A 50,000-foot view of the Rise and Fall of Nations

I am currently reading Ray Dalios’ Principals for The Changing World Order, and wanted to use this weeks essay as an opportunity to share a framework I learned from the book, that I am currently thinking about.

In last weeks essay, I spoke about my obsession with studying history, as it adds relativity to the aspects of our world that seem most profound or unique.

One great lesson from reading history is the polarization of cycles - one in particular, being wealth and poverty. In Dalio’s book, he has broken the cycles of global wealth down to five distinct stages, and identified what a country needs to move from one stage to the next. His framework come from studying the rise and fall of empires over the last 2000 years.

Imagine staring down from the sky at a timelapse of human history, with a focus on global power. You would see the concentration of power migrate around the earth - from century to century, continent to continent, world powers would emerge, dominate, fracture and fall.

As powers rise, their national currencies flood the globe in sync with their distribution of power. As they weaken, their currencies ebb away and the next one arrives. Money tells the story of power.

In the 15th and 16th century the Portugese real took over global maritime and commercial trade, until it was displaced by the Dutch guilder in the 17th century. The the British pound took the stage in the 19th century, until the United States dollar in the 20th.

But you can follow the money further, and read the stories of power through the lens of the Byzantine solidus, the Roman denarius, the Chinese wuzhu, and many, many more.

The framework I want share with you today is a 50,000 foot view of the rise and fall of nations in the context of their power and wealth.

Using Dalio’s framework, I created an exercise that I wanted to share with you.

To begin, I have reduced the content of the relevant chapters to bullet points (which I have shared below).

I like to read through the below list, accompanied by Google Maps - world view, open on my browser.

As I read through the list, I try to identify a list of countries I would place in each stage.

To take it further, I will select countries from the globe at random, and try to figure out which stage they belong.

It is a fun exercise, and I recommend you give it a try. Let me know what you find…

Where do you live?

What stage is your country in?

Let me know.

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Stage 1: People and Their Countries Are Poor and They Think of Themselves as Poor

• People live on low incomes with a subsistence lifestyle.
• Money is highly valued, and waste is minimal.
• Debt is minimal, as people are reluctant to lend to them.
• Inherited circumstances and approach to life are significant determinants of wealth accumulation.
• Evolution through this stage is dependent on culture and ability.
• Those advancing work hard, save more than they need, and worry about future scarcity.
• Examples are early-stage emerging countries.

Stage 2: People and Their Countries Are Rich but Still Think of Themselves as Poor

• People maintain financial cautiousness from past experiences.
• High work rate, high savings, pegged exchange rates, and investments in real assets and reserve currency bonds.
• Increased investment in productivity-enhancing resources, like human capital development and infrastructure.
• Parents prioritize their children's education and hard work.
• High savings rates, rapidly rising incomes, and rising foreign exchange reserves.
• Examples are late-stage emerging countries.

Stage 3: People and Their Countries Are Rich and Think of Themselves as Rich

• High incomes make labor more expensive.
• Investments in infrastructure, capital goods, and R&D continue to yield productivity gains.
• Priorities shift to leisure and luxury from work and savings.
• Increased spending on the arts and sciences.
• Decreased work hours and increased expenditure on leisure and luxury goods.
• Countries develop militaries to project and protect their global interests.
• Examples are peak health countries.

Stage 4: People and Their Countries Are Poorer and Still Think of Themselves as Rich

• Debts rise relative to income.
• Workforce becomes expensive due to high earning and spending.
• Decreased savings rates, increased debts, and corners are cut.
• Investment in infrastructure, capital goods, and R&D slows.
• Cities and infrastructure become older and less efficient.
• Increased reliance on reputation rather than competitiveness to fund deficits.
• Large military expenditure often occurs to protect global interests.
• Countries often run twin deficits (balance of payments and government deficits).
• Financial bubbles and wars are common.
• Examples are early declining countries.

Stage 5: People and Their Countries Are Poor and They Think of Themselves as Poor

• Negative cycle of increasing private debts, decreasing private sector spending, asset values, and net worths.
• Increase in government debt, deficits, and central bank money printing.
• Depreciating currencies to ease the pain of deleveraging.
• Poor economic conditions and weak currencies.
• Countries have to compete with cheaper countries in earlier stages of development.
• Decreased global power and influence.
• Long recovery period, with some countries never returning to their peak (e.g., Romans and Greeks), while others have a few times (e.g., Chinese).
• Examples are clearly declined countries...

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