Bridgewater why countries succeed and fail economically

This change in the prevailing psychology occurs primarily because a new generation of people who did not experience the bad times replaces those who lived through them. Signs of this change in mindset are reflected in statistics that show reduced work hours e. Countries at this stage and in transition to the next typically become the great importers5 and have symbiotic relationships with the emerging countries that are the great exporters, especially of low value- added goods.

At the same time, the businesses and investors of countries in this stage increasingly look for higher returns by investing in emerging countries where labor costs are cheaper which further supports the symbiotic relationship, and their capital markets and currencies develop blue-chip status and are actively invested in by both domestic and foreign investors.

They also attract the money of investors who seek safety rather than high returns because they are perceived as safe, blue-chip countries. In this stage, capital raising and financial market speculation picks up, largely motivated by both the development of these markets and the good returns that they have provided up to this point. With this development of their capital markets, increasingly spending and investing are financed by borrowing as the prior prosperity and investment gains are extrapolated.

They typically develop their militaries in order to project and protect their global interests. Prior to the midth century, large countries at this stage literally controlled foreign governments and created empires of them to provide the cheap labor and cheap natural resources to remain competitive.

In this stage they are on top of the world and they are enjoying it. I call these countries early stage developed countries. This is the leveraging up phase — i. The psychological shift behind this leveraging up occurs because the people who lived through the first two stages have died off or become irrelevant and those whose behavior matters most are used to living well and not worrying about the pain of not having enough money.

Because the people in these countries earn and spend a lot, they become expensive, and because they are expensive they experience slower real income growth rates. Since they are reluctant to constrain their spending in line with their reduced 5 Japan in was an exception 6 Again, Japan in was an exception. Because their spending continues to be strong, they continue to appear rich, even though their balance sheets deteriorate. Their cities and infrastructures become older and less efficient than those in the two earlier stages.

Their balance of payments positions deteriorate, reflecting their reduced competitiveness. They increasingly rely on their reputations rather than on their competitiveness to fund their deficits. They typically spend a lot of money on the military at this stage, sometimes very large amounts because of wars, in order to protect their global interests.

In the last few years of this stage, frequently bubbles occur. By bubbles we mean rapidly increasing debt financed purchases of goods, services and investment assets. These bubbles emerge because investors, businessmen, financial intermediaries, individuals and policy makers tend to assume that the future will be like the past so they bet heavily on the trends continuing. They mistakenly believe that investments that have gone up a lot are good rather than expensive so they borrow money to buy them, which drives up their prices more and reinforces this bubble process.

Bubbles burst when the income growth and investment returns inevitably fall short of the levels required to service these debts. More often than not they are triggered by central bankers that were previously too easy i. I call these countries late stage developed countries. While, countries of all sizes can go through this stage, when big countries go through it they are typically approaching their decline as great empires.

After bubbles burst and when deleveragings occur, private debt growth, private sector spending, asset values and net worths decline in a self-reinforcing negative cycle. In this way, their central banks and central governments cut real interest rates and increase nominal GDP growth so that it is comfortably above nominal interest rates in order to ease debt burdens. As a result of these low real interest rates, weak currencies and poor economic conditions, their debt and equity assets are poor performing and increasingly these countries have to compete with less expensive countries that are in the earlier stages of development.

Their currencies depreciate and they like it. As an extension of these economic and financial trends, countries in this stage see their power in the world decline. These cycles have occurred for as long as history has been written.

For example, while families lived in houses that were different ages ago, the cycle of children being raised by parents until they are independent, at which point they work and have their own children which they do until they get old, stop working and die, was essentially the same thousands of years ago. Similarly, while monetary systems were different ages ago e. They are also essentially irrelevant to rulers who typically have time horizons of a couple of years.

As a result, they are not controlled, which is the main reason that they are destined to occur. Example: The Ascent and Decline of the British Empire We will explain our view of the ascent and decline of the British Empire both because it is a good example of the previously described process and because it sets the stage for the rise and early decline of the US Empire and what we believe will be the rise and decline of the Chinese Empire.

As with all history, different people will attribute the ascent and decline of the British Empire to different causes, so keep this in mind when reading our theory. It is pretty well agreed that the ascent of the British Empire began in the late 18th century when the Industrial Revolution began and the decline occurred in the middle of the 20th century when World War II ended, so its cycle took place over years.

But there are disagreements about why these things occurred. In our opinion, from before then until Great Britain was in stage 3 of the previously described cycle, from to it was in stage 4 and from until around it was in stage 5 of the cycle. We will show why we believe this in the charts that follow. To begin, the chart below shows the geographic size of the British Empire going back to While countries of all sizes can go through this stage, when big countries go through it they are typically emerging into great world powers.

