Bridgewater Associates founder Ray Dalio's lengthy article: "Civil War?"

"Local time on Monday, Ray Dalio, the founder of Bridgewater Associates, published a long article titled 'Civil War?' Dalio analyzed the 'Fifth Stage' and 'Sixth Stage' of the internal cycle of a country. According to Dalio's analysis, the Fifth Stage is the eve of class conflict erupting due to fiscal deterioration, and it has critical significance in the internal cycle of a country, with the United States currently in this stage. Dalio summarized the "toxic combination" that triggers major internal conflicts, including: the country and the people facing fiscal difficulties (such as large debts and unfulfilled obligations); huge income, wealth, and values gaps within society; and severe economic shocks. These "toxic combinations" are usually accompanied by other problems. The more the following factors occur, the greater the likelihood of serious conflicts (such as civil wars or revolutions): social tensions escalate, lack of empathy and connections between the rich and the poor; political polarization, a decline in moderates, and the rise of populist forces; bureaucratic dominance, hindering effective reform; media distortion, loss of truth, manipulation of information for struggle; weakening rule of law, people focusing more on emotions and stances, and abandonment of rules; and frequent violent protests. The article emphasizes that the solution is not violent revolution, but strong and peaceful reformers. To avoid catastrophic collapse, a country must act during the Fifth Stage to promote truly effective reforms that benefit all, achieve fairer distribution of wealth and opportunities, and maintain social cohesion. These leaders need to have the ability to unite the whole society, rather than intensifying conflicts. Dalio warned against blindly believing that "this won't happen here." Successful countries are those that can continuously self-repair and adapt to changes during the cycle. Dalio's latest article comes at a time of escalating turmoil in Los Angeles: according to Xinhua News Agency, the California state government filed a lawsuit on the 9th, requesting the court to rule that the presidential memorandum issued by President Trump on the 7th and the order of the Department of Defense to deploy the California National Guard to the Los Angeles area are illegal, and to revoke the relevant orders. Meanwhile, President Trump publicly supported the suggestion to arrest California Governor Newsom, stating that deploying the National Guard was a good decision and he did not want a civil war. The following is an excerpt from Dalio's latest lengthy article: Seeing what is happening now feels like watching a movie I have seen many times before. My perspective comes from over 50 years of experience as a global macro investor and my study of the past 500 years of history. In my 2021 book 'Principles for Dealing with the Changing World Order,' I describe a template that can be used to contrast with actual developments to help understand how the world order has evolved. I also explain the eternal and universal cause-effect relationships that drive changes in the world order during the major cycles. This template leads me to believe that there is a high probability of convergent collapses in the monetary system, domestic political order, and international geopolitics. Unfortunately, the events happening in reality closely match this template. The purpose of this article is to help you understand recent developments from the perspective of this template, especially how to understand the erosion of domestic order (which I describe as a form of 'civil war,' but this does not necessarily mean people will kill each other). Chapter Five of my book describes the 'Great Cycle of Internal Order and Chaos.' This process unfolds through a large cycle consisting of six stages, each with its own unique features. Given the government's debt issues and the unrest in Los Angeles being suppressed by President Trump deploying the National Guard, I think it is appropriate to remind everyone of this template now. If you are interested in the complete cycle and all six stages, you should read the full Chapter Five. It's too long for me to elaborate on here. But because I believe we are currently in the Fifth Stage, the 'pre-civil war stage,' I will share my description of this stage and the Sixth Stage, the 'civil war stage.' I believe these contents provide a good guide to what may happen in the future. As always, I welcome any questions or comments you may have. Fifth Stage: When fiscal conditions deteriorate and conflicts intensify The most core factors in the major cycle are debt, currency, and economic activity. I have detailed this cycle in Chapters 3 and 4, so I will not go into detail here. However, to understand the Fifth Stage, one must understand its connection after the Third Stage (peaceful prosperity, good debt and credit conditions) and the Fourth Stage (luxurious decay, conditions starting to deteriorate). This process eventually leads to the most painful stage - the Sixth Stage, where funds are depleted, often accompanied by the outbreak of a revolution or civil war. And the Fifth Stage is the eve of a class conflict erupting due to fiscal deterioration. How different leaders and groups handle conflicts will determine whether a country can undergo peaceful transformation or turn to violence. Many countries are showing this trend today. Countries that are financially healthy (income exceeds expenses, assets exceed liabilities) are relatively better off; otherwise, they are in dangerous situations. They want to 'take money' from those with a stable economy. The key issue is that there are a few who are financially healthy compared to the