'The Changing World Order' - Ray Dalio (Review/Summary)

Review/Summary:

Ray Dalio is the 70th richest man in the world (worth $20 billion) and the founder of Bridgewater Associates - the biggest hedge fund in the world.

In his latest book 'The Changing World Order' (currently the #1 economics bestseller in America) he gives a model to explain the rise and fall of superpowers. According to him, there have been 3 superpowers (Holland, Britain, America) and now the 4th one (China) is rising. He says the rise and fall of superpowers is driven/caused by two major cycles: the economic cycle and the political cycle. He further divides the political cycle into two cycles: the internal political cycle and the external political cycle. And among these 3 cycles, the most important is the economic cycle. Dalio says the economic cycle is driven/caused by the debt/credit cycle. In fact, the book's cover has a diagram of the debt/credit theory of economic cycles. But this is a fringe theory in economics. So Dalio's model is based on a fringe theory - which puts a big question mark on his entire model. Interestingly, the book has been praised by many heavyweights like Bill Gates and Henry Kissinger - but by only one economist: Lawrence Summers. And coincidentally, Lawrence Summers is also the only major economist who supports the debt/credit theory of economic cycles.

Other criticisms:

# In a good detective novel, all the loose ends go on getting tied up and cleared away as we reach the end of the book. Dalio's book is the opposite - cracks start appearing in his model and go on adding up. So at the end, we have to take his model with a pinch of salt.

# Dalio's basic approach is to build a numerical model that takes the numeric values of various indicators and uses them to make predictions about the world. This is a very interesting exercise but the world is too complex a system to be modelled like this. What gets left out is much more (both in quality and quantity) than what can be captured in such a model.

# Dalio's model basically says that a country collapses as a superpower when its debt becomes too high. To prove his argument, he bombards us with a ton of graphs of very specialised economic indicators for the 4 superpowers - but the most important graphs are missing: the debt-to-GDP ratios.

# Throughout the book, Dalio keeps saying that America is declining because its debt is high and China is rising because its debt is low. But America's total debt (government + corporate + household) is 240% of its GDP and China's total debt is 250% of its GDP. At the end of the book, he says that he has constructed his own index to measure a country's debt burden. He should have revealed this in the beginning - when he describes his debt/credit theory of economic cycles.

# Dalio wrongly uses many basic economics terms. Example: 'Devaluation' means a country reducing the value of its currency against other currencies. But he uses the word to mean a currency losing its value against gold. This is nothing but an increase in the price of gold - which anyway happens due to inflation. So he keeps saying 'devaluation' when it is actually inflation.

# Dalio talks about the 'real economy' and the 'financial economy' - as if they are two systems, equal in size and importance. This is wrong - the financial system is nothing but a sub-system of the economic system.

# People who have studied economics can read this book to test their understanding of the subject. People who have not studied economics are better off reading a good economics textbook instead.

# The book has no index or bibliography.

However Dalio does get a couple of points right:

# Importance of education - Dalio identifies 8 factors that make a country a superpower: 1) Education 2) Technology 3) Competitiveness 4) Military 5) Trade 6) GDP 7) Financial centre 8) Reserve currency. These are in chronological cause-effect order: ie, 1 leads to 2, 2 leads to 3, and so on. That is - he (correctly) identifies education as the most fundamental factor that makes a country strong. This is especially relevant for India because our education system (especially our primary education system) is very weak.

# Importance of fiscal discipline - During normal times, a country can have a high debt/deficit and nothing will happen. But normal times do not last forever - sooner or later, a shock will come. In the last two years alone, the world has had two major shocks: Covid-19 and the Ukraine War. And when a shock comes, countries with a low debt/deficit survive but countries with a high debt/deficit collapse. Hence fiscal discipline (ie, a country spending less than what it earns) is of paramount importance.