Money, Power, and the Collapse of Empires | Ray Dalio on Lex Fridman Podcast

Key Takeaways

  • Those who have money, have the power to buy and influence those with political power (nation-state)
    • Royalty, nobility, and the church – classic historical examples from the 16th and 17th centuries
  • New world order usually begins after radical changes (revolution or war)
    • After that, there is a period of extended peace and prosperity led by the dominant world power
    • People get used to the prosperity and they borrow money which leads to a debt bubble
  • When the debt bubble ultimately bursts, it leads to printing money, internal conflict, and wealth redistribution
    • The rival power challenges the leading power in some kind of war to test their economy and military power
    • The result is the winners get to agree on the new world order
  • The Dutch empire invented capitalism (the first stock exchange in 1602)
    • It was the key to their success but it also contributed to their downfall
    • The Dutch guilder was the world’s first reserve currency
  • China displaced the US as the world’s largest trading country (more exports to other countries)
    • They are economically competitive but they don’t have the world’s reserve currency
    • Tech niche is the only non concerning indicator for the US, but even in that area, China is improving faster
  • The US is losing the educational advantage; quality of public education is deteriorating
    • China is attempting to create freedom and creativity in areas that are not political
    • “The stereotype that you don’t see creativity happening is an old stereotype”Ray Dalio
  • Currently, bitcoin is worth about 20% of the value of gold and Ray doesn’t believe it will surpass gold
  • Get to know yourself, feel the “pull” and follow your passion
    • Use personality tests to learn more about yourself

Key Books Mentioned

Intro

  • Ray Dalio (@RayDalio) is an American billionaire investor, author, and founder of Bridgewater Associates. He is widely regarded as one of the greatest innovators in the finance world
  • He is back on Lex Fridman Podcast to talk about the big cycle that governs the rising and declining empires, the position of the United States concerning China, what he thinks about bitcoin, and much more
  • Host – Lex Fridman (@lexfridman)

What Is More Important, Money or Power?

  • Money and power have a symbiotic relationship
    • They support each other and compete with each other
  • Those who have money, have the power to buy and influence those with political power (nation-state)
    • Royalty, nobility, and the church – classic historical examples from the 16th and 17th centuries
    • They support each other in various ways and compete for money and power
  • The dynamic changes as technology changes and people leave, but it’s always about those with money, and those with political power around the most valuable assets that produce money

Big Cycle Behind Empires’ Rises and Declines

  • “The archetypal big cycle governs the rising and declining empires and influences everything about them, including their currencies and markets.” Ray Dalio
  • New world order usually begins after radical changes (revolution or war)
    • After WW2, the winners created the world system as we now know it
    • The new world order was built around an American world order
    • In 1944 a new international monetary system was forged in Bretton Woods
    • The United States held 80% of the world’s money (gold) and had a powerful military 
    • The International Monetary Fund and the World Bank were in Washington
  • After that, there is a period of extended peace and prosperity (working together) led by the dominant world power
    • People get used to the prosperity and they borrow money which leads to a debt bubble
    • When the debt bubble ultimately bursts, it leads to printing money, internal conflict, and wealth redistribution
  • The rival power challenges the leading power in some kind of war to test their economy and military power
    • The result is the winners get to agree on the new world order
    • That is what has continually happened throughout history

The Rise and Decline of the Dutch Empire

  • The Dutch empire invented capitalism (the first stock exchange in 1602)
    • It was the key to their success but it also contributed to their downfall
    • Capitalism places the resources into the hands of inventive people but it creates wealth and opportunity gaps
  • The Dutch empire had a powerful military, but they were also a very inventive society (great shipbuilders)
    • 25% of the world’s new inventions came from the Dutch
    • Their influence extended all over the world, and their currency was widely accepted
    • The Dutch guilder was the world’s first reserve currency
    • Becoming more successful made them more expensive and less competitive
  • New countries came along, learned to build ships from the Dutch, and did it for less money
    • The work ethic changes; they believe that they should enjoy life more because they have money
    • Having world reserve currency allows you to borrow a lot of money
    • Those who want to save want to hold your money and that means they will lend you money
    • The result is that countries get deeper into debt
  • They lose their competitiveness and get themselves into bad financial circumstances and large wealth gaps
    • This sets the stage for downturns; the nation’s coffers are empty, they are spending more than they are earning
    • And if they have a rival power that is challenging them, they see greater internal conflict over wealth
    • The British got stronger (economically and militarily), hurt the Dutch shipping business, and attacked them
    • Internal and external problems usually result in an internal or external war that leads to the change in the new world order