majority in bad situations. This uneven situation is the main driving force behind the differences in various aspects (such as education, healthcare, infrastructure, and overall well-being) among countries, states, cities, companies, and individuals. At the same time, there are significant cultural differences in how countries react to these pressures, with some countries tending to respond in more harmonious ways, while others tend to confront. Because the Fifth Stage has critical significance in the internal cycle of a country and many countries (most notably the United States) are currently in this stage, I will spend some time detailing the cause-and-effect mechanisms in this stage and the key indicators to focus on when observing its evolution. I will then discuss more specifically the state in which the United States currently finds itself. The classic 'toxic combination' The 'toxic combination' that triggers major internal conflicts includes: The country and the people facing fiscal difficulties (such as large debts and unfulfilled obligations); Huge income, wealth, and value gaps within society; Encountering severe economic shocks. These multiple factors are"The gathering usually brings chaos, conflicts, and even civil wars. Economic shocks can be caused by various reasons, including the burst of financial bubbles, natural disasters (such as pandemics, droughts, and floods), and wars. This kind of shock is like a financial stress test. The financial situation during stress testing (measured by the relationship between income and expenses, assets and liabilities) is like a buffer. The greater the gap between income, wealth, and value, the more fragile the system is.When financial problems occur, the private sector is usually the first to be affected, followed by the public sector. Because the government will never let the financial problems of the private sector drag down the entire system, the government's financial situation is key. When the government loses purchasing power, collapse occurs. But before collapse happens, there will be a lot of struggles around money and political power. By studying more than 50 civil wars and revolutions, it can be seen clearly that the most reliable leading indicators of civil war or revolution are government financial bankruptcy and the coexistence of huge wealth gaps. This is because when the government loses financial capacity, it cannot support private entities that need to be rescued to maintain the functioning of the system (as the US government did in late 2008), nor can it purchase necessary supplies, nor can it hire people to do necessary work. The government loses its "power." A typical sign in the "fifth stage," as well as a leading indicator of loss of borrowing and spending capacity, and one of the triggering factors to enter the "sixth stage," is the government's huge deficit, where the government deficit is enormous, and debt exceeds the purchasing willingness of all buyers except the national central bank. When a government that cannot print money has to raise taxes and cut spending significantly, or when a government that can print money prints a lot of money and buys government debt, this leading indicator is activated. Specifically, when the government is financially depleted (i.e., with a large deficit, high debt, and dried up financing channels), the options are extremely limited: either raise taxes and cut spending drastically, or print a lot of money, leading to currency devaluation. Governments that can print money usually choose to do so because it is a relatively "painless" path, but this causes investors to flee depreciating currency and debt. Governments that cannot print money must raise taxes and cut spending, which leads to rich people fleeing because they can't bear the higher taxes and loss of services. If these areas that cannot print money also have severe wealth inequality, it often leads to some form of civil war or revolution. As of writing this document, this late-cycle debt dynamic is occurring at the federal and state levels in the United States, with the main difference being that state governments cannot print money to repay debt, while the federal government can. Many state and federal governments are facing significant deficits, heavy debts, and massive wealth disparities, and the Federal Reserve has the ability to print money. The Federal Reserve prints money and buys federal government debt, supporting federal government spending far exceeding income. Although this helps the federal government and its beneficiaries, it also leads to significant losses in real purchasing power for holders of dollars and dollar debt. Regions with the greatest wealth gap, heaviest debt, and most severe income decline (including cities, states, and countries) are most likely to erupt in conflict. Interestingly, the states and cities in the US with the highest average income and wealth levels are also the areas with the heaviest debt and largest wealth gaps, such as San Francisco, Chicago, New York City, Connecticut, Illinois, Massachusetts, New York, and New Jersey. Faced with these situations, there must be cuts in spending or a way to raise more funds. The next question is: who will bear the cost of solving these problems, the "rich" or the "poor"? Obviously, it cannot be the poor. Cutting spending is most unbearable for the poorest people, so more taxes must be levied on those who can pay, exacerbating the risk of some form of civil war or revolution. But when the rich realize they will be taxed to repay debts and cover deficits, they usually choose to leave, triggering a process of "hollowing out." Currently, this is driving population shifts between some states in the US. If the economic situation worsens, this process will