Ray Dalio’s Big Cycle: Empires Fall When They Get Rich, Indebted, and at War With Themselves

Lex Fridman opens with a large question drawn from Dalio’s new book: looking at world history, which force is more important and more lasting, money or power? Dalio does not pick a winner. They go hand in hand, he says. They support each other and they compete with each other. People who have money hold a kind of power that is not only purchasing power. It is also the ability to influence those who hold political power.

He walks the pattern back to sixteenth- and seventeenth-century Europe, where royal families, nobles, and the church sat at the same table, backing one another and wrestling over money and power among themselves. Agricultural land was the productive asset that mattered then. When technology and society changed — machines, the Industrial Revolution, talent coming off the farms — the mix of who sat at the table changed. The dynamic did not. Those with money still deal with those who have political power, around whatever assets produce both.

The main locus of that political power, he adds, is the nation-state. In 1668, after thirty years of war, countries as we know them took shape: borders, control inside those borders, and a rule against intrusion from outside. Inside each country the power is stacked again — central, provincial or state, then municipal — and how those layers coordinate is how the country actually runs.

Dalio’s “archetypal Big Cycle” is built from three long cycles: debt and capital markets, internal order and disorder, and external order and disorder. By *order* he means a system — how the thing actually works. There is an internal order, usually written into a constitution or some set of agreements, and a world order that sets how countries sit relative to one another.

1945 is his cleanest sample. A war is, in his telling, a fight to decide the world order. The winners then built the system we still recognize. In 1944 they built the Bretton Woods monetary system, because gold was money and the United States held 80 percent of the world’s gold, half the world economy, and the dominant military. The United Nations went to New York; the World Bank and the IMF went to Washington. “Classically you have a war to determine whose rules we’re following, and then you have the new order being constructed.”

What usually follows is an extended stretch of peace and prosperity, because nobody wants to fight the dominant power: you know you would lose, there has been a surrender, and the world has been carved up. A lot of debt and a lot of class conflict have also been wiped out. The late-nineteenth-century industrial boom and the post–World War II decades are his examples of peaceful, prosperous stretches led by the dominant world power.

Dalio dates the modern version of the cycle to around 1500, when the Dutch invented what he calls capitalism: the first capital markets, the first stocks, and the first stock market. The mechanism worked because it got resources into the hands of inventive people, just as societies were moving from land to human inventiveness. Prosperity followed. So did wealth gaps, because those who make a lot of money make much more than those who do not, and opportunity gaps, because the rich can educate their children in ways others cannot. Debts grew alongside the gaps.

The Dutch combination was ships that could sail around the world, military power, and a wildly inventive society — he says 25 percent of the world’s new inventions came from the Dutch. Currency and military followed the ships. The more people used the money, the more it became a reserve currency, which then let the country borrow, because savers wanted to hold it. Education, in his definition, is both skill and civility: the ability to deal well together. All of those strengths compounded.

Then success made them expensive. Britain learned shipbuilding from the Dutch and could do it more cheaply. Work ethic tilted toward enjoying the wealth. The reserve-currency privilege buried them deeper in debt. In a downturn the first question is whether there is enough money: coffers bare, spending more than earning, granaries empty rather than stocked. If a rival is also challenging them, internal conflict over wealth sharpens. Internal and external problems together usually produce a civil war or an external war, and then a new world order.

The leading reserve-currency empires he tracks are the Dutch, the British, the American, and the Chinese, though he says the same pattern applies more widely. What he refused to do in the book was lean on words and concepts, because those are subjective. He wanted measurements: education, military power, economic output, trade, and the rest, plotted over five hundred years, so a reader can see the arcs and how they combine. “I didn’t want to make it Ray’s interpretation, because I don’t know if I’m right.”

Those numbers also double as a live health index. For policymakers, he argues, the noisy debate over whether they are doing a good job can be reduced to a simpler test: if the lines on the chart are improving, if the health index is improving, then life is moving in a better direction. Cause-and-effect in the data also becomes a model of probabilities for what comes next. A scorecard in the book compares the United States, China, and Europe today against twenty years ago, and treats the change itself as an indicator of where things are headed.

