Thinks we are on the verge of Civil War. I tend to agree
Ray Dalio
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For reasons covered more completely in my book Principles for Dealing with the Changing World Order, the US appears to be on a classic path toward some form of civil war. In this post I’d like to show you both what that path looks like and where the US appears to be on it. While the classic cycle is covered more completely in my book in Chapter 5, “The Big Cycle of Internal Order and Disorder,” I will give a distillation of that here.
What is obvious from looking at many cycles of rises and declines of different historical cases is that the combination of…
…1) financial problems due to not having enough money that lead to large deficits, high taxes, a lot of money printing, and high inflation, and…
… 2) large wealth and values gaps in which people are more willing to fight for what they want than to compromise…
… leads to some sort of fighting for control (rather than compromising according to the rules) which is a “civil war,” though these fights can be more or less violent. Notably, when that happens at the same time as there are foreign powers that are becoming strong enough to challenge the leading world power that is encountering this civil war dynamic, it is an especially risky period. That is the period I believe we are now in.
Maybe my views are right and maybe they’re wrong. My goal is simply to pass along what I see for you to consider for yourself. To do that I want to put what is now happening in the context of the typical cycle. In my book, I looked at many cycles which then made clear what the typical cycle looks like. Here I will describe it briefly so together we can monitor actual developments relative to the typical sequence of developments. That way we can envision the typical path to help us form expectations of what is coming next and see whether we are on or off that path.
By most of the measures that I use, the current financial conditions and irreconcilable differences in desires and values are consistent with the ingredients leading to some form of civil war. We are seeing that they are leading to much greater amounts of populism/extremism and conflicts between the right and the left, which is classic. Both sides are fighting to win at all costs and are unwilling to compromise. History shows us that when 1) extremists who will fight to win at all costs are in the majority and 2) respecting rule of law becomes of secondary importance to winning, internal conflicts reach the point of being self-reinforcing. Moderates are eliminated and so is and the ability to compromise, creating the fights to win that are civil wars. Actual developments are tracking that archetypical path. In the interest of brevity, I won’t barrage you with the numerous measures that show this but I will direct you to the book if you’re interested in seeing them.
What follows are short excerpts from my book that describe the cycle that I saw repeatedly play out in history and that I believe that we are in stage 5 of. My goal in sharing these is to simply and briefly show how the archetypical cycle works as a template for understanding and tracking what is happening now—and to pass along some principles for dealing with what’s happening.
It’s up to you to decide what you think about that template and what you want to do about it.
From Principles for Dealing with the Changing World Order
THE SIX STAGES OF THE INTERNAL CYCLE OF ORDER AND DISORDER
Internal orders typically change through a relatively standard sequence of stages, like the progression of a disease. By looking at their symptoms we can tell which stages countries are in. For example, just as Stage 3 cancer is different from Stage 4 cancer in ways defined by different conditions that exist and have come about as a result of things that happened in prior stages, the same is true for the different stages of the big internal cycle. Like diseases, different conditions warrant different actions to address them and they produce a different range of probabilities that those actions will lead to.
From studying history it appears to me that the stages of the archetypical cycle from internal order to internal disorder and back happens through six stages. I will quickly go through the stages except for Stage 5 which is the stage it appears to me that the U.S. is in which warrants closer attention. The six stages are as follows.
■ Stage 1, when the new order begins and the new leadership consolidates power, which leads to . . .
■ . . . Stage 2, when the resource-allocation systems and government bureaucracies are built and refined, which if done well leads to . . .
■ . . . Stage 3, when there is peace and prosperity, which leads to . . .
■ . . . Stage 4, when there are great excesses in spending and debt and the widening of wealth and political gaps, which leads to . . .
■ . . . Stage 5, when there are very bad financial conditions and intense conflict, which leads to . . .
■ . . . Stage 6, when there are civil wars/revolutions, which leads to . . .
■ . . . Stage 1, which leads to Stage 2, etc., with the whole cycle happening over again.
These cycles have taken place for as long as there has been recorded history (and probably before).
Since different countries are typically in different stages of the cycle and since they take wealth and global political power from each other, some countries are rising while others are declining. For those reasons it’s important to look at each country separately. Also for this reason whole world is less volatile than any one country, with some rising and others declining.
Delving into the Six Stages of the Cycle
I will now briefly explain what the archetypical six stages look like in greater detail so we can identify them easily when we see them and so we can better imagine what might come next. I will focus more on Stage 5 which is the stage I believe the U.S. is in.
