Principles

Why do great nations and empires rise, dominate, then fall? In The Changing World Order, Ray Dalio presents a sweeping framework called the Big Cycle—a recurring pattern through which economies, empires, and world orders expand, peak, and decline. He argues that if you understand these cycles and the forces behind them, you can anticipate major changes in global power, avoid financial destruction, and position yourself wisely for the next era.

The predictable rhythm of history

Dalio shows that history repeats through a three-phase rhythm: the Rise phase (innovation, education, trade, and sound finance build prosperity); the Top (wealth and power peak but excesses build); and the Decline (debt crises, social fractures, inflation, and wars). Eventually a new order emerges. This rhythm is visible in the Dutch, British, and American empires, each lasting about 200–300 years. Each phase is powered by interlinked variables—productivity, education, trade, debt, and military strength—that usually rise and fall together.

Three cycles and five guiding forces

Beneath the Big Cycle run three interconnected engines: (1) the long-term debt and capital-market cycle; (2) the internal order/disorder cycle (domestic unity vs. polarization); and (3) the external order/disorder cycle (peaceful trade vs. geopolitical conflict). Dalio overlays these with five main forces—the “Big Five”: finances and debt, internal cohesion, external competitiveness, innovation, and acts of nature. When those forces move in the same direction, you get clear historical momentum—either toward national strengthening or collapse.

Monetary plumbing and political psychology

Money, credit, and debt form the system’s bloodstream. Periods of rapid credit growth often lead to bubbles, crises, and the temptation to print money. Political reactions—inequality, populism, and polarization—shape whether societies reform peacefully or erupt violently. A nation’s fate depends not just on finance but on how its people, institutions, and leaders respond to stress. Education, culture, meritocracy, and shared purpose determine whether the downturn phase becomes a creative renewal or a destructive collapse.

From Dutch guilders to the US dollar

To make these ideas concrete, Dalio traces historical cases: the Dutch guilder’s golden age and collapse in the 1600–1700s, Britain’s industrial and financial dominance followed by imperial overreach, and the United States’ post‑1945 leadership culminating in the dollar’s supremacy. Each followed the same archetype: innovation and openness created prosperity; debt, decadence, and conflict undermined it. The modern U.S.–China rivalry fits this same pattern, with the incumbent (U.S.) facing debt and internal division while the rising challenger (China) rapidly grows wealth, technology, and geopolitical reach.

Lessons for individuals and investors

Dalio’s goal is not prophecy but preparedness. Understanding where your country sits in the cycle helps you navigate risks—monetary debasement, revolutions, or wars—that have recurred for 500 years. He urges you to watch indicators like debt levels, real interest rates, internal unity, and innovation capacity. The key is diversification—across assets, currencies, and locations—and humility about the limits of prediction. The world order always changes, but by seeing the cycles clearly, you can adapt peacefully while others are caught by surprise.

Core takeaway

“Everything rises and falls in a classic Big Cycle.” The trick is not to fight the rhythm of history—but to recognize it early, preserve adaptability, and make decisions aligned with the next swing of the cycle.

Dalio’s framework rests on the interaction of three massive cycles that shape every national story: the long-term debt and capital-market cycle, the internal order cycle, and the external order cycle. When these align—especially all negative—they trigger epochal transitions such as the 1930s Great Depression or the modern U.S.–China power shift.

Long-term debt and capital markets

This cycle drives the boom-and-bust rhythm of capitalism. Credit expansions raise prosperity but also build unsustainable claims. Eventually defaults or monetization reset the system. Dalio traces this pattern from the Weimar hyperinflation and Great Depression to the 2008 crisis and 2020 pandemic printing. When rates hit zero, central banks move from normal rate policy (Monetary Policy 1) to asset purchases (Policy 2), and finally to monetary–fiscal collaboration (Policy 3). Every step increases risk of currency debasement.

Internal order and disorder

Inside nations, cooperation alternates with polarization. The six-stage domestic political cycle runs from revolution and institution-building to unity, prosperity, excess, crisis, and sometimes civil war. Warning signs of Stage 5–6 tension include high debt, populism, and institutional distrust. The U.S. today, Dalio warns, shows roughly 70% progression through its internal cycle, echoing the 1930s.

