For about a month now I had been thinking of a simple way to explain how the global financial system works in relation to political events and conflict, both internal and external. Then I stumbled upon this video on YouTube. It is the least complicated explanation about boom and bust cycles and how they bring about new world orders.
Who is Ray Dalio?
Raymond Thomas Dalio (born August 8, 1949) is an American billionaire investor and hedge fund manager, who has served as co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, since 1985. He founded Bridgewater in 1975 in New York. Within ten years, it was infused with a $5 million investment from the World Bank‘s retirement fund. Dalio is regarded as one of the greatest innovators in the finance world, having popularized many commonly used practices, such as risk parity, currency overlay, portable alpha and global inflation-indexed bond management.
Dalio was born in New York City, and attended C.W. Post College of Long Island University before receiving an MBA from Harvard Business School in 1973. Two years later, in his apartment, Dalio launched Bridgewater. In 2013, it was listed as the largest hedge fund in the world. In 2020 Bloomberg ranked him the world’s 79th-wealthiest person. Dalio is the author of the 2017 book Principles: Life & Work, about corporate management and investment philosophy. It was featured on The New York Times best seller list, where it was called a “gospel of radical transparency.”
Ray Dalio
The operative phrase in Dalio’s video is why nation’s rise and fail in the modern context as opposed to empires in the past when the monarchy was at the height of its power in Europe. This was before the discovery of the New World. This was the period which saw the rise of the Dutch and British empires, which were dominant and the smaller ones such as the Spanish, German, Austro-Hungarian and Ottoman empires.
The US was late in the game and did not bother with establishing its own empire but became an effective practitioner of financial and military hegemony with its “interventions” in other sovereign countries after its rise to power after World War I. It was the financier of both World War I and World War II.
Dalio’s macro context offers the perfect explanation why we have fallen behind our Asian neighbors in terms of economic progress. We have never been able to see through an internal conflict which allowed a new order to emerge. It should have been the revolution against Spain but that was pre-empted by the sale of the Philippines to the US. The Philippine-American War was one of pacification which we never had a chance of winning because the ilustrados already sold us out.
This is why we have failed as a nation. The elite have effectively become our colonizers and the grant of independence in 1946 was not true independence but more of the country becoming a satellite state of the US because of our strategic location and the bases which they set up when we were an American colony. Effectively, it was not independence but a continuation of the status quo.
Ferdinand Marcos had a vision but he also failed in its implementation because of the global economic situation during that period which Dalio goes into detail about when Richard Nixon took the US out of the gold standard which was established at Bretton-Woods in 1947. That is half of it because the other half is clearly attributable to the wrong decisions Marcos made which may have been the immediate effect of his failing health.
The US also opted out of the gold standard because it needed to purchase oil from the Middle East after its domestic reserves ran out. The oil producing countries did not have gold reserves so they were paid in dollars. These dollars would not have much value without gold reserves and thus the decision was made for these countries to be able to print currency on the basis of how much dollars they had in reserve. The oil price shocks brought about by wars breaking out in the Middle East also took its toll on the global economy. In 1973 during the Arab-Israeli war and 1979 with the Islamic Revolution in Iran which ousted the Shah.
Dalio’s big cycle theory is proven by the conflict between Russia and Ukraine, which the US has been intervening in since 2004 and how it has an impact on Russia and China’s developing alliance and on India as well, which has historical ties to Russia and is part of the QUAD security alliance in what the US refers to as the Indo-Pacific region. The US does not want to start a world war but it is using Ukraine as its proxy. Joe Biden has openly called for regime-change during his European trip and the rest of the world continues to wrestle with the economic effects of record high energy and commodities prices brought about by the instability of the US and other country’s sanctions on Russia.
At this point, the US has no fallback position in terms of which country is set to succeed China as the manufacturer for the US. Obama’s pivot to Asia was focused on a trade alliance which had Vietnam as the main player given how it has become a manufacturing powerhouse. But the US strategy was stopped dead in its tracks by the election of Trump over Hillary Clinton. Vietnam has not shown an eagerness to replace China any time soon as well. Asia is the world’s fastest growing market and it is in its best interest to exploit the opportunity in its backyard.
As Dalio points out, the US has dug itself into another hole what with its deficit spending fueling inflation. Prior to the pandemic, there was the “quantitative easing” where interest rates were at near-zero levels and the Federal Reserve pumped liquidity into the economy to keep it from sliding into a recession. China and Japan are the US’ largest creditors. They hold the most dollars in terms of actual cash and Treasury securities because of the trade deficit it has with the US.
China’s liquidity has allowed it to form the Asian Infrastructure and Investment Bank which seeks to fund infrastructure development projects throughout the world. The AIIB is focused on breaking US hegemony in development loans to emerging market countries
It remains to be seen what the US strategy will be to pull itself out of the coming bust cycle. Russia and China have contingencies prepared for any more sanctions the US will impose on them. At the moment, it appears that the US is more focused on regime-change in Russia. China is toeing the fine line with its alliance with Russia and keeping clear of any action the US may interpret as direct support for Russia.
In our case, we will need to strike a balance with our independent foreign policy between the US, China and Russia. Duterte has managed to repair our diplomatic relations with China. He has opened doors with Russia and India with his state visits. It is for this reason that we should elect a President who has a firm grasp of geopolitics like Duterte and also one who can be Machiavellian enough to protect our interests in the emerging new world order.
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