Vuk Vukovic Profile picture
Jun 24 46 tweets 25 min read
I read @RayDalio's new book, “The Changing World Order”

in which he claims the US “empire” is in its final stages of decline

Interesting, but with all due respect, he’s wrong.

Here’s why 👇 (long thread 🧵 )
@RayDalio 1/
Dalio's theory falls in the typical Malthusian fallacy trap:

it juxtaposes linear resource production with exponential debt creation (private & public sector overleveraging)

and concludes that this cannot last.

Just like it failed to last in the past for other Empires.
@RayDalio 2/
This, btw, is not a new theory.

Many empire-desolation theories claim that Empires reach their zenith when corruption, overleveraging and/or inflation lead to societal decay.

This then sets the stage for decline.

The Empire becomes vulnerable to inside & outside shocks
@RayDalio 3/
However, what such Malthusian fallacy theories neglect is the impact of rapid technological innovation

(of which the US is a world leader)

and entrepreneurial trial and error

(another US stronghold)

which typically create resource abundance.
@RayDalio 4/
Neither of these - tech innovation or trial-&-error -

were present in previous Empires to the extent they are present in modern-day United States

Previous Empires that Dalio analyzes (and many others that he doesn't) all grew mostly on monopoly power and state conquest.
@RayDalio 5/
There's a reason why the US stock mkt has a positive secular trend

Its firms are attracting investors worldwide, more than any other market in history. Why?

Innovation and trial-&-error that create industrial giants

(+monopoly power and political protection every now&then)
@RayDalio 6/
What’s hurting the US today is not its model of capitalism based on debt,

nor its political polarization, class discrimination or inequality.

These were present in several other times in their history.
@RayDalio 7/
What’s hurting it today is a system of corporate political capture,

that's lowering inter-generational mobility, and exacerbating the inequality problem.

But this too happened before at certain points in time.
@RayDalio 8/
It hurt the system, but it did not destroy it.

Why? Because the US is a politically inclusive open-access society,

with strong entrepreneurial dynamism and trial-and-error democracy.
@RayDalio 9/
And that works better than any top-down system that attempts to kick-start economic growth via massive resource redistribution.

It works only until a certain level, after which the lack of inclusiveness and lack of trial&error lead to social decay
@RayDalio 10/
My point is that Dalio, and similar theories, are focusing on the wrong indicators

They are seeing discord and destruction in open democracies

but democracies persist BECAUSE of this discord and instability
@RayDalio 11/
Discord and instability

(like discrimination, inequality, lack of mobility, cronyism, corporate capture)

are all *temporary* errors

which, within open-access societies,

attract innovative solutions to solve them.
@RayDalio 12/
E.g. Climate change is a hot global issue rn

There are so many powerful initiatives + social pressures,

in addition to policies being implemented,

that are determined on solving this issue.

Never underestimate the innovative capacity of open-access orders.
@RayDalio 13/
Top-down, closed-access, centralized systems with bloated bureaucracies,

will *never* provide such solutions.


because they lack the creative trial-and-error capacity.
@RayDalio 14/

If corruption, cronyism and having an overleveraged financial sector is a problem for a declining Empire like the US,

then China, suffering from each of these (hint: Evergrande)

will hardly overtake the US as the next globally-dominant “Empire”
@RayDalio 15/
Also, people taking about China seldom understand their drivers - they are not the same as those of the West.

For China, during its 5000 year (!) history

it was always, ALWAYS, about inward perfection.

Inward perfection >> outward conquest.
@RayDalio 16/
As a side note, check out Zheng He's 15th century ship compared to that of Columbus. It was bigger and much more advanced.

Yet China never used that tech capacity for conquest and int’l domination. Like the West has.

It will remain focused more inward than outward.
@RayDalio 17/
We do have a multi-polar world, and Asian countries are finally living up to the standard.

And that's a great thing!

Much better than the Cold War era

Trade with Asian countries made everyone - on aggregate - better off
@RayDalio 18/
It’s not about China overpowering the US to become the next global superpower

It already *is* an economic superpower

There doesn’t have to be only one.

This is not Game of Thrones.
@RayDalio 19/
The world is much more complex than that.

Just because the US won’t be the biggest global trade player

doesn’t mean it will perish or lose its int’l dominance

Even if it does, it won’t end in revolutions and discord

After all, neither did the British empire!
@RayDalio 20/
The British empire dissolved b/c their army strength was overpowered by the Germans

No country is even close to challenging the US in military power or funding

Also, back then you could wage wars if you developed superior technology...
@RayDalio 21/
(like Britain did against Holland or Spain in 16th cent, or Germany against Britain in 20th cent)

But waging war to weaken the US in the nuclear age is inconceivable

Just like the US will never attack another nuclear power - Cold War game theory logic still works
@RayDalio 22/
The US will therefore NOT be weaker.

