Where is the Economy Going?

By Joseph Stanford 

I want to talk about some ideas from an investor that i’ve been studying recently. His name is Ray Dalio and he is considered by many to be one of the greatest investors in history. Certainly is the most successful hedge fund manager in history. He’s been described as the DaVinci or Steve Jobs of investing. His company Bridgewater that he started out of his apartment at age 26 has been built into an organization that manages >$200Billion in hedge funds and shapes a large deal of how our world works. As a result Ray is

one of the richest men in the world. 

Ray coined the idea that national economies follow long and short term debt cycles i.e. large global oscillations with periods of ~100 years comprised of small localized oscillations with periods of 10 years.

He theorizes that we are in Phase 5 of a 6 phase long term debt cycle. Phase 5 is the phase where the system starts showing signs of decline or collapse that inevitably lead to revolution/civil war. AKA phase 6. Its only after these periods of revolution/civil war that the long term debt cycle restarts at Phase 1. His model has has been validated by many developed nations throughout history. i.e. Chinese dynasties going back 1000’s of years. 

At this point it is important to note that Ray claims government printing of money is not always harmful nor does it always create inflation, but how its a necessary part of the debt cycle and if done properly - in a way that any debt incurred produces an ROI greater than the initial spending, it can have a net positive effect on an economy with little downside. 

Some indicators of advanced stages of Phase 5:

+ Decadence - Money spent by the have’s (as opposed to the have-nots) on luxury does not have a positive ROI and leads to economic instability. Especially if debt is used for purchases of decadence.

+Populism/Extremism - Populism is a political and social phenomenon that appeals to ordinary people who feel that their concerns are not being addressed by elites. It’s common when there are large wealth or opportunity gaps, perceived cultural threats from those with different values both inside and outside the country, and establishment elites in positions of power who are not working effectively for most people. Populists are much more extreme than moderates and tend to appeal to the emotions of the common man. Populists create counter populists which leads to conflict. An example can be seen in the battle between communism and racism in the 1930’s. Today we see this with Trump coming to fame on the right while people such as vs Bernie, AOC, Elizabeth Warren, and Kamala Harris coming to fame on the left. 

+Demonization of those in other classes. Scapegoat classes arise who are commonly believed to be the source of problems. The public assumes the belief that if (fill in the blank) group is destroyed, imprisoned or kept out, the nation will be better off. 

+ Loss of truth in the public domain. Not knowing what is true because of distortions in the media and propaganda increases as people become more polarized, emotional, and politically motivated. People’s emotions are manipulated by the media to gain support and destroy the opposition.

In this late stage of Phase 5, even very capable and powerful people are now too afraid of the media to speak up about important matters or even run for office. Many are censored.

+Protests become increasingly more violent. 

One big difference of today vs the past is the rapid distribution of information (or more accurately disinformation, or propaganda) at scale. With the internet, communication can happen at light speed and with AI or digital algorithms, information can be infinitely varied until the desired result is produced. Today the country is split 50-50 over seemingly unreconcilable lines. Moderates are increasingly in the minority and extremists are increasingly in the majority in each party exists a self-reinforcing pull to greater polarization and increased conflict.

Where does this lead us? Is it still rational to assume he US economy will follow the age old trend of the long term debt cycle? Or has AI and other technologies created a disruptive environment where the old world order has been thrown out and replaced with an unpredictable new one.