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Sydnee Gatewood
Sydnee Gatewood
Articles (3148) 

Ray Dalio Commentary- The Changing World Order Chapter 8: The Archetypical Cycle of Internal Order and Disorder

From the Bridgewater founder's LinkedIn blog

December 01, 2020 | About:

The Cycle of Internal Order and Disorder & Where We Are in It

Executive Summary

How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or "orders" for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce their consequences. In the next two chapters we will explore the timeless and universal cause/effect relationships that shape the internal orders that people have and the behaviors that drive the shifts between periods of order and periods of disorder.

We are now seeing growing disorder in a number of leading countries around the world, most importantly in the United States. I wanted to put that disorder into context so I did the research I am sharing in these chapters. Because how the US handles its disorder will have profound implications for Americans, others around the world, and most economies and markets, in these two chapters I am focusing more on the US than on other countries, though I will follow these chapters with examinations of other leading countries.

The following chart shows in a simplified way where the US is within the archetypical Big Cycle as determined by the previously described measures that drive the rise and decline of empires. It is in this stage when there are bad financial conditions and intensifying conflict. Classically this stage comes after periods of great excesses in spending and debt and the widening of wealth and political gaps and before there are revolutions and civil wars. The United States is at a tipping point in which it could go from manageable internal tension to revolution and/or civil war. To be clear, I am not saying that the United States or other countries are inevitably headed that way; however, I am saying that now is an especially important time to know and watch the markers in order to understand the full range of possibilities for the period ahead. In this chapter, I explore those markers by drawing on the lessons from analogous historical cases.

Because the subject is so important I want it to be complete, which has made it more than 40 pages long, so I put it in two chapters: Chapter 8 is "The Archetypical Cycle of Internal Order and Disorder" and Chapter 9 is "Delving into the Six Stages of the Internal Cycle with a Particular Focus on the US Now."

Remember: if you want to get through this quickly you can just read the highlights, which are in bold. Principles are in bold and italics.

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As you know, I was drawn to do this research by the unique configuration of three big interrelated forces that are now having the biggest effects on who has what wealth and power since the 1930-45 period. They are: 1) the big debt, money, and economic cycle, 2) the big internal cycle of order/disorder (caused by gaps in wealth, values, and politics), and 3) the big external cycle of peace and war (caused by rising powers, most importantly China, challenging the leading world power, the United States).[1] Since I already covered 1) the big debt/money/economic cycle in Chapters 2 and 3, and 3) the big cycle of external relations (especially between the United States and China) in Chapters 5 through 7, I am now going to focus on 2) the big internal cycle of order/disorder. The big internal order cycle is the most important cycle because how people interact within countries has a much bigger influence on countries' strengths and well-being than how people and countries interact with each other internationally.

Because I wondered how today's conditions and policies compare with those in the past, I wanted to see where we are in those cycles and the evolutions that got us there. Obviously the recent movement in the internal order has been toward greater disorder (especially in the United States)—i.e., people and politicians are now at each other's throats to a degree greater than at any time in my 71 years—and these struggles over wealth and power are becoming more vicious. That led me to study analogous times in history.

By now you know my approach. It is to learn like a doctor learns—by encountering many cases as a global macro investor over my roughly 50-year career and by studying many historical cases. Studying many cases helps me understand the cause/effect sequences that drive their progressions. I study them qualitatively and quantitatively through my experiences, by speaking with pre-eminent experts, reading great books, and digging into stats and archives. From that learning comes a visualization of an archetypical sequence of how things happen. With that I study deviations from that archetypical cycle to try to explain them. Then I put these mental models into algorithms both to monitor conditions relative to my archetypes and to help me make decisions based on them. I do this continuously and will continue to do it until I die, so what you are reading is a work-in-progress.

To see this picture of continuously evolving systems/orders for controlling wealth and power and the timeless and universal principles governing them, I had to put many bits and pieces together because history is typically presented in chopped-up bits and pieces and the single story of the changing world order is too enormous to study and digest as one whole thing. Because of its enormity, I contained my ambition to trying to understand the last 500 years and China's dynasties back to the Tang Dynasty around the year 600 pretty well and the eras before then pretty superficially. I focused on the big trends, the most important cause/effect relationships, and the most important principles that will help me most now and in the future. Though I am certainly no expert in all of this history, through my examination of it, the cycles of internal order and disorder and the main reasons for the changes came out loudly and clearly and provided me with a valuable context for seeing where we are and what might happen next.