The United States Is Encountering a True Rival Power

  • China’s balance of payments is better than the US
    • China displaced the US as the world’s largest trading country (more exports to other countries)
    • They are economically competitive but they don’t have the world’s reserve currency
    • The US has the world’s reserve currency, but they are at risk of losing its reserve status
  • The US are creating debt, borrowing, and printing considerable amounts of money
    • When the government spends more than it takes in, they have to sell bonds
    • That is why the world has many dollar-denominated bonds
  • More bonds have to be sold than they are bought, and that leaves the federal reserve with two choices:
    • Raise the interest rate to cut down borrowing (which slows the economy and hurts the markets)
    • Fill the difference by producing money (the debt monetization) which produces inflation in goods, services, and financial assets
  • Moreover, there is a lot of internal conflict in the United States
    • China is a more autocratic state and they separate the political from the economic
    • Based on the entrepreneurship and the finances of new businesses, there is less internal conflict in China
  • Tech niche is the only non concerning indicator for the US
    • But even in that area, China is improving faster
    • China puts about eight times as many computer engineers and they have more free data, etc.
    • Finance, internal order-disorder, and education levels are of high concern for the US

The Collapse of the American Empire

  • The US is losing the educational advantage; the quality of public education is deteriorating
    • Ivy League universities are for privileged people
    • They are not investing in human capital as other countries like Japan, Ireland, and China
  • The US is at war with itself
    • History teaches us to be financially sound and earn more than we spend, and everything will take care of itself
    • It’s a very simple formula but once you start going down, it’s hard to reverse it
    • A lot of debt is inherited, as well as broken infrastructure, and this is why big cycles happen
    • “What happened before created the lay of the land that is then increasingly difficult to deal with.”Ray Dalio
  • What is the solution?
    • Bipartisanship and broad-based prosperity
    • Moderates who are going to be able to work together
    • Dealing with the fundamental problems in a way that works for the majority
    • The US has resources; wealth and science, but it doesn’t work for the majority of the people

China’s Dialectical Tradition and Confucianism

  • Everything comes with pros and cons (two opposites)
    • They are always looking for the benefits of any two opposites “colliding”
    • How to keep the capital markets when they produce wealth gaps and debt cycles?
    • How to reconcile communism and the market economy and the capital market?
  • In China, it’s about the extension of the Confucian family values
    • They think about the common good instead of individualism
    • E.g. Chinese government regulates how much time children spend playing video games
    • The US is the country of individualism, rights to speak up, individual property rights, etc.
    • China is attempting to create freedom and creativity in areas that are not political (creativity in entrepreneurship, product development, etc)
    • “The stereotype that you don’t see creativity happening is an old stereotype”Ray Dalio

Ray’s Thoughts About Bitcoin

  • We are entering an era of competition of “moneys”
    • Bitcoin is part of that competition, but there will be a lot of different kinds of money (like NFTs)
    • Ray Dalio hasn’t bought any NFT’s
  • He still favors gold because you can’t trace it
    • He believes not being connected has benefits (less risk) in a world of connections 
    • Gold is a universally recognized source of money
    • The third-largest source of money in central bank reserves
  • He doesn’t think bitcoin will serve the same purposes as gold does
    • Currently, bitcoin is worth about 20% of the value of gold and Ray doesn’t believe it will surpass gold

Advice for Young People

  • Get to know yourself, feel the “pull” and follow your passion
    • Use personality tests to learn more about yourself
    • Make your work and passion the same thing
    • Consider the financial aspect (money gives you freedom and choice)l
  • Learn from your mistakes and accept your weaknesses
    • Don’t fight them, understand them so you don’t repeat them
    • Pain + reflection = progression
  • Find people whose strengths complement your weaknesses
    • Working together is the best way to achieve success
  • Life is like a video game; full of challenges, learning experiences, and temptations
  • 5 step process – evolutionary looping process
    • Know your goals and priorities and move in that direction
    • Understand your problems and obstacles
    • Diagnose them to get at the root of the problem, be objective about your weaknesses
    • Design a plan to get around them
    • Implement the design and do the work
  • Over time you will move in the direction that you want to go
  • “Man’s ability to invent and adapt is the greatest power that gives me justifiable hope.”Ray Dalio

Lex Fridman Podcast : , , , , ,
Notes By Dario

More Notes on these topics

Top Insights and Tactics From

31 Best Podcasts of All Time

FREE when you join over 25,000 subscribers to the
Podcast Notes newsletter

No Thanks