Ray Dalio, a global macro investor, has observed recurring patterns in the rise and collapse of monetary, political, and geopolitical orders, which he terms "the Big Cycle." These cycles typically span about 75 years and suggest that current global conditions are evolving similarly to the tumultuous period preceding 1945.
The Big Cycle and Current Stage
Dalio's framework outlines six stages of the Big Cycle, with Stage 6 representing a period of significant disorder or breakdown. He asserts that the world is currently in Stage 5, the phase immediately preceding this breakdown.
This perspective, informed by 50 years of investing and studying historical cause-and-effect relationships, differs from many who are surprised by current events, possibly due to a focus on daily events rather than long-term cyclical patterns.
Historical Parallels
Historical analysis indicates that all monetary, domestic political, and international political orders undergo a Big Cycle progression. The 1929-1945 period, marked by significant disorder, saw the breakdown of existing orders and the subsequent establishment of new ones after World War II, largely led by the United States. Factors such as major natural events and technological advancements also influence these cycles.
These cycles are consistently driven by similar dynamics. For instance, large debt/monetary cycles occur when debts and debt service payments grow disproportionately to incomes, leading to spending constraints and potential debt service problems.
This situation, especially with large outstanding debts and budget deficits, can cause an imbalance between debt asset supply and demand, potentially devaluing debt or currency.
Historically, pre-war periods have also seen creditors shift bond holdings to gold due to fears of devaluation or default by reserve currency countries.
Markers of Stage 5 Progression
The progression from Stage 5 towards Stage 6 is typically characterized by:
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Substantial and rapidly increasing government debts and geopolitical conflicts, fostering concerns about currency value and security, particularly for reserve currencies, which often leads to increased demand for gold.
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Significant income, wealth, and values disparities within countries, contributing to the rise of both left and right-wing populism and irreconcilable differences that challenge compromise and the rule of law.
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A shift from a world order dominated by a single power and relative peace to one defined by great power conflicts.
These conditions have historically resulted in financial instability and conflict, posing particular challenges for democracies, which rely on the ability to resolve disagreements through established rules. Past examples include the 1930s when four democracies transitioned to autocracies amidst similar pressures.
Contemporary Observations
Current global dynamics observed by Dalio align with these historical markers:
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High levels of debt, deficits, and the debasement of fiat currencies, exemplified by the dollar, are coinciding with a rise in gold prices.
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Increasing political and ideological polarization within nations, leading to what some describe as "pre-civil war" developments, driven by significant wealth and values differences.
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The post-1945 multilateral, rules-based international order is exhibiting signs of breakdown, giving way to an environment more akin to pre-1945 great power conflicts and assertive geopolitical maneuvers.
Dalio suggests that present circumstances are more analogous to the pre-1945 era than the post-1945 period to which many are accustomed. While acknowledging that outcomes are not predetermined, he expresses a lack of optimism regarding leaders' collective ability to effectively address these challenges.