Stage 1: When the New Order Begins and the New Leadership Consolidates Power
To fight a civil war or to have a revolution is to have a great conflict in which one side wins and the other side loses. Stage 1 is the first phase that follows the war. It is a time when the winners gain control and the losers must submit. While the winners were strong enough to win, at this first stage of the new order, to be successful they must consolidate power and rebuild the country to work well consistent with their new vision.
Stage 2: When Resource-Allocation Systems and Government Bureaucracies Are Built and Refined
I call this phase “early prosperity” because it is typically the beginning of a peaceful and prosperous period. To be successful the system has to produce prosperity for most people, especially the large middle class.
Stage 3: When There Is Peace and Prosperity
I also call this phase “mid-prosperity.” It is the sweet spot of the internal order cycle. It is when people have an abundance of opportunity to be productive, are excited about it, work well together, produce a lot, get rich, and are admired for being successful.
Stage 4: A Period of Excesses
I also call this the “bubble prosperity phase.”
There is the rapidly increasing debt-financed purchases of goods, services, and investment assets, so debt growth outpaces the capacity of future cash flows to service the debts. So bubbles are created.
There is a shift in the spending of money and time to more on consumption and luxury goods and less on profitable investments.
The country’s balance of payments positions deteriorate, reflecting its increased borrowing and reduced competitiveness.
Wealth and opportunity gaps are large and resentments between classes emerge.
Stage 5: When There Are Bad Financial Conditions and Intense Conflict
The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and nondebt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.
A classic marker of being in Stage 5 and a leading indicator of the loss of borrowing and spending power, which is one of the triggers for going into Stage 6, is that the government has large deficits that are creating more debt to be sold than buyers other than the government’s own central bank are willing to buy. That leading indicator is turned on when governments that can’t print money have to raise taxes and cut spending, or when those that can print money print a lot of it and buy a lot of government debt.
Those places (cities, states, and countries) that have the largest wealth gaps, the largest debts, and the worst declines in incomes are most likely to have the greatest conflicts. Interestingly, those states and cities in the US that have the highest per capita income and wealth levels tend to be the states and cities that are the most indebted and have the largest wealth gaps—e.g., cities like New York, San Francisco, and Chicago, and states like Connecticut, Illinois, Massachusetts,New York, and New Jersey.
Facing these conditions, expenditures have to be cut or more money has to be raised in some way. Who will pay to fix them, the “haves” or the “have-nots”? Obviously, it can’t be the have-nots. But when the haves realize that they will be taxed to pay for debt service and to reduce the deficits, they typically leave, causing the hollowing-out process.
History shows that raising taxes and cutting spending when there are large wealth gaps and bad economic conditions, more than anything else, has been a leading indicator of civil wars or revolutions of some type.
Other indicators are:
+ Decadence
What a society spends money on matters. When it spends on investment items that yield productivity and income gains, it makes for a better future than when it spends on consumption items that don’t raise productivity and income.
+ Bureaucracy
While early in the internal order cycle bureaucracy is low, it is high late in the cycle, which makes sensible and needed decision making more difficult.
+ Populism and Extremism
Out of disorder and discontent come leaders who have strong personalities, are anti-elitist, and claim to fight for the common man. They are called populists. Populism is a political and social phenomenon that appeals to ordinary people who feel that their concerns are not being addressed by the elites. It typically develops when there are wealth and opportunity gaps, perceived cultural threats from those with different values both inside and outside the country, and “establishment elites” in positions of power who are not working effectively for most people. Watch populism and polarization as markers. The more that populism and polarization exist, the further along a nation is in Stage 5, and the closer it is to civil war and revolution. In Stage 5, moderates become the minority. In Stage 6, they cease to exist.
+ Class Warfare
In Stage 5, class warfare intensifies. That is because, as a rule, during times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies. In Stage 5, these things become much more apparent. In Stage 6, they manifest themselves in open fighting. A classic marker in Stage 5 is the demonization of those in other classes, which typically produces one or more scapegoat classes which are commonly believed to be the source of the problems. This leads to a drive to exclude, imprison, or destroy them, which happens in Stage 6.