Education is his most important leading indicator, especially broad-based education drawn from the largest possible population, because you never know where talent will come from. He points to the Confucian exam tradition in the great Chinese dynasties as a meritocratic way of pulling in the whole population, which also creates the sense that the system is fairer than pure privilege. Education, for him, is not only facts. It is civility: how to behave together. On the charts, education leads; inventiveness and technology follow; competitiveness in world markets follows after that, as countries climb from cheap textiles toward higher-value technology.

On the financial measure, Dalio says the United States is borrowing a lot, creating a lot of debt, and printing a lot of money, with a limited capacity to keep doing so. The government spends more than it takes in, so it sells bonds. The world already holds a large stock of dollar bonds because the dollar is the reserve currency, and those bonds now offer significantly negative real returns. More bonds have to be sold than buyers want. The Federal Reserve then faces a choice: raise rates to curtail borrowing, which slows the economy and hurts markets, or fill the gap by monetizing the debt, which inflates goods, services, and financial assets.

China’s balance of payments looks better by his measures. It has displaced the United States as the world’s largest trading country, competitive on exports, but it does not have the world’s reserve currency — which he calls a real blessing for the United States, and a risk the United States is running through this imbalance. History, he says, shows these shifts go slowly and then, eventually, quickly. Internal order is the other major split: a lot of conflict in the United States, less in China, both because it is more autocratic and because it has split the political from the economic. Stay out of politics, and entrepreneurship, new businesses, and capital-raising are open. Whether one likes that bargain is another question; on his conflict measures, the reading is lower.

Conflict is not always a vice in his framework. Revolutionary conflict can be a hellacious civil war in the short run and still a transition to a new beginning; competition that makes things better is productive. His measures try to capture political conflict, social conflict, fighting, and crime as a composite. On education, American public schools have deteriorated even against other developed countries — PISA-type scores around 38th in the world, a big plunge — while the United States still uniquely holds the world’s best universities. China is improving fast, in quantity and in the resources behind it. It turns out about eight times as many computer engineers and has more open data. When he first went to China in 1984, he brought ten-dollar calculators as gifts for high-ranking people, who treated them as miracle devices. Now the race is in quantum computing and AI. “If you take the trajectory of the competitiveness, not just look at the current level, you have a situation where they’re improving at a much faster rate.”

All of those indicators concern him for the United States, with a partial exception for technology, and even there he says America is improving more slowly than China. The punch line is not a forecast of a foreign invasion. “This is all good for the world if the world can get along.” The way to a healthy country, in his compressed history, is to be strong: be financially sound, earn more than you spend. “The United States’s war is with itself. That’s the main war.”

Fridman objects that the advice sounds simple while the indicators have momentum: once education slides and borrowing starts, reversal is hard. Dalio agrees. Indebtedness is politically desirable, because constituencies look at what they get and do not inspect the balance sheet. It is always better, in that incentive, to borrow, spend, and leave the cleanup to the next person. A new president inherits debt, broken infrastructure, and not enough money to fix it. Earning more is not easy. Spending less will not happen. Monetizing the debt is what remains, which is why the cycle keeps appearing.

Fridman wants strong leaders who will fund education, big projects, and new technology. Dalio agrees with the list and then relocates the bottleneck. Everyone has opinions and fights over whose are exactly right. The most important move, he says, is to become bipartisan: a bipartisan cabinet, drawing on moderates from both parties who can work together, so the country is one country and policy serves the majority in the middle rather than the poles. “I think our greatest risk is in not being able to do that.” Real wealth and science have never been better, he adds, but they have to work for the majority of people and stay productive. The alternative is the scary one, and history shows the different ways that alternative has evolved — some of them into wars.

Asked about trajectories toward a cold or hot war with China, Dalio splits the problem. He counts five kinds of war: trade, technology, geopolitical influence, capital, and military. As far as military war goes, he thinks it is only a Taiwan issue — and that is a big issue. The other four will be rough competitions over a long evolution. Taiwan, he says, has long been a sovereignty question for China, with roots in the “hundred years of humiliation” from the 1840s to 1949, when foreign powers came in, including through the Opium Wars.

