Unpacking the Five Forces Driving a Rare Global Transformation
In a thought-provoking article, renowned investor Ray Dalio warns that the current focus on U.S. tariff announcements distracts from larger, more critical forces. He states, “At this moment, a huge amount of attention is being justifiably paid to the announced tariffs and their very big impacts on markets and economies while very little attention is being paid to the circumstances that caused them and the biggest disruptions that are likely still ahead.” Dalio identifies a “classic breakdown of the major monetary, political, and geopolitical orders,” a phenomenon he says “occurs only about once in a lifetime” but has historical precedents.
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Debt Crisis
On the monetary and economic front, Dalio pinpoints a debt crisis. He writes, “The monetary/economic order is breaking down because there is too much existing debt, the rates of adding to it are too fast, and existing capital markets and economies are supported by this unsustainably large debt.” He elaborates, “The debt is unsustainable because of the large imbalance between a) debtor-borrowers who owe too much debt and are taking on a too much debt because they are hooked on debt to finance their excesses (e.g., the United States) and b) lender-creditors (like China) who already hold too much of the debt and are hooked on selling their goods to the borrower-debtors (like the United States) to sustain their economies.” He ties this to “a deglobalizing world” where trust is eroding, noting, “the major players can’t trust that the other major players won’t cut them off from the items they need (which is an American worry) or pay them the money they are owed (which is a Chinese worry).”
So, the old monetary/economic order in which countries like China manufacture inexpensively, sell to Americans, and acquire American debt assets, and Americans borrow money from countries like China to make those purchases and build up huge debt liabilities will have to change. These obviously unsustainable circumstances are made even more so by the fact that they have led to American manufacturing deteriorating, which both hollows out middle class jobs in the U.S. and requires America to import needed items from a country that it is increasingly seeing as an enemy.
Domestically, Dalio sees political fracture. He states, “The domestic political order is breaking down due to huge gaps in people’s education levels, opportunity levels, productivity levels, income and wealth levels, and values—and because of the ineffectiveness of the existing political order to fix things.” He describes this as “win-at-all-cost fights between populists of the right and populists of the left,” leading to “democracies breaking down because democracies require compromise and adherence to the rule of law.”
Geopolitical Power Shift
Geopolitically, he observes a power shift. “The international geopolitical world order is breaking down because the era of one dominant power (the U.S.) that dictates the order that other countries follow is over,” he writes, adding, “The multilateral, cooperative world order the U.S. led is being replaced by a unilateral, power-rules approach.” He points to “the U.S. led trade-war, geopolitical war, technology war, and, in some cases, military wars” as evidence.
Dalio also lists “acts of nature (droughts, floods and pandemics)” and “amazing changes in technology such as AI” as forces “highly impactful to all aspects of life.” He urges focus on these five elements, stating, “Changes in these forces and how they are affecting each other is what we should be focusing on,” rather than tariffs alone. He references his book, Principles for Dealing with the Changing World Order, for historical context, noting, “The Overall Big Cycle is described in six clearly identifiable stages.”
By grasping the bigger picture beyond the tariff tumult, he believes policymakers and individuals alike can work towards better outcomes in an undeniably turbulent time. It’s a sobering yet galvanizing call to action from one of the world’s most influential economic thinkers.