+ The Loss of Truth in the Public Domain
Not knowing what is true because of distortions in the media and propaganda increases as people become more polarized, emotional, and politically motivated. In Stage 5, those who are fighting typically work with those in the media to manipulate people’s emotions to gain support and to destroy the opposition. It is well-recognized this is now happening. The perceived truth in media, both traditional and social, is lower than at any other time in our lifetimes. For example, a 2021 Gallup poll found that only 7 percent of Americans surveyed have “a great deal” of trust in the media and only 36 percent of those surveyed have either a “fair” or “great deal” of trust in the media. That compares with 72 percent who trusted the media in 1976.
Even very capable and powerful people are now too afraid of the media to speak up about important matters or run for public office.
+ Rule-Following Fades and Raw Fighting Begins.
When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution. Late in Stage 5 it is common for the legal and police systems to be used as political weapons by those who can control them. Also private police systems form for self protection and to fight others. Late in Stage 5 there are increasing numbers of protests that become increasingly violent.
---
I try to measure all these things so I can view them objectively. Suffice it to say that we are seeing most of these things happening in degrees that we’ve never seen in our lifetimes before but have happened many times before that prior to civil wars. Politically, in the 2022 elections we will see losses by moderates and gains by extremists/populists as each of the parties will have fights between the moderates and the extremists that the extremist-populists will win because each side want fighters not compromisers and moderates will also choose not to run. Hopefully, but not certainly, we will get through this election with the election rules prevailing without a fight over them. That will set the stage for two more years of fighting that will likely lead to either irreconcilable differences and lack of progress or worse. During this time many decisions will have to be made. For example, the Supreme Court will make decisions on contentious issues that people are willing to fight over. There is a big risk that each side will view the decisions as unfairly made by the other side and not accept them, which will lead to tests of power. As time passes the money and credit that the central government and central bank made abundantly available will dissipate, making tensions worse. Challenges from foreign rivals might also pick up, bringing the US into the 2024 elections facing that set of circumstances. That election will most likely be a battle between the populists of the right and the populists of the left in which neither side will accept losing. Such a sequence of events will be consistent with the typical path that leads to civil war. The main thing we need to do is know what that typical path looks like and see if events are or aren’t tracking it.
How will we know if there is a transition from Stage 5 to Stage 6?
When one is in Stage 5 (like the U.S. is now), the biggest question is how much the system will bend before it breaks. While there are some classic markers I want to emphasize that nothing is precise. But here are some classic signs:
Crossing from Stage 5 (when there are very bad financial conditions and intense internal and external conflict exist) to Stage 6 (when there is civil war) occurs when the system for resolving disagreements goes from working to not working.
History shows that the biggest risk to democracies is that they produce such fragmented and antagonistic decision making that they are ineffective and disorderly which leads to bad results and revolutions led by populist autocrats who represent large segments of the population who want to have a strong, capable leader get control of the chaos and make the country work well for them.
The most obvious clear marker of going into a bad civil war is people dying. History shows that when people start dying in conflicts – even just a few of them – that one expect much worse because then emotions and the need for retributions fuel more fighting.
Looking Ahead and Following What’s Happening.
As I explained, I like to measure things to see them objectively and clearly. Many of the measurements that are shown in my book (and others) will be updated in my ongoing communications. I expect that we will watch what’s happening together.
The Rising Risk of Civil War: Following in the Footsteps of History
Ray Dalio
Ray Dalio
Co-Chief Investment Officer & Chairman…
Published Feb 3, 2022+ Follow
For reasons covered more completely in my book Principles for Dealing with the Changing World Order, the US appears to be on a classic path toward some form of civil war. In this post I’d like to show you both what that path looks like and where the US appears to be on it. While the classic cycle is covered more completely in my book in Chapter 5, “The Big Cycle of Internal Order and Disorder,” I will give a distillation of that here.
What is obvious from looking at many cycles of rises and declines of different historical cases is that the combination of…
…1) financial problems due to not having enough money that lead to large deficits, high taxes, a lot of money printing, and high inflation, and…
… 2) large wealth and values gaps in which people are more willing to fight for what they want than to compromise…
… leads to some sort of fighting for control (rather than compromising according to the rules) which is a “civil war,” though these fights can be more or less violent. Notably, when that happens at the same time as there are foreign powers that are becoming strong enough to challenge the leading world power that is encountering this civil war dynamic, it is an especially risky period. That is the period I believe we are now in.
Maybe my views are right and maybe they’re wrong. My goal is simply to pass along what I see for you to consider for yourself. To do that I want to put what is now happening in the context of the typical cycle. In my book, I looked at many cycles which then made clear what the typical cycle looks like. Here I will describe it briefly so together we can monitor actual developments relative to the typical sequence of developments. That way we can envision the typical path to help us form expectations of what is coming next and see whether we are on or off that path.