External order and geopolitical cycles

Externally, rival powers shift the balance of global influence. Relative competitiveness, technology, and military reach determine who sets the rules. The Dutch yielded to Britain, Britain to America, and the U.S. now faces challenges from China. These transitions often coincide with financial stress and internal division. The 1930–45 period—debt crisis, depression, populism, and world war—is Dalio’s archetypal collapse of one world order and birth of another.

Practical application

Watch the intersection of these cycles. When high debt meets internal discord and external rivalry, risk of disruption multiplies. But when innovation, unity, and prudent finance align, renewal begins.

For Dalio, money is not static—it evolves through repeating regimes. He distinguishes three forms: Type 1 hard money (metal coins), Type 2 paper claims convertible to metal, and Type 3 fiat money printed at will. Each expansion of credit increases prosperity and fragility until a reset—via devaluation, reform, or revolution.

The six-stage long-term debt cycle

Money cycles through predictable phases: a hard-money base; expansion of paper claims; credit-fueled booms; crisis and bank runs; monetization; and flight to hard assets. Historical markers include Rome’s debasements, the Bank of Amsterdam run (1780s), the post-WWI crashes, and the U.S. dollar’s 1971 break with gold. Each demonstrates how prosperity sows the seeds of crisis.

Reserve currencies: rise, plateau, fall

Reserve currencies embody trust. The guilder, pound, and dollar each achieved that role by combining innovation, financial markets, and credible governance—then lost it through debt excess and loss of competitiveness. Transitions are slow but end abruptly when credibility cracks, as with the guilder collapse during the Anglo-Dutch wars or sterling’s devaluations after WWII.

Signals of strain today

Dalio advises monitoring debt-to-income ratios, real yields, central bank balance sheets, and capital controls. Negative real rates and large fiscal–monetary coordination indicate late stages. Currency privilege lasts until holders flee; at that point, inflation and depreciation erase savings, transferring wealth from creditors to debtors. The lesson: study monetary plumbing as closely as you study politics—it decides who gains and who loses when systems reset.

Nations rise when they maintain internal balance and cooperative governance; they fall when polarization and external conflict reinforce each other. Dalio outlines two political feedback loops—one domestic, one international—that drive the turns of history.

Internal six-stage political cycle

Every new order begins with consolidation after revolution, then institution-building, then prosperity. Success breeds complacency and decadence, leading to debt excesses and elite corruption. Populism rises, centrists disappear, and the social contract breaks. If unresolved, civil war or peaceful revolution resets the cycle. Dalio highlights Roosevelt’s 1930s New Deal as a rare non‑violent Stage‑5 reform that prevented civil war through redistribution and reform.

External balance-of-power dynamics

Externally, conflict manifests in five domains: trade, technology, capital, geopolitical alignment, and military confrontation. When rising and ruling powers clash across all five—as the U.S. and China increasingly do—the risk of world‑order overhaul spikes. The 1930s Germany–UK–US tensions foreshadowed such transitions; today’s semiconductor and currency disputes mirror them.

The leadership challenge

Wise leaders engineer win–win outcomes through empathy and negotiation—maintaining power without catastrophe. Dalio contrasts Deng Xiaoping’s pragmatic reforms with leaders who rigidly defended privilege and triggered revolution. His advice: when internal fractures widen, deliberate institutional renewal and compromise are smarter than suppression or denial.

Dalio identifies 18 measurable determinants that explain why some nations thrive longer. He divides them into inherited advantages (geography, resources), human and institutional qualities (education, leadership, values), and dynamic interactions (class conflict, innovation, fiscal health, military strength, reserve‑currency status). These create an integrated scorecard of power.

Human capital and innovation

Education, culture, and work ethic drive productivity. Societies that reward inventiveness—like the Dutch merchants or British industrialists—multiply wealth. When institutions decay and corruption spreads, talent migrates and decline accelerates. Dalio encourages quantifying these traits using consistent data while supplementing them with qualitative judgment about leadership character.

Interactional and cyclical dynamics

Social psychology repeats multigenerationally: industrious founders build wealth, their grandchildren consume it. Large wealth gaps and value divides push politics toward extremes. Reinforcing loops between culture and finance—thrift vs. indulgence, openness vs. fear—govern long-run prospects more than temporary resource endowments.

Using the model

You can score nations (1–10 per determinant) to gauge future resilience. Weakening education, innovation, trade share, and surging debt are red flags. Dalio’s team built such indices to compare Dutch, British, American, and Chinese trajectories. The main insight: culture and policy still outweigh fate. Renew education, uphold law, and manage debt, and a country can restart its rise.

