The Rise and Fall of Great Empires – Are We There Yet?

Billionaire Ray Dalio made a video summarising his many years of research into world empires, how they rise, grow and eventually fail. It is called Principles for Dealing with the Changing World Order and has been watched on YouTube nearly 70 million times.

Dalio says that in roughly 50 years as an investor, the events that surprised him the most were the ones that had not previously happened in his lifetime. That prompted him to study further back in history so that “I could anticipate the future by studying the past.”

In 1971, the US defaulted on its debts at a time when the USD was on the gold standard ($1 was theoretically exchangeable for one ounce of gold). This default was the result of the US issuing more paper dollars than there was gold to honour this arrangement. Then President Richard Nixon abandoned the dollar’s peg to gold, ushering in the new era of free-floating currencies. Instead of a collapse in the stock market, prices actually rallied 25%.

The exact same thing happened in 1933 when then President Franklin D. Roosevelt banned private ownership of gold and removed the USD from the gold standard. Dalio found that this had happened many times previously: central banks extend more credit than they have gold to back these loans. When that happens, it is wise to buy gold, stocks and commodities because they invariably go up in value as paper money depreciates.

The Three Major Trends Dalio Identified

• Countries didn’t have enough money to pay their debts even when interest rates were dropped to zero. So central banks print more aggressively.
• Big internal conflicts emerge due to growing gaps in wealth and values. The Left wants to redistribute wealth, and the Right wants to preserve what they have.
• Increasing external conflicts between a rising great power and the existing power, as is now happening between the US and China.

The current US world order commenced after World War II, solidified by the Bretton Woods agreement that created the USD as the world’s reserve currency. A reserve currency is a dominant currency, one used broadly as payment for global trade (especially oil). While Bretton Woods pegged the US at $35 an ounce, other currencies pegged themselves to the USD, but that fell apart in 1971.

Better education leads to increased technological development, industrialisation, fuelling capital market and currency growth.

A new cycle typically begins after a major conflict, followed by a period of peace and prosperity, with growing trade. After a period of time, wealth gaps appear between the rich and the poor, and conflicts start to emerge.

Dalio’s study conforms broadly to the book The Fourth Turning by William Strauss and Neil Howe, who argue that societies undergo major upheavals roughly every 80 to 100 years. In other words, we are coming to the 80-100 year decline of the US empire.

The last great “turning” was in the 1930s during the Great Depression. The US and China are now roughly equal in terms of economic output and trade. Donald Trump’s trade war (tariffs) against China appears to have backfired as China did not blink, saying they would be prepared to sacrifice the 13% of their exports that ended up in the US.

Of the 750 currencies that have existed since 1700, only 20% of them still exist and all of them are seriously devalued.

None of this is to say these empire shifts occur peacefully. Conflict is part of the contest, and that certainly appears to be the case as the US comes to terms with its waning power, both financially and militarily. China is on the rise.

Another feature of aging empires is the belief that the good times will continue, leading to more credit extension and asset bubbles. Bubbles may go on far longer than common sense dictates, but they always collapse.

It’s clear that Donald Trump is using tariffs as a lever to weaken the USD and so make US exports more competitive. He wants China and other trade partners to strengthen their currencies – hopefully leading to the reshoring of US manufacturing companies from abroad. The USD is already more than 10% weaker against the euro than when Trump took office, so that part appears to be working. Less certain is whether the massive offshoring of US industries over the last 40 years will be reversed.

This perhaps explains the collapse and rapid rebound in asset prices over the last two months. Bitcoin traded its way back to $4,400 after breaking below $80k. The Nasdaq has returned to where it was at the start of April 2025.

We may see a continuation of this rally in the weeks ahead, but we would expect some painful whiplash movements along the way. Volatility is here and will remain with us for the foreseeable future.

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