Starting about fifty years before this conversation, there was an agreement that there is one China, Taiwan is part of China, and reunification would be peaceful. The peaceful reunification has not happened, and in Beijing’s view that is a very big issue. The situation is tense enough, he says, that it could produce a military war or a military accident. If there were a military war, “God help us,” given the new ways of inflicting harm. Cyber war, in his mapping, sits inside military war: inflicting pain through cyber, plus space war, drone warfare, and other forms that are not only traditional or nuclear. If the military war is avoided, the other four competitions still decide who is strongest.

On Xi Jinping, Dalio sketches a biography and a policy arc rather than a cartoon. Xi’s father was an early leader; Xi himself was treated brutally in the Cultural Revolution, came up through the ranks, and is, Dalio says, a very intelligent man. China works in two five-year terms, and they were coming to the end of Xi’s second. He came in aiming at reform toward a more open market economy, at a moment when five major banks lent to state-owned enterprises and local governments with implied government guarantees, and when corruption was viewed as an existential threat. Over ten years, markets opened, capital reached small and medium-sized enterprises, and China built what Dalio calls the second-largest capital markets, where you can raise money, be an entrepreneur, and become a billionaire. In the second term, with Liu He as vice premier, they started dealing with rising debt and a real-estate bubble. Xi’s line was that houses are meant to live in, not to speculate on. The “three red lines” of financial ratios for developers are, in Dalio’s view, a healthy cleanup of bad debts, even when the public reads bankruptcies as pure crisis.

Externally, relations with the United States and others have become much less cooperative and more confrontational. Domestically, the debt problem plus that external shift has produced what they call “core leadership,” more centered on Xi and less openly challenging, on the theory that difficult times favor more centralized decisions. Fridman restates that as yes-men and centralized control. Dalio says the black-and-white version overstates it. Of the Politburo Standing Committee, he counts four more allied with Xi and three less; it is still collective leadership with intense jockeying at the top, more like forcing Democrats and Republicans into the same government and making them work it out.

Fridman presses on freedom of speech and the worry that China’s central management, however good for growth, limits the individual freedom that produces entrepreneurship and wild new things. Dalio answers with a dialectic: everything comes with pros and cons, and the art is taking the benefits of two opposites. Capital markets put money in the hands of motivated entrepreneurs and also produce wealth gaps and debt cycles. Deng Xiaoping’s way of reconciling communism with markets, Dalio recalls, was the line that it does not matter whether the cat is white or black, so long as it catches mice: if it makes the country richer, that becomes the objective.

A Chinese leader once described the philosophical split to him in family terms. The United States is a country of individuals; individualism is its vibrancy — the right to speak, protection of the person, property rights — and organization is built from the bottom up, even inside companies. China, in that telling, is an extension of the Confucian family: hierarchy, the common good first. A high-speed rail that serves the common good will outrank individual protections that stand in the way. Video games are typed and timed for children because that is believed to be good for society; most American parents, Dalio guesses, would say leave it to me and my kids. Data follows the same split: Americans argue over company versus individual control and almost never say the government should hold it; in China the default is government control because that is supposed to be best for society. The stereotype that China has no creativity is, he says, an old one. Since he started going in 1984, real per capita income has increased 26 times, longevity by ten years, and the poverty rate from 88 percent to less than 1 percent on basic survival.

Plato’s *Republic*, he reminds Fridman, already described cycles among democracy, autocracy, and the rest. Each system has a vulnerability. Democracy’s is internal conflict that can run all the way to anarchy. In World War II, four democracies — Germany, Italy, Japan, and Spain — chose autocracy because internal disorder made people want someone to bring order. Democracy’s strength is adherence to rules and checks and balances, which give it the flexibility to change without civil war, but the rules have to be respected. “When the causes that people are behind are more important to them than the system, the system is in jeopardy.” He puts a very high chance on neither side accepting a loss in 2024. The trend did not start in 2020. Populism emerged before Donald Trump was elected; Trump, in Dalio’s account, was elected as a populist because a large share of the population felt the system did not work for them, the first populist leader in a developed country, and the battle of group against group has grown since.