History validates the Big Cycle. The Dutch, British, American, and Chinese stories reveal repeating drivers of ascent and descent and how monetary systems intertwine with them.

The Dutch innovation engine

In the 1600s, the Netherlands fused technology, trade, and finance—its Bank of Amsterdam (1609) and VOC (1602) were revolutionary. Naval supremacy and financial depth made the guilder the first global reserve currency. But wars and over‑lending to the VOC eroded credibility; by 1795 deposits traded at heavy discounts, ending Dutch dominance.

British industrial and financial supremacy

Britain combined Enlightenment thinking, rule of law, and industrialization to dominate 19th‑century trade. The Bank of England (1694) enabled deep capital markets; sterling became the global unit of account. Yet by the late 1800s, high inequality and slower innovation paved the road to decline. Two world wars exhausted finances, culminating in 1947–67 devaluations. The U.S. replaced Britain as the new hegemon.

American century and its limits

Post‑1945 the U.S. built Bretton Woods, controlling two‑thirds of world gold. Nixon’s 1971 severing of gold convertibility created fiat dominance. Volcker’s disinflation restored confidence; later QE eras exposed fragility again. Today the dollar still holds over half of global reserves, but Dalio notes that fiscal deficits, polarization, and overprinting threaten its edge. As rivals mature, reserve roles could slowly shift.

China’s return to prominence

China’s dynastic cycles mirror Dalio’s internal stages: consolidation, prosperity, decadence, decline, and renewal. After a “Century of Humiliation,” Deng Xiaoping’s market reforms reignited growth, lifting hundreds of millions from poverty. Xi’s era emphasizes technological self‑sufficiency and geopolitical expansion (Belt & Road). The renminbi remains small globally but rising fast—an indicator of China’s climb within the next order.

Dalio frames current tensions as a multi‑front contest eerily similar to past transitions between leading and rising powers. The U.S. and China already engage in simultaneous five “wars”: trade, technology, capital, geopolitical, and cultural.

Trade and technology clashes

Tariffs, industrial policy, and alliances define trade warfare. The real struggle, however, lies in AI, semiconductors, and quantum computing—technologies that determine both productivity and military edge. Restrictions on Huawei, chip export bans, and rival supply chains resemble 19th‑century races for industrial advantage.

Capital and financial systems

Dollar dominance lets the U.S. weaponize finance through sanctions; China and others respond with alternative payment systems and digital currencies. The contest extends to reserve‑currency influence, with the renminbi slowly internationalizing through trade and the Belt and Road network.

Geopolitical and cultural arenas

Territorial disputes (Taiwan, South China Sea) could be flashpoints if diplomacy fails. Cultural contrasts—individualism vs. collectivism, liberal democracy vs. party‑state pragmatism—intensify mistrust. Dalio’s warning: the greatest danger is that each side misreads the other’s existential priorities, turning solvable problems into irreversible conflicts.

Guiding principle

Power matters, but empathy and negotiation preserve civilization. Understanding incentives and limits—not moralizing—offers the best chance for peace in the coming transition.

Dalio translates history into strategy. Markets, he says, reflect four drivers—growth, inflation, risk premiums, and discount rates—all shaped by the Big Cycle. By knowing which phase you’re in, you can build resilient portfolios and nations.

Investment implications

When debt is high and real yields fall, own real assets (commodities, real estate, inflation‑protected securities). When disinflation follows crisis, rotate toward riskier assets. Above all, diversify across geographies and currencies—since any single nation’s decline can wipe out local savers. The 20th century showed that investors in Russia, Germany, or China lost everything multiple times, while diversified global holders preserved wealth.

Indicators for forecasting

Dalio’s firm tracks over a century of data—education, debt, innovation, military power, and internal conflict—to rate countries. His tools produce probability‑based scenarios: the U.S. still leads but is decaying; China ascends but lacks reserve privileges. Key gauges for individuals include debt burdens, unity vs. polarization, and real returns on capital. You can use these guides as early‑warning systems for the next global reset.

Principles for enduring change

Preparation is probabilistic. Protect against intolerable loss first, diversify second, and seek opportunity last. Hold liquidity, hedge inflation, invest in innovation, and stay adaptive. As Dalio learned from Bridgewater’s near‑collapse in 1982, humility, data, and scenario thinking matter more than confidence. The ultimate asset is the capacity to learn faster than the environment changes.