accelerate. These factors largely drive the development of tax cycles. History shows that in an environment with high wealth inequality and poor economic conditions, increased taxation and spending cuts are the strongest leading indicators of some form of civil war or revolution. It should be clear that these changes are not necessarily in the form of violence, although they can lead to violence. I see these cycles happening in my own life. For example, I live in Connecticut, the state with the highest average income in the US, but also with the most severe wealth and income inequality and one of the highest per capita debts and pension deficits. I see the rich and poor focusing on their own lives without much concern for each other, as they have little interaction. Through interactions with the rich in our community and the work my wife and I do to help high school drop-outs in disadvantaged communities, I catch a glimpse of the lives of both groups. I see the extremely poor living conditions in poor communities, and the wealthy (who seem wealthy and extravagant in the eyes of the poor) actually not seeing themselves as wealthy. I see them all struggling with their difficulties - the rich with work-life balance, education for their children, etc.; the poor with income, food, avoiding violence, and providing their children with quality education. I see these two groups more likely to hold critical, stereotypical views of each other, tending to dislike each other rather than seeing each other as members of the same community in need of assistance. Due to these stereotypes and the feeling of the rich that they are not wealthy and that the poor are not worthy of their support, mutual support is becoming very difficult. I am concerned about the future because the current situation could worsen. I witness the health and financial impacts of the COVID-19 pandemic revealing the dire conditions in poor communities and exacerbating the fiscal gap that could trigger toxic combinations. Averages are not as important as the number of suffering people and the power they have. Those who support policies that benefit the overall, such as free trade, globalization, and technological advancements replacing manpower, but do not consider what could happen if the distribution of overall benefits cannot benefit the majority, overlook a key fact: the overall itself is in danger. To achieve peace and prosperity, society must have the productivity that benefits the majority. Do you think we have achieved this today? History shows that when the government goes bankrupt, a path to raise productivity that benefits the majority is effective: restructuring and/or devaluing enough existing debts and non-debt obligations. This is a common practice in the fifth and sixth stages. Although this kind of restructuring or devaluation is usually painful in the present, it can reduce the burden of debt on the overall population.Take on the responsibility and create conditions for reconstruction.One of the key factors for success is that newly created debt and currency must be used to improve productivity, bring good returns on investment, rather than being distributed unconditionally without bringing production or income growth. If the latter happens, the currency will depreciate to the point of losing almost all purchasing power, and neither the government nor anyone else will benefit from it. History shows that borrowing money for projects that can significantly increase productivity and provide a return on investment higher than the borrowing costs can improve living standards and repay debts, making such policies effective. If funds for financing debts are insufficient, central banks printing money and acting as lenders of last resort is completely acceptable, as long as these funds are used for investments that provide sufficient returns and can repay debts. History and logic both show that investing in education at all levels (including vocational training), infrastructure, and fruitful research is very effective. For example, large-scale education and infrastructure programs almost always succeed, although the results of these investments usually take a long time to become apparent. In fact, improvements in education and infrastructure, even if financed by borrowing, are almost always key factors in the rise of empires, while the decline in the quality of such investments is almost always a precursor to the decline of empires. If done properly, these interventions can completely offset the "toxic mix" effect. The "toxic mix" is usually accompanied by other issues. The more these factors are present, the greater the likelihood of serious conflicts (such as civil war or revolution) occurring. Decadence In the early stages of a cycle, time and money are usually spent more on productive activities, but in the later stages, time and money are more often spent on pleasure, such as luxury residences, art, jewelry, and fashion. This phenomenon begins in the fourth stage, when such expenditures are seen as fashionable, but by the fifth stage, they begin to seem distasteful. Extravagant spending is usually financed by borrowing, exacerbating the deterioration of financial conditions. The psychological changes that occur alongside this transition are equally understandable: the wealthy believe they should be able to freely use the money they earn to enjoy life, while the poor, suffering hardships, see such consumption as unfair and selfish. In addition to intensifying social resentment, extravagant consumption (relative to savings and investment) also weakens productivity. Where a society puts its money is crucial. If it is spent on investment projects that can increase productivity and income, the future will be brighter; if it is spent on consumables