Home » Principles for Dealing with the Changing World Order: Ray Dalio (Transcript)

Principles for Dealing with the Changing World Order: Ray Dalio (Transcript)

Full text of author Ray Dalio’s talk titled ‘Principles for Dealing with the Changing World Order’.

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TRANSCRIPT:

Ray Dalio – Author

The changing world order — the times ahead will be radically different from those that we’ve experienced in our lifetimes, though similar to many times before.

How do I know that? Because they always have been.

Over my roughly 50 years of global macroeconomic investing, I’ve learned the hard way that the most important events that surprised me did so, because they never happened in my lifetime.

These painful surprises led me to study the last 500 years of history for similar situations where I saw that they had indeed happened many times before, with the ups and the downs of the Dutch, British and U.S. empires. And every time they did, it was a sign of the changing world order.

This study taught me valuable lessons that I’m going to pass along to you here in a distilled form. You can find the comprehensive version in my book “Principles for Dealing With The Changing World Order”.

HOW I LEARNED TO ANTICIPATE THE FUTURE BY STUDYING THE PAST

Let me begin with a story that brought me to this point about how I learned to anticipate the future by studying the past.

In 1971, when I was a young clerk on the floor of the New York Stock Exchange, the United States ran out of money and defaulted on its debts. That’s right; the U.S. ran out of money. How?

Well, back then gold was the money used in transactions between countries. Paper money, like the dollar, was like checks in a checkbook in that it had no value other than it could be exchanged for gold, which was the real money.

At the time the United States was spending a lot more money than it was earning by writing a lot more of these paper money checks than it had gold in the bank to exchange for them. As people turned these checks into the bank for gold money, the amount of gold in the U.S. started to dwindle.

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It soon became obvious that the U.S. couldn’t keep its promises for all the existing paper money, so people holding dollars rushed to exchange them before the gold ran out.

Recognizing that the U.S. was going to run out of real money, on Sunday evening, August 15th, President Nixon went on television to tell the world that the U.S. was breaking its promise to let people exchange their dollars for gold. Of course, he didn’t say it that way; he said it more diplomatically without making it clear that the United States was defaulting.

(Video: [President Nixon] ‘Strength of a nation’s currency is based on the strength of that nation’s economy, and the American economy is by far the strongest in the world. Accordingly I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States.’)

I watched in awe realizing that money as we understood it was ending. What a crisis? I expected the stock market to plunge the next day, so I got on the exchange floor early to prepare when the opening bell rang, pandemonium broke out, but not the kind I expected. The market was up… way up and went on to rise nearly 25%. That surprised me, because I never experienced a currency devaluation before.

When I dug into history, I discovered that the exact same thing happened in 1933, and had the exact same effect. Then paper dollars were also linked to gold which the U.S. was running out of, because it was spending more paper money checks than it had gold to exchange for them. And President Roosevelt announced on the radio that he would break the country’s promise to exchange dollars for gold.

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[Radio: (President Roosevelt): Itwas then that I issued the proclamation, providing for the national bank holiday. This was the first step in the government’s reconstruction of our financial and economic fabric. The second step, last Thursday was the legislation promptly and patriotically passed by the Congress confirming my proclamation and broadening my powers so that it became possible in view of the requirement of time to extend the holiday and lift the ban of that holiday gradually in the days to come. This law also gave authority to develop a….”]

In both cases, breaking the link to gold allowed the U.S. to continue spending more than it earned, simply by printing more paper dollars. Since there was an increase in the number of dollars, without an increase in the country’s wealth, the value of each dollar fell.

As these new dollars entered the market without a corresponding increase in productivity, they went to buy lots of stocks, gold and commodities, and hence caused their prices to rise.

As I studied more history, I saw that the exact same thing happened many many times before. I saw that since the beginning of time, when governments spent much more than they took in in taxes, and conditions got bad, they ran out of money and they needed more, so they printed more… a lot more which made its value fall and made the prices of most everything, including stocks, gold and commodities rise.

That’s when I first learned the principle that when central banks print a lot of money to relieve a crisis, buy stocks, gold and commodities, because their value will rise and the value of paper money will fall. This printing of money is also what happened in 2008 to relieve the mortgage driven debt crisis, and in 2020 to relieve the pandemic-driven economic crisis. And it almost certainly will happen in the future.

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So I suggest that you keep this principle in mind.

These experiences gave me another principle which is to understand what is coming at you. You need to understand what happened before you. That principle led me to study how the roaring 20’s Bubble turned into the 1930’s Depression, which gave me the lessons that allowed me to anticipate and profit from the 2007 bubble, turning into the 2008 bust.

All these experiences led me to develop an almost instinctual urge to look to the past for similar situations, to learn how to handle the future well.

CHANGING ORDERS

Over the last few years, three big things that hadn’t happened in my lifetime prompted me to do this study.

First, countries didn’t have enough money to pay their debts, even after lowering interest rates to zero. So their central banks began printing lots of money to do so.

Second, big internal conflicts emerged due to growing gaps in wealth and values. This showed up in political populism and polarization between the left who want to redistribute wealth and the right who want to defend those holding the wealth.

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