17 Jun Are we Approaching a ‘Dalio Moment’?
“Not for some time.” – The Lonely Realist
What is a “Dalio Moment”?
Ray Dalio is a leading proponent of cycle theory. His book, Principles for Dealing with the Changing World Order, predicts an unhappy end to the current “Big Cycle,” warning that an unraveling of the current world order will be triggered by a combination of (1) the accumulation of historically excessive national debt, (2) widening wealth and income disparities, (3) great power rivalries that foretell conflicts between the American-led West and the Axis of the Sanctioned, (4) climate change that roils food sources, triggers emigration, and widens geopolitical divides, and (5) serial technology revolutions like biotech and AI. Dalio asserts that these earth-shaking forces are coalescing much as they did repeatedly over the past 2,000 years so that when those “forces come together in the magnitudes that we are now seeing, history has shown that they [trigger] seismic shifts in financial orders, domestic orders, and world orders … in ways that we have never seen in our lifetimes.” How imminent is that seismic shift? Dalio warns that 2024, the next American election year, and 2025, the year in which America’s debt ceiling once again will be revisited, are hazardous periods that may see a calamitous end to the current “Big Cycle.”
Such a “Dalio Moment” timeframe, however, appears excessively pessimistic since (1) the current economic cycle has been and will continue to be lengthened by central bank innovations and interventions that suppress volatility and defer the inevitable consequences of excessive national debt, (2) intra-country wealth disparities are being temporarily alleviated by increased entitlement spending, (3) neither America nor China is yet in a position to engage in a military contest for global supremacy, (4) in the near-term, the world will be successful in mitigating the effects of climate change, and (5) AI will create substantial benefits that will more than offset the adverse effects of accelerating technological change.
Yet Dalio is far from being the only student of history predicting an early and unfortunate end to the current cycle. Among other prominent cycle scientists who share his views are Neil Howe, whose term for a Dalio-like end to the current “Big Cycle” is the “Fourth Turning,” where America will “experience a mood of national urgency … on a par with that of [the three] earlier Turnings – the era of the Great Depression and World War II; the era of the U.S. Civil War; or the era of the American Revolution – [after which] the old American republic will disappear [and] a new American republic, as yet unrecognizable, will take its place”; George Friedman, who sees the high degree of extremism in the current political cycle as presaging turmoil deeper than the economic, social, political and military crises faced by America in the 1930s; Peter Turchin who, in his forthcoming book, End Times, Elites, Counter Elites, and the Path of Political Disintegration, cautions that America is experiencing an end-of-cycle imbalance similar to the one that preceded the Civil War where more losers than winners will propel societal upheaval; and John Mauldin, who believes that the “Debt Supercycle” will result in a “Great Reset” where “bond markets rebel and [national] debt must be restructured, or austerity or tax increases are imposed to bring the debt back to manageable proportions.” Each of these economic, political and social cycle analyses predicts an inevitable “Dalio Moment,” and each provides a Hemingwayesque caution that “change happens slowly and then, seemingly, all at once.”
Whether or not any outcome can be termed “inevitable,” what is clear is that there are significant instabilities. Mark Buchanan in his book, Ubiquity: Why Catastrophes Happen, provides a useful instability metaphor: “Every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep…. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation…. Rather it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.”
How “steep” are today’s mountain-sized piles of debt, wealth disparities, cultural divisions, great power rivalries, climate risks, agricultural, industrial and technological revolutions, etc.? Avalanches are destructive …, and continuing the piling up of figurative grains adds to the potential for destruction. For example, every President for the past 30 years has had term-average approval ratings below 50%, a measure of how disgruntled Americans have been with their leaders. Combine that leadership dissatisfaction with the fact that Congressional candidates in 2024 will be selected predominantly by extremists at the ends of the political spectrum, that America is in the midst of a once-in-a-lifetime turnover from the Baby Boom generation, and that there are rapidly-evolving changes taking place in America’s social norms, and it is clear that there indeed is an avalanche risk. And this at a time when America continues to add to its enormous debt …, which it will continue to do. The recently-concluded debt ceiling deal between the Biden Administration and House Republicans will continue to pile-on grains through January 2025 … when there will be yet another debt ceiling crisis that itself will be compounded by, among other things, the December 31, 2025 sunset of Trump Administration tax cuts. And what of the effects of deglobalization? History shows that protectionism at any level is a bad economic idea with unintended consequences. Add to that the fact that whoever becomes President in 2025 is likely to be facing a continuing war in Europe with Vladimir Putin betting that he will achieve victory only after America ends its support for Ukraine …, a bet that already has the support of a vocal Congressional minority and at least two Presidential candidates. The list goes on … and on and on …, pointing to an avalanche risk that could be triggered at almost any time.
While it is true that the “debt ceiling crisis” has resolved, it was not truly a “crisis.” The same is true of the “regional bank crisis.” America was not and is not today on the edge of disaster. A debt default and cascading bank failures are real problems, but they are problems that can be solved … and were. In themselves, they are not catastrophes that portend a depression, the end of American democracy or the like. They are, however, warning signs that support the cycle thesis voiced by Dalio and others. If those keen observers of the American experiment are correct in their analysis that historical cycles are rhyming and that “if something cannot go on forever, it will stop,” that indeed portends an approaching “Dalio Moment.”
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Finally (from a good friend)