The vulnerability of a communist or autocratic system, he splits in two. Economically, it threatens motivation and productivity; free markets and capital markets have been effective at allocating resources and funding new ideas, which is why China moved toward that dialectic. Politically, the autocratic risk is that enough discontent arises and the system does not have the flexibility to bend, so it breaks. Human nature supplies the rest of the arc. A generation that has been through war does not want another and will abide by the rules; a later generation forgets the horrors and wants to fight, internally and externally, each side cheering the other into conflict. Studying history, he says, is like watching the same movie over and over. The only things that seem to change are the clothes and the technologies.

On Vladimir Putin, Dalio again starts at the end of the last order. Communism ended, the Soviet Union collapsed, a market economy had to be built, and Boris Yeltsin — in Dalio’s description, an alcoholic who had trouble managing — put Putin in. Russia had the classic late-cycle ingredients: broke, people fighting, anarchy, institutions collapsed, ministries not working. The stated need was twenty-five years of stability, democracy, and better capital markets. Putin, as a semi-autocratic leader who from all indications would respect democracy, became popular in democratic elections by bringing peace and stability after the breakup. Russia is not a significant economic power and is a significant military power, now with a strong alliance with China. Ukraine is a sensitivity because many Russians live there and because of NATO on the border. He offers that as an objective layout, not a moral scorecard.

Fridman notes that this way of talking — describing how a system works, why it is working, what the metrics show — is refreshing compared with the usual human-rights indictment. Dalio says he tries not to impute his values. There are intolerable things, he is not denying that, but growing up American among different nationalities and religions taught him to treasure that other people’s business is their business, until you decide where the line is and when your way has to be their way. That is a delicate question internationally, bound up with sovereignty and the Peace of Westphalia. As an investor in about forty countries, he follows government guidance from his own government and others, because disconnecting businesses from China would be economically disastrous and would also cut the understanding that comes from working together, which helps reduce wars.

Fridman, who speaks Russian, says he is sad he will never really know Chinese culture from the inside — language, literature, ordinary people, not just officials. Dalio has gone to China since 1984, more than half his life, without the language, through translators, English speakers, and sending his son to a local school. The thing that scares him most is not disagreement. It is “the not wanting to know the other perspective.” He is trying to sit in the middle and help mutual understanding. Understanding is not agreement. Even if you want to out-compete someone, or go to war with them, knowing what they think is the best thing to have. Enemy mentality makes any attempt at understanding look like taking their side, and that momentum to fight is dangerous.

Henry Kissinger, who praised the book and is thanked in the dedication, is Dalio’s example of that skill at ninety-eight. Geopolitics, Dalio says, is a chess game with multiple players on the same board. Kissinger can sit in each seat, see the position as that player sees it, and stay calm. He is a historian and a practitioner, weaker on economic history — which is why the two of them enjoy talking, each filling the other’s gap — and he thinks in strategy rather than tactics. Fridman adds that when he hears Putin in Russian he infers human hopes that vanish in American conversations. Dalio says it has never failed: listen to a conversation or a speech, then watch the reporting, and the reporter has picked a headline characterization that has very little to do with what was happening.

Dalio admits his view of Bitcoin has changed because Bitcoin itself changed. Something like ten or eleven years earlier, the program was thrown out into the world. It has not been hacked, it has operated, it has come an amazing way, and it has obtained the status of imputed value — maybe the most excited topic among a lot of people. He thinks the world is entering an era of competition among monies, because fiat is being printed and its purchasing power diluted. Bitcoin is part of that contest, but so are other cryptocurrencies, central-bank digital currencies, and even NFTs, which you can own as an investment and prefer to Bitcoin. He has not bought an NFT yet. He wants to, to experience them, and thinks he should mint one so he knows what it feels like. Like pets.com in 2000, some of this will be treasured and some will be trashed. That, he says, is the beauty of a competitive system.