that do not increase productivity or income, the future will deteriorate. Bureaucracy In the early stages of an internal order cycle, bureaucracy is low; in the later stages, bureaucracy becomes highly inflated, making it increasingly difficult to make rational and necessary decisions. This is because as society develops, things become more complex, and eventually even some obviously good things cannot be advancedoften requiring revolutionary change to address them. In a legal and contractual system, this problem can be particularly acute, as the law itself may hinder the progress of obviously beneficial initiatives. Here is an example I have personally experienced, as my wife and I care deeply about it. Due to the fact that the U.S. Constitution does not list education as a federal government responsibility, education is mainly the responsibility of state and local governments, with school funding coming primarily from local tax revenues in cities and towns. While there are variations between states, children in affluent cities in affluent states generally receive a much better education than children in poorer cities in poorer states. Although most people believe that children should have equal educational opportunities, the reality is blatantly unfair and inefficient. However, this institutional structure is deeply entrenched in the political system and is almost impossible to change without revolutionary reform. There are many examples where bureaucracy hinders wise and effective action, but I do not have enough time or space to list them all. In today's America, this has become a serious issue. Populism and Extremism In times of chaos and discontent, strong-willed leaders who are anti-elitist and claim to fight for the common people often rise to power, these are known as populists. Populism is a political and social phenomenon that appeals to ordinary people who feel that their concerns are not being addressed by the elite. It often emerges in contexts where wealth and opportunity gaps widen, different values at home and abroad are seen as cultural threats, and the "establishment elite" hold power but fail to effectively advocate for the welfare of the masses. When these factors stir the anger of ordinary people, populists take advantage of the situation. These populists can come from the left or the right, often holding more extreme political views than centrists and appealing to the emotions of the common people. They tend to be confrontational rather than cooperative, and tend to be exclusive rather than inclusive. This can lead to intense conflicts between left-wing and right-wing populists due to irreconcilable differences. The extent of extremism manifested in the "revolutions" they lead varies. In recent years, Trump's election in the U.S. in 2016 reflected the rise of right-wing populism, whereas the popularity of figures like Sanders, Elizabeth Warren, and AOC represents the influence of left-wing populism. Populism is gaining momentum in political movements in multiple countries. Observing populism and political polarization as key indicators, the more severe populism and polarization are, the more likely a country is in the fifth stage, closer to civil war and revolution. In the fifth stage, centrists become a minority; by the sixth stage, centrists are almost non-existent. Class Struggle In the fifth stage, class struggles intensify. This is because in times of distress and heightened conflict, people tend to categorize others based on stereotypes of class, viewing these classes as enemies or allies. This phenomenon becomes increasingly pronounced in the fifth stage, and may escalate into an extremely dangerous situation by the sixth stage. A characteristic of the fifth stage, which worsens in the sixth stage, is the demonization of other classes, which often leads to one or more classes becoming scapegoats and widely perceived as the root of the problem. The result is the impulse to exclude, imprison, or even eliminate members of these classes, which can occur in the sixth stage. Racial, ethnic, and socio-economic groups are often demonized in situations like this.Demonized under constant socio-economic pressure."Demonization" and "scapegoating" are typical and dangerous phenomena that require our close attention. The loss of truth in the public domain As people become more divided, emotional, and politicized, distorted information from media manipulation and propaganda makes it increasingly difficult for people to discern the truth. In the fifth stage, warring parties often collaborate with the media to manipulate public emotions in order to garner support and attack their opponents. In other words, left-wing media personnel collaborate with left-wing political forces, and right-wing media personnel unite with right-wing political forces to attack each other in a "dirty battle." The media becomes unrestrained, like self-appointed prosecutors: individuals are often "convicted" by the media without a trial, leading to their lives being completely destroyed. During World War I and World War II, even in the democratic country of Britain, a "news department" was set up to disseminate government propaganda. Mainstream media publishers who complied with government propaganda demands were promoted, while non-compliers were criticized and marginalized. Revolutionaries also distorted facts in various publications. During the French Revolution, newspapers run by revolutionaries advocated against the monarchy and religion, but these revolutionaries later banned newspapers with dissenting views during the "reign of terror." During periods of large wealth gaps and prevalent populist thinking, stories exposing the elite are particularly popular and commercially valuable in the mediaespecially