Its importance may drop relative to other ascending countries, but it’s innovation and trial-and-error mentality

combined with its state-of-the-art universities will ensure that it remains the global leader in innovation
@RayDalio 23/
What Dalio’s theory

and all other Malthusian-based theories predicting the decline of the US empire

are missing is the fact that success of a nation is driven by:
@RayDalio 24/

1) An open-access order (North-Wallis-Weingast argument)

2) A politically inclusive society (Acemoglu-Robinson argument)

3) A disruptively innovative society (Schumpeterian argument)

4) A trial-and-error democracy
@RayDalio 25/
An Empire’s true strength is measured by its robustness to shocks

like military or terrorist attacks, or economic crises.

The US withheld these shocks quite successfully thus far
@RayDalio 26/
The Great Depression and the Great Recession were the biggest threats to Western model of capitalist democracy

Both produced alternatives: the first gave rise to national-socialism and communism

The second gave rise to state capitalism
@RayDalio 27/
None of these alternatives have what it takes to overthrow a capitalist democracy:

persistent innovation through trial and error

Trial-and-error helps a falling empire (or society) consolidate and fix itself from within

Like it did in late 19th century US
@RayDalio 28/
The same with worker rights

or women’s rights

or black rights

or gay rights

they were all fought for and achieved within an open and inclusive democracy.

Greater human rights have almost never been achieved under autocratic or semi-autocratic regimes
@RayDalio 29/
If you wanna read more about this,

here’s a few scholars who spent their entire careers on this fascinating issue:

Acemoglu & Robinson (2019): Narrow Corridor

Acemoglu & Robinson (2012): Why Nations Fail

North, Wallis, Weingast (2009): Violence and Social Orders
@RayDalio 30/

Olson (1982) Rise and Decline of Nations

Olson (2000) Power and Prosperity

Clark (2007) A Farewell to Alms

Mokyr (2016) A Culture of Growth

McCloskey (2009) Bourgeois Dignity
@RayDalio 31/
Or, arguments similar to Dalio’s but with more scientific vigor

Ferguson (2011) Civilization (+his books Empire and Colossus) @nfergus

Gordon (2020) The Rise and Fall of American Growth

Morris (2015) Why the West Rules - For Now

Frankopan (2012) Silk Roads @peterfrankopan
@RayDalio @nfergus @peterfrankopan 32/
Or read Taleb’s @nntaleb Incerto

to get an idea what works
(decentralization + freedom)

and what doesn’t
(centralization + suppression)
@RayDalio @nfergus @peterfrankopan @nntaleb 33/
The main problem when you use history and macro theory to make inferences/predictions about the future is that both are falsifiable

You cannot prove many causal relationships in macro or in history.
@RayDalio @nfergus @peterfrankopan @nntaleb 34/
You can use natural experiments in history to make causal inferences about specific situations

But you can seldom generalize them.
@RayDalio @nfergus @peterfrankopan @nntaleb 35/
e.g., a natural experiment in history was when Napoleon was conquering Europe, specifically German city states.

Areas where Napoleon implemented his reforms (Code Civil, abolishing guilds, lowering the power of the Church, etc.) ...
@RayDalio @nfergus @peterfrankopan @nntaleb 36/
...had much better economic outcomes 100 years later compared to similar neighboring areas where Napoleon didn’t implement these reforms

That’s a natural experiment of history.
@RayDalio @nfergus @peterfrankopan @nntaleb 37/
Another example was the African slave trade

Areas with more coastal exposure have worse economic outcomes than similar areas without coastal exposure.


Western expropriators enslaved more people from areas where it was easier to transfer them to a boat.
@RayDalio @nfergus @peterfrankopan @nntaleb 38/
Any grand conclusions made by comparing relative levels of GDP through time, cross-country are likely to be dead wrong.

An interesting story, that’s all.
@RayDalio @nfergus @peterfrankopan @nntaleb 39/
In conclusion,

Dalio gives a very interesting historical overview of many past and current empires.

But does NOT provide a working theory on why nations fail.
@RayDalio @nfergus @peterfrankopan @nntaleb 40/
His theory carries zero causal implications,

what he sees in the US today is exactly what we’ve seen there in the late 19th century (robber barons), the 1920s or the 1960s,

periods after which the US underwent massive economic expansion
@RayDalio @nfergus @peterfrankopan @nntaleb 41/
Driven by debt, yes, but debt that was financing innovation and entrepreneurial spirit

Also, the same overleveraging issues he sees in the US are present in China.

