Over two installments of “The Changing World Order,” the second of which was released today, Ray Dalio released the fourth chapter of the study, which focuses on the ascent of the U.S. as the leading world power, the establishment of the American era beginning in 1945 and asses where the country is today in its arc as a world power. Ray believes studying the rise and fall of world powers is incredibly important right now because bigger than COVID-19 is the world order shift we are experiencing with the rise of China because how countries respond to the pandemic will directly impact their status in the new world order.
U.S. Dominance And Relative Wealth Are Declining In The New World Order
The latest installment focuses on the second half of the American era and discusses how the U.S.’ dominance and relative wealth are declining while rivalries are intensifying under President Trump. These conflicts are visible in negotiations with allies, such as Europe and Japan, regarding trade and paying for military expenditures, as well as with international rivals, including China and Iran. The latter conflicts with China over trade, technology, geopolitics and capital are the most important, intensifying and have not been seen since the economic sanctions of the pre-World War II era (1930s).
Welcome to our latest issue of ValueWalk’s hedge fund update. Below subscribers can find an excerpt in text and the full issue in PDF format. Please send us your feedback! Featuring Point72 Asset Management losing about 10% in January, Millennium Management on a hiring spree, and hedge fund industry's assets under management swell to nearly Read More
Other key takeaways from the installment include:
- Reserve Currency: The ability for a country to print money and have it accepted by the world is a luxury of only the world’s reserve currency (right now the U.S.) and is the most valuable economic power a country can have, but a country needs to maintain sizable reserves in order to have enough “world money.” The US is currently very powerful because it can print the world’s money but it would be very vulnerable if it lost this status (as Ray noted earlier the last driver of a declining world power is its currency going out of style and the first step towards that is when a country debases its currency, which the U.S. is doing right now which the current necessary stimulus measures).
- Interest Rates: During the 2008 financial crisis, interest rates were lowered until they hit 0%. With borrowed money being essentially free, investment and corporate borrowers took advantage of this to drive up stock prices and corporate profits. However, the money did not trickle down proportionately and the wealth gap widened as a result. This gap has only been intensified as a result of COVID-19 and today is the largest it’s been since the 1930-45 period. If not addressed well, it will result increased geopolitical tensions globally and domestic fighting nationally, which we are already seeing emerge this summer.
- Military Prowess: In 1945, the U.S. was clearly the sole dominant military power that could not be threatened by others. However, over the last 75 years this has shifted and today there is a significant chance the U.S. could lose wars against China and Russia in their geographic areas of strength as well as be unacceptably harmed by other second-tier powers if there was a conflict.