Through this learning process, I saw how countries, like any other organism, have well-defined life cycles. I saw how changes in internal orders (i.e., countries' systems for governing internally) and changes in the world order (i.e., the systems for governing power throughout the world) happen continuously and everywhere in similar and increasingly interconnected ways that flow together as one all-encompassing story from the beginning of recorded time up to this moment. My seeing many interlinking cases evolve together helped me to see the patterns that govern them and to imagine the future based on what I've learned. Most importantly I saw how the constant struggles for wealth and power produced a continuously evolving 1) internal systems/orders and 2) external systems/orders and saw how these internal and external orders affect each other—with the whole thing (i.e., the world order) working like a perpetual-motion machine that evolves while doing the same things over and over again for basically the same reasons.

I saw how the biggest thing affecting most people in most countries through time is how people struggle to make, take, and distribute wealth and power, though they also struggled over other things, most importantly ideology and religion. I saw how these struggles happened in timeless and universal ways throughout time, and how these struggles had huge implications for all aspects of people's lives, starting with what happened with taxes, the economy, and how people were with each other through periods of boom and bust and peace and war, and how they unfolded in cyclical ways, like the tide coming in and out.

I saw that when these struggles took the form of healthy competition that encouraged human energy to be put into productive activities, they produced productive internal orders and prosperous times and when those energies took the form of destructive internal fighting, they produced internal disorder and painfully difficult times. I saw why the swings between productive order and destructive disorder typically evolved in cycles driven by logical cause/effect relationships and how they happen in all countries for mostly the same reasons. I saw that those who rose to achieve greatness did so because of a confluence of key forces coming together to produce that greatness and those who declined did so because these forces dissipated.

I also saw that going from one extreme to another in a long cycle has been the norm, not the exception—that it is a very rare country in a very rare century that doesn't have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both. Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced. That is because the really big boom periods and really big depression/revolution periods come along about once in a lifetime, and once-in-a-lifetime experiences are naturally surprising…and because the swings between great and terrible times tend to be far apart, the futures we encounter are more likely to be more opposite than similar to those that we had and expect.

For example, my dad and most of his peers who went through the Great Depression and World War II (which came about because of the Roaring '20s debt boom) never imagined the post-World War II economic boom because it was more opposite than similar to what they had experienced. I understand why, given those experiences, they wouldn't think of borrowing or putting their hard-earned savings into the stock market, so it's understandable that they missed out on profiting from the boom. Similarly, I understand why, decades later, those who only experienced debt-financed booms and never experienced depression and war would borrow a lot to speculate and would consider depression and war implausible. The same is true with money: money used to be "hard" (i.e., linked to gold) after World War II until governments made money "soft" (i.e., fiat) to accommodate borrowing and prevent entities from going broke in the 1970s. As a result, most people now believe that they should borrow more of it even though borrowing and debt-financed booms have historically led to depressions and civil wars.

I have come to believe that while the lessons and warnings of history are clear if one looks for them, most people don't look for them because most people learn from their experiences and a single lifetime is too short to give them those lessons and warnings that they need. In this chapter I will share with you the lessons and warnings that I think I have learned from my experiences and explorations. Remember that while I am doing my best to be as accurate as possible, I am not sure that my perspective is right, so I am simply presenting how I see things for you to evaluate for yourself.

To do that, in the first part of this chapter I will take you through what I believe are timeless and universal principles of how domestic orders typically change from one set of conditions to the next. The way I see it, at any moment in time there are both 1) the existing set of conditions that include the existing domestic and world orders and 2) timeless and universal forces that cause changes in these conditions. Most people tend to pay too much attention to 1) what exists relative to 2) the timeless and universal forces that produce the changes. I want to do the opposite because understanding the timeless and universal forces that produce changes is most important. I will do this exploration in two parts. In this chapter I will focus on the timeless and universal forces that produce the changes— including the timeless and universal drivers behind them and the six stages of the archetypical cycle—and in Chapter 9 I will delve into these six stages in much greater depth and look at where the US now stands within this context.

Continue reading here.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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