Dalio On A “Military War” With China “Will Be Much Worse Than Most People Imagine”

Following last week’s chapter, I wanted to flag that Ray has published the latest installment of his “Changing World Order” study today, which focuses on American – Chinese relationship and various “wars” between the two nations.

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Q2 2020 hedge fund letters, conferences and more

The American - Chinese Relationship

Ray Dalio explores the American - Chinese relationship in the context of his universal principles: relationships, power and war. Key takeaways from the chapter include:

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The Technology War:

  • The technology war is a much more serious war than the trade war because whoever wins the technology war will probably also win the economic and military wars.
    • The US appears to now have greater technology abilities overall, though it varies by type of technology, and it is losing its lead.
    • There is a tech decoupling going on that is part of the greater decoupling of China and the US, which will have a huge impact on what the world will look like in 5 years.
    • If the US shut-off Chinese access to essential technologies that would signal a major step-up in war risks.

The Trade-Economic War:

  • Moves to cut off essential imports from either side would signal a major escalation that could lead to a much worse conflict. Both countries, especially China, are shifting to more domestic production and “decoupling.”
    • Over the next five years we should see both countries to be more independent from each other.

The Geopolitical War:

  • It is Ray’s belief that China has a strong desire to not have a hot war with the US or to forcibly control other countries (as distinct from having the desire to be all that it can be and to influence countries within its region).

The Capital War:

  • The two main capital war risks are of being shut off from capital (which is a greater risk for China than it is for the US) and losing one’s reserve currency status (which is a greater risk for the US than for China).
    • The United States’ greatest power comes from being able to print the world’s money (i.e., from having the world’s leading reserve currency) and all the operational powers (e.g. influences on the clearing system) that go along with that. The United States is risking losing some of this power while the Chinese are in the position of gaining some of it.
    • The US could see its reserve currency status reduced without there being an alternative reserve currency to go into.

The Military War:

  • It is impossible to visualize what the next war will be like, though it probably will be much worse than most people imagine.

The Culture War:

  • Some of these cultural difference are minor and some of them are so major that many of them would fight to the death over them.

And finally, and maybe most importantly:

The War with Ourselves:

  • The internal wars and challenges in both China and the US are more important and bigger than external wars and challenges.  These include political wars within the leadership of the country and at all levels of government, wars between different factions.