content where right-wing media criticizes left-wing elites and left-wing media attacks right-wing elites. History shows that the significant increase in such activities is a typical problem of the fifth stage, and when the media's opinion-forming power is combined with other punitive measures, the media becomes a powerful weapon. This phenomenon is widely recognized today. The "credibility" of traditional and social media has fallen to its lowest levels in our lifetimes. For example, a 2019 Gallup poll showed that only 13% of Americans "trust the media a great deal," with only 41% saying they "trust the media a fair amount" or "trust the media a great deal." This figure was as high as 72% in 1976. This is not just a problem for marginal media, but also for mainstream media and society as a whole. Even newspapers like The Wall Street Journal and The New York Times, once seen as models of journalistic integrity, have experienced a significant drop in trust. In addition to political motives, the financially challenging backdrop of the current media industry has made sensational stories more profitable. Many of the media professionals I encounter share the same concerns as me, even though they usually do not publicly express these views. This dynamic is hindering freedom of speech, as people fear being intentionally misrepresented and attacked in traditional media and social media, and therefore dare not speak out. Even highly capable and influential individuals nowadays are reluctant to speak out publicly or run for public office out of fear of the media. Because almost all high-profile figures are subject to criticism, almost everyone I know believes that being outspoken in public for truth and justice is dangerous, especially to those who may offend extreme individuals skilled at manipulating the media. Although these issues are rarely discussed in public, they are frequently discussed in private. For example, I recently had lunch with a retired general who had held senior positions in the government, and we discussed his future plans. I asked him what he was most passionate about, and he said, "Of course, it's helping my country." When I asked if he would consider running for public office, he replied that although he was willing to sacrifice his life for his country, he could not stand the idea of enemies fabricating lies through the media and social platforms to harm him and his family. Generals like him, and many other people I know who should be heard by society, are now afraid to speak out publicly because they fear being attacked by extremists, whose attacks can be amplified through sensational media. Many of my friends have advised me not to openly discuss the controversial issues in this book, saying that doing so might lead to a "media siege." While they may be right, I will not be silent because of it. Rules are abandoned, and naked struggles begin When the "demands" that people passionately advocate for become more important than upholding the decision-making system itself, that system is in danger. Rules and laws can only work under two conditions: they must be extremely clear, and the majority must value cooperation within the rule system enough to compromise for the system to function properly. If these two conditions are not met, the legal system is in jeopardy. If opposing parties are unwilling to communicate rationally with each other or make concessions for the collective welfare (i.e. giving up the benefits they could gain through strife), then some form of internal conflict will occur, testing the power dynamics of the parties involved. At this stage, "winning at all costs" becomes the name of the game, and "by any means necessary" becomes the norm. In the later stages of the fifth stage, people no longer argue logically, but are entirely driven by emotions. When "winning" becomes the sole important goal, unethical struggles escalate in a self-reinforcing manner. When everyone is fighting for their beliefs but unable to reach consensus, the entire system is on the brink of civil war or revolution. This situation typically manifests in several ways: In the later stages of the fifth stage, those in power often use the legal and police system as a political weapon. Additionally, private armed organizations may arisesuch as gangs that physically harm and steal, or bodyguard forces that protect wealthy individuals from such threats. In the later stages of the fifth stage, the number of protests significantly increases and becomes increasingly violent. When widespread discontent erupts in society and the authorities let it spread, it may eventually evolve into riots. Once they try to suppress it forcefully, the situation may explode. Conflicts in the later stages of the fifth stage typically accumulate and escalate into violent conflicts, marking the formal entry into a stage historians call the "period of civil war," which I refer to as the "sixth stage" in the "big cycle." This leads to my next principle: When in doubt, leaveIf you do not want to get involved in civil war or war, leave as early as possible while you still can. This situation often occurs in the late stages of the fifth stage. History shows that when the situation deteriorates, those seeking to leave often find that "the gates have already closed." The same applies to investments and capital flowsduring such times, countries often implement capital controls and other restrictive measures. english: Escape, imprisonment, or being killed.How do these civil wars happen? In the previous section, I described a series of dynamics in the fifth stage that drive society across boundaries into the sixth stage. In this stage, all these dynamics will be greatly amplified. Next, I will continue to explain. How Civil Wars and Revolutions