Ray Dalio: The Coming Great Conflict

“From studying 50-plus civil wars and revolutions, it became clear that the single most reliable leading indicator of civil war or revolution is bankrupt government finances combined with big wealth gaps.”

By Ray Dalio at Time: A similar sort of conflict is happening internationally—i.e., there is a classic great power conflict with the two big sides internationally being the China-Russia side and the US -G7-Australia side and regional conflicts are being sorted out by nations in alliances with these two big sides. But that is a subject for another day. Let’s now focus on how the internal conflict dynamic typically works and apply that template to what’s happening to internal politics with this excerpt from Chapter Five of Principles for Dealing with the Changing World Order.

Stage 5: When There Are Bad Financial Conditions and Intense Conflict

The most important influence that transpires in a Big Cycle is that of debt, money, and economic activity. Because I covered that cycle comprehensively in Chapters 3 and 4, I won’t explain it here in detail. But to understand Stage 5, you need to know that it follows Stage 3, in which there is peace and prosperity and favorable debt and credit conditions, and Stage 4, in which excess and decadence begin to bring about worse conditions. This process culminates in the most difficult and painful stage—Stage 6—when the entity runs out of money and there is typically terrible conflict in the form of revolution or civil war. Stage 5 is the period during which the interclass tensions that go along with worsening financial conditions come to a head. How different leaders, policy makers, and groups of people deal with conflict has a major impact on whether the country will undergo the needed changes peacefully or violently.

You can see signs of this happening now in a number of countries. Those that have adequate financial conditions (i.e., have incomes that are greater than their expenses and assets that are greater than their liabilities) are in relatively good shape. Those that do not are in relatively bad shape. They want money from the others. The problem is that there are many more who are in bad shape relative to those that
are in good shape.

You can also see that these different conditions are big drivers of the differences in what is now happening to most aspects of these countries, states, cities, companies, and people—e.g., their education, healthcare, infrastructure, and well-being. You can also see big cultural differences in how countries approach their stressful conditions, with some approaching them more harmoniously than others who are more inclined to fight.

Because Stage 5 is such a pivotal stage in the internal cycle and because it’s the stage that many countries, most importantly the US, are now in, I will devote some time to going through the cause/effect relationships at play during it and the key indicators to watch in examining its progression. Then I will turn more specifically to where the United States stands.

The Classic Toxic Mix

The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and non-debt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.

That confluence typically brings about disorder, conflict, and sometimes civil wars. The economic shock can come about for many reasons, including financial bubbles that burst, acts of nature (such as pandemics, droughts, and floods), and wars. It creates a financial stress test. The financial conditions (as measured by incomes relative to expenses and assets relative to liabilities) that exist at the time of the stress test are the shock absorbers. The sizes of the gaps in incomes, wealth, and values are the degrees of fragility of the system. When the financial problems occur, they typically first hit the private sector and then the public sector. Because governments will never let the private sector’s financial problems sink the entire system, it is the government’s financial condition that matters most. When the government runs out of buying power, there is a collapse. But on the way to a collapse there is a lot of fighting for money and political power.

More here.