealthy. After all, I've met many Chinese Americans working at FANG companies who are in denial that a major conflict between China and the USA will hurt them personally. Such people seem smug in their complacency, ignoring the artifacts and history so clearly presented and in plain view at Angel Island.

Nevertheless, on balance I think Dalio makes a very good point, which is that within the next 5-10 years there's going to be a reckoning in the USA about its economic system, democracy, and its economic rivalry with China. It's quite clear to me that the USA is close to a civil war, and while the result might kick off the start of another long cycle of prosperity and peace, civil wars are not much fun to live through and if you are in a position to buy insurance against that, you should! Dalio makes the very good point that the most important thing in life is to set yourself up in a situation so that you always have an escape, and that you are never zero'd out during the tumultuous times ahead.

I certainly can't argue against that, and will recommend that you read this book and think through the issues.

Dalio has several supplemental papers at I perused them and was disappointed at how shallow they are. For instance, his solution to fixing capitalism's inequality is to fix the education system. First of all, there's a huge lag time between education improvements and any impact that can be felt by the economy or individuals. Certainly the education approach will not prevent a revolution, nor solve the immediate problem of child poverty. His papers on Universal Basic Income basically dismisses it as being too expensive. All I can say is that for someone like Dalio, it's probably true: he's diversified himself sufficiently (and probably has a bunker in New Zealand) that he and his family will be unimpacted if the USA plunges into a Pinochet-style dictatorship. But for the rest of us, increased redistribution of wealth is a cheap price to pay for retaining our democracy.

1 comment:

G C said...

I got through about 200 pages of this book, and it was truly awful. Ray talks in some sort of weird code that is hard to follow. He also comes off as a little overconfident. My friend worked at the company for a while and swore it was a cult.

Based on your review, I'll pick it up again for the good stuff at the end.