Money has two purposes: a medium of exchange and a storehold of wealth. Ideally it is portable and recognized in other countries. Gold still wins for him, for two reasons. Bitcoin can be traced — who owns it, where it is going — and governments can have that ability; a gold coin is not connected, and “not connected” has benefits in a world where connections can be risky. Gold has also been universally recognized as money for thousands of years and is the third-largest source of money in central-bank reserves, a role he does not think Bitcoin will play. Bitcoin is a small part of his mix. He does not think a million-dollar coin is possible. Bitcoin’s total value is about a trillion dollars, all crypto about $2.2 trillion; the gold that is not jewelry and not in central banks is about five trillion. Bitcoin is therefore worth about 20 percent of that gold stock. He does not think it will be worth more than gold. Twenty percent “sounds kind of about right.” Even if the whole gold-and-gold-equivalent pool doubled, there is still a logical ceiling relative to things like it.

Fridman, having just talked with Elon Musk, asks for a financial analysis of the plan to put a literal Dogecoin on the moon, and whether it might become the reserve currency there and on Mars. Dalio’s first reaction is “that’s cute.” He remembers Musk after PayPal, with something like $180 million or $90 million, asking why they were not going to outer space, and wanting to put a plant and a watering can on the moon or Mars — first life on another world — as an inspiring notion. He respects Musk’s habit of doing other things behind the joke, so he would take the Dogecoin as symbolic and ask what is next. Humor, he and Fridman agree, is part of how ideas spread. Taking everything too seriously slows it down. That, too, is human nature.

Fridman asks for a system for taking notes, pointing at the bolded sentences in Dalio’s books as a way of marking what actually matters. Dalio’s method starts from a stubborn observation: almost everything happens over and over, while people live in the blizzard of the present. After he makes a decision, or right at the time, he pauses, reflects, and writes the principle down — a recipe: how would I make that decision, and what are the criteria. Writing it makes the thinking clearer, and it applies to the next case, because the next case is rarely the first of its kind. People treat a problem as their first of that type, or their first child, when the pattern has already happened plenty of times.

He started doing this about thirty years ago to communicate with people at the company he had set up, so they could debate the principles rather than argue in the fog. He wishes excellent decision makers would write theirs down. Kissinger’s forthcoming book on leadership, he hopes, will not only describe leaders but name the essential elements of a good leader and under what circumstances. Once you think in principles, life is less confusing: you meet a situation, ask what species it is, and recall how to deal with that species. “I wish anybody who’s successful wrote down their principles, or their recipes for making those types of decisions.”

For people still in high school or college, Dalio’s advice is to know yourself, follow the pull of your passion, and make work and passion the same thing, while still considering money because money buys freedom and choice. For about twenty-five years he has used personality-profile tests to help people understand themselves and one another. He built a free one, PrinciplesYou, that takes about thirty minutes, tells you about yourself, and can take a second person’s results and describe the relationship. On the journey you will have mistakes and weaknesses. Do not fight that fact. His principle is that pain plus reflection equals progress. Reflection is how you learn not to make the same mistake again. Other people have strengths where you are weak; working well together is the most effective way to succeed. He likens a life to a video game: challenges, obstacles, temptations, and the need to maximize learning.

Then he compresses it into five steps. First, know your goals: you can have almost anything you want, but you cannot have everything you want, so you have to prioritize. Second, on the way you will hit problems and obstacles; identify them. Third, diagnose them to the root cause, which may be your weakness or someone else’s, and be objective. Fourth, design a way around them. Fifth, implement the design — follow through. That produces new results, which should be better, and you loop. He calls it an evolutionary looping process. You keep doing it, you learn, and you move in the direction you want.

The book is dedicated to his grandchildren and their generation, “who will be participants in the continuation of the story. May the force of evolution be with you.” Fridman asks where that force is taking civilization, and what in the story gives him hope. Evolution, Dalio says, has a direction toward improvement. The greatest force is the human capacity to adapt and invent. The charts in the book — life expectancy, health, the things we think of as better — run upward over time, and you barely see the downturns from depressions and wars. That is justifiable hope. As for becoming a multi-planetary species, his time horizon does not yet have him analyzing that, but he hopes so. Fridman closes with Dalio’s own line: every time you confront something painful, you are at a potentially important juncture, with a choice between healthy and painful truth or unhealthy but comfortable delusion.