Happen As previously described, the cycle of accumulating wealth and widening wealth gaps ultimately leads to a very small number of people controlling a large proportion of wealth, while the majority of poor people overthrow the rule of the wealthy through civil wars and revolutions. This situation occurs far more frequently than people imagine. Although most typical civil wars and revolutions transfer power from the right to the left, there are also many cases where wealth and power are transferred from the left to the right. These cases are less common and manifest differently, usually occurring when the existing order falls into disorder and incompetence, and the majority of people crave strong leadership, discipline, and efficiency. The success or failure of these new regimes, whether left or right, is the same: the key to success lies in achieving widespread economic prosperity; if not, it fails. Because widespread economic prosperity is the decisive factor in the success or failure of the new regime, the long-term trend is the simultaneous improvement of overall wealth and wealth distribution (i.e. the economic and health conditions of ordinary people improve). In a certain stage of the "Big Cycle," people often overlook this macroscopic view. The people who lead these civil wars or revolutions, in the past as well as now, are usually from the educated middle class. These leaders are often charismatic, adept at organizing and leading powerful and efficient revolutionary organizations to drive change. Although vast wealth disparities and economic difficulties are often the main sources of conflict, revolutions are also often the result of multiple layers of dissatisfaction. During the revolutionary process, different groups with various demands usually come together to drive change, but after victory, internal conflicts often arise due to power and policy differences. As mentioned earlier, during the civil war/revolution stage, ruling governments almost always face severe financial, credit, and purchasing power shortages. This shortage prompts the government to seek resources from the wealthy, while the wealthy transfer their assets to safe places or forms (such as other countries, foreign currency, gold, and other assets that are difficult to tax or do not produce productivity), which in turn prompts the government to implement capital controls to prevent these outflows. Furthermore, internal chaos can attract challenges from external hostile powers. Because civil wars weaken the unity and capability of a country, they attract foreign interventions. This is also one of the reasons why civil wars and external wars often erupt simultaneously. Other reasons include: heightened emotions, tendencies of populists towards combat, leaders discovering that external conflicts can unite domestic populations and deliberately creating conflicts, and in extreme scarcity, being more willing to launch wars to acquire the needed resources. Almost all civil wars are accompanied by external intervention, as external powers seek to influence the outcome of the war for their own interests. The onset of civil wars and revolutions is often not obvious when it occurs, only becoming apparent when one is immersed in it. While historians may assign start and end dates to them, these dates are often contrived. Civil wars are extremely brutal because they are fights for survival. Everyone is forced to take sides, and moderates are most likely to be marginalized in the midst of the turmoil. In such situations, the most suitable leaders are "inspiring generals" - individuals who can rally support and win various battles. Due to the intense struggle, they also need to be tough enough to take necessary measures to win. Historians often designate the "civil war period" as lasting only a few years and ending with the side that controls the capital government institutions as the victor. However, just as the beginning can be murky, the end of a war is often not as clear-cut as history records - post-war power struggles can continue for many years. Although civil wars and revolutions come at a heavy cost, if reformed properly, they often lay a better foundation for the future. The post-civil war or revolution future depends on the post-war responses and rebuilding efforts. Conclusion My research on history tells me that, besides "evolution," there is nothing eternal in the world. In the process of evolution, there are cycles like tides - rising and falling - that are difficult to resist or reverse. To cope with these changes, the key lies in understanding which stage of the cycle one is in and mastering the eternal and universal principles to deal with that stage. As environmental conditions change, the approach must also be adjusted - in other words, what is optimal depends on the environment one is in, and the environment is always undergoing the dynamic changes we have just discussed. If a society cannot adapt to change, it will eventually decline. That is why continuous reform to adapt to change is the best way forward. The criteria for judging the superiority or inferiority of a system are very simple: whether it can effectively meet the needs of the majority of people. This can be measured by objective indicators, and we are indeed doing so and will continue to do so. Having said that, the loudest and clearest lesson transmitted from history is that building win-win relationships through effective cooperation, expanding and fairly distributing the "cake" together so that the majority of people are satisfied is more rewarding and much less painful compared to internal wars for wealth and power, where one side overwhelms the other. This article was reprinted from "Wall Street See," author: He Hao; GMTEight editor: Huang Xiaodong.