I call these countries late-stage emerging countries. At the same time, the prevailing psychology changes from a putting the emphasis on working and saving to protect oneself from the bad times to b easing up in order to savor the fruits of life.

This change in the prevailing psychology occurs primarily because a new generation of people who did not experience the bad times replaces those who lived through them. Signs of this change in mindset are reflected in statistics that show reduced work hours e.

Countries at this stage and in transition to the next typically become the great importers5 and have symbiotic relationships with the emerging countries that are the great exporters, especially of low valueadded goods. At the same time, the businesses and investors of countries in this stage increasingly look for higher returns by investing in emerging countries where labor costs are cheaper which further supports the symbiotic relationship, and their capital markets and currencies develop blue-chip status and are actively invested in by both domestic and foreign investors.

They also attract the money of investors who seek safety rather than high returns because they are perceived as safe, blue-chip countries.

In this stage, capital raising and financial market speculation picks up, largely motivated by both the development of these markets and the good returns that they have provided up to this point. With this development of their capital markets, increasingly spending and investing are financed by borrowing as the prior prosperity and investment gains are extrapolated.

Countries that are large and in this stage almost always become world economic and military powers. They typically develop their militaries in order to project and protect their global interests. Prior to the midth century, large countries at this stage literally controlled foreign governments and created empires of them to provide the cheap labor and cheap natural resources to remain competitive. In this stage they are on top of the world and they are enjoying it.

I call these countries early stage developed countries. This is the leveraging up phase — i. The psychological shift behind this leveraging up occurs because the people who lived through the first two stages have died off or become irrelevant and those whose behavior matters most are used to living well and not worrying about the pain of not having enough money. Because the people in these countries earn and spend a lot, they become expensive, and because they are expensive they experience slower real income growth rates.

Since they are reluctant to constrain their spending in line with their reduced 5 6 6 Japan in was an exception Again, Japan in was an exception. Because their spending continues to be strong, they continue to appear rich, even though their balance sheets deteriorate.

Their cities and infrastructures become older and less efficient than those in the two earlier stages. Their balance of payments positions deteriorate, reflecting their reduced competitiveness. They increasingly rely on their reputations rather than on their competitiveness to fund their deficits.

They typically spend a lot of money on the military at this stage, sometimes very large amounts because of wars, in order to protect their global interests. In the last few years of this stage, frequently bubbles occur. By bubbles we mean rapidly increasing debt financed purchases of goods, services and investment assets. These bubbles emerge because investors, businessmen, financial intermediaries, individuals and policy makers tend to assume that the future will be like the past so they bet heavily on the trends continuing.

They mistakenly believe that investments that have gone up a lot are good rather than expensive so they borrow money to buy them, which drives up their prices more and reinforces this bubble process. Bubbles burst when the income growth and investment returns inevitably fall short of the levels required to service these debts. More often than not they are triggered by central bankers that were previously too easy i.

I call these countries late stage developed countries. While, countries of all sizes can go through this stage, when big countries go through it they are typically approaching their decline as great empires. After bubbles burst and when deleveragings occur, private debt growth, private sector spending, asset values and net worths decline in a self-reinforcing negative cycle. In this way, their central banks and central governments cut real interest rates and increase nominal GDP growth so that it is comfortably above nominal interest rates in order to ease debt burdens.

As a result of these low real interest rates, weak currencies and poor economic conditions, their debt and equity assets are poor performing and increasingly these countries have to compete with less expensive countries that are in the earlier stages of development. Their currencies depreciate and they like it. As an extension of these economic and financial trends, countries in this stage see their power in the world decline.

These cycles have occurred for as long as history has been written. For example, while families lived in houses that were different ages ago, the cycle of children being raised by parents until they are independent, at which point they work and have their own children which they do until they get old, stop working and die, was essentially the same thousands of years ago.

Similarly, while monetary systems were different ages ago e. They are also essentially irrelevant to rulers who typically have time horizons of a couple of years.

As a result, they are not controlled, which is the main reason that they are destined to occur. This simple but not simplistic video by Ray Dalio, Founder of Bridgewater Associates, shows the basic driving forces behind the economy, and explains why economic cycles occur by breaking down concepts such as credit, interest rates, leveraging and deleveraging.

This article is for folks who are interested in economics, especially about how monetary and fiscal policy will work differently in the future.

This report is an examination of populism, the phenomenon how it typically germinates, grows, and runs its course. An in-depth look at productivity and structural reform and what it means for whether countries succeed or fail. Dalio is sharing a briefing paper that he and his research team prepared. To ask other readers questions about Productivity and Structural Reform , please sign up.

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