They're just hidden a bit better.

Which doesn’t mean China will fail.
@RayDalio @nfergus @peterfrankopan @nntaleb 42/
Nor does it imply it will become the dominant single global superpower (like the US overtaking the British Empire)

China will continue its ascent and increase its importance.

But it’s downfall, if it happens, will not be due to debt-induced cycles
@RayDalio @nfergus @peterfrankopan @nntaleb 43/
It will be due to internal political pressures.

If they become more open
- not a democracy, but more like a Singapore-based inclusive political system (which tends to work well in Asia) -

they are more likely to paper the cracks in their debt-driven economic model.
@RayDalio @nfergus @peterfrankopan @nntaleb Thanks for reading this long thread!

Read Dalio’s book (or just watch the video), and let me know if you agree or disagree.

And give me a follow @wolf_vukovic if you liked this.
Lots of great comments, thank you all!

Addressing some of them here:

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More from @wolf_vukovic

Jun 25
A lot of great comments and constructive criticism over yesterday's thread - thank you all!

A few more points I wanted to clarify...

The main one being - this is not a "this time is different" argument, quite the opposite actually :)

🧵 (much shorter)
A "this time is different argument" would mean

that Dalio's Big Cycle is a historical stylized fact, while I'm claiming that this time it doesn't apply.


My argument was that the Empires' Big Cycle framework is not an accurate portrayal of historical cause & effect.
The two-dimensional framework Dalio is using,

similar to the standard Malthusian argument,

is wrong.

Because he, and many who succumb to this fallacy, are focusing on the wrong indicators.
Read 15 tweets
Apr 12
Bullish or bearish?

Let's see 👇 🧵
1/ Let's start with the bearish arguments.

Rampant #inflation is killing consumer confidence

Which is down to recession-time levels

(source: Uni of Michigan)
2/ Also, consumer expectations on their financial situation one year from now are close to all time lows

The 3-month moving average is worse than during the Great Recession

Very close to 1970s stagflation...
Read 25 tweets
Mar 11
Yesterday's 7.9% CPI didn't even take into account the escalation in prices due to the war in Ukraine and Russian sanctions.

Inflation will, unfortunately, continue to rise despite earlier trends of supply chain easing 😩
🧵 👇
In my previous threads I first explained why the source of inflation this time wasn’t entirely monetary:

...followed by why the supply chain issues were the main culprit, and when they might ease:

Read 21 tweets
Feb 26
Since Russia invaded Ukraine on Thu, S&P500 went from -2.5% to +1.5% in one day, continuing +2% on Fri (cum +6%!)

NASDAQ grew a cumulative +8% since Thu dip!

Why are markets rallying during a terrible war in Europe?

Very quick thread 👇 🧵
1/ Are investors just brutal warmongers looking to benefit from other people's misery?

(Well, some might be, but not most)

Markets are forward looking; investors anticipate medium to long-term consequences of major events.

Investors also *hate* uncertainty.
2/ In this case, notice which expectations had changed the last few days.

Monetary policy, first and foremost.

Investors now anticipate a 25bps rate hike in March, rather than 50bps hike.

(calculations by @steve_hanke )
Read 8 tweets
Feb 11
Why were supply chain issues such a huge driver of inflation?

And when might they ease out?

Everything you want to (need to) know about the supply chain crisis.

Thread 🧵 👇
1/ In my previous thread I explained why I think the 7.5% inflation does NOT have a strictly monetary origin.

What is its origin?

Over the past year, prices are up mainly due to a post-COVID driven mismatch in supply and demand.

2/ After COVID there was a huge surge in demand to get us back to 2019 lvls of spending

When somth falls rapidly as it did in 2020, and goes up rapidly in 2021, there will be consequences.

The supply chain simply couldn’t cope with this convexity.
Read 21 tweets
Feb 8
“Inflation is always and everywhere a monetary phenomenon.”

...said Milton Friedman.

Not this time though. This time, Friedman is wrong.

Here’s why 🧵 👇

What Friedman meant was that inflation was always caused by an increase of money supply.

In the vast majority of historical cases this was true:

Germany in 1920s,
Zimbabwe in '08,
Venezuela in '19,
Turkey in '21, etc.

Not in present-day US, though.

But we’ve all seen the huge increase in M1 money supply in the US, right?

There must be causality here.

Not really, no.

This graph is actually very misleading (there was a change in methodology in May 2020), but more on that later.
Read 21 tweets

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