By most of the measures that I use, the current financial conditions and irreconcilable differences in desires and values are consistent with the ingredients leading to some form of civil war. We are seeing that they are leading to much greater amounts of populism/extremism and conflicts between the right and the left, which is classic. Both sides are fighting to win at all costs and are unwilling to compromise. History shows us that when 1) extremists who will fight to win at all costs are in the majority and 2) respecting rule of law becomes of secondary importance to winning, internal conflicts reach the point of being self-reinforcing. Moderates are eliminated and so is and the ability to compromise, creating the fights to win that are civil wars. Actual developments are tracking that archetypical path. In the interest of brevity, I won’t barrage you with the numerous measures that show this but I will direct you to the book if you’re interested in seeing them.
What follows are short excerpts from my book that describe the cycle that I saw repeatedly play out in history and that I believe that we are in stage 5 of. My goal in sharing these is to simply and briefly show how the archetypical cycle works as a template for understanding and tracking what is happening now—and to pass along some principles for dealing with what’s happening.
It’s up to you to decide what you think about that template and what you want to do about it.
From Principles for Dealing with the Changing World Order
THE SIX STAGES OF THE INTERNAL CYCLE OF ORDER AND DISORDER
Internal orders typically change through a relatively standard sequence of stages, like the progression of a disease. By looking at their symptoms we can tell which stages countries are in. For example, just as Stage 3 cancer is different from Stage 4 cancer in ways defined by different conditions that exist and have come about as a result of things that happened in prior stages, the same is true for the different stages of the big internal cycle. Like diseases, different conditions warrant different actions to address them and they produce a different range of probabilities that those actions will lead to.
From studying history it appears to me that the stages of the archetypical cycle from internal order to internal disorder and back happens through six stages. I will quickly go through the stages except for Stage 5 which is the stage it appears to me that the U.S. is in which warrants closer attention. The six stages are as follows.
■ Stage 1, when the new order begins and the new leadership consolidates power, which leads to . . .
■ . . . Stage 2, when the resource-allocation systems and government bureaucracies are built and refined, which if done well leads to . . .
■ . . . Stage 3, when there is peace and prosperity, which leads to . . .
■ . . . Stage 4, when there are great excesses in spending and debt and the widening of wealth and political gaps, which leads to . . .
■ . . . Stage 5, when there are very bad financial conditions and intense conflict, which leads to . . .
■ . . . Stage 6, when there are civil wars/revolutions, which leads to . . .
■ . . . Stage 1, which leads to Stage 2, etc., with the whole cycle happening over again.
These cycles have taken place for as long as there has been recorded history (and probably before).
Since different countries are typically in different stages of the cycle and since they take wealth and global political power from each other, some countries are rising while others are declining. For those reasons it’s important to look at each country separately. Also for this reason whole world is less volatile than any one country, with some rising and others declining.
Delving into the Six Stages of the Cycle
I will now briefly explain what the archetypical six stages look like in greater detail so we can identify them easily when we see them and so we can better imagine what might come next. I will focus more on Stage 5 which is the stage I believe the U.S. is in.
Stage 1: When the New Order Begins and the New Leadership Consolidates Power
To fight a civil war or to have a revolution is to have a great conflict in which one side wins and the other side loses. Stage 1 is the first phase that follows the war. It is a time when the winners gain control and the losers must submit. While the winners were strong enough to win, at this first stage of the new order, to be successful they must consolidate power and rebuild the country to work well consistent with their new vision.
Stage 2: When Resource-Allocation Systems and Government Bureaucracies Are Built and Refined
I call this phase “early prosperity” because it is typically the beginning of a peaceful and prosperous period. To be successful the system has to produce prosperity for most people, especially the large middle class.
Stage 3: When There Is Peace and Prosperity
I also call this phase “mid-prosperity.” It is the sweet spot of the internal order cycle. It is when people have an abundance of opportunity to be productive, are excited about it, work well together, produce a lot, get rich, and are admired for being successful.
Stage 4: A Period of Excesses
I also call this the “bubble prosperity phase.”
There is the rapidly increasing debt-financed purchases of goods, services, and investment assets, so debt growth outpaces the capacity of future cash flows to service the debts. So bubbles are created.
There is a shift in the spending of money and time to more on consumption and luxury goods and less on profitable investments.
The country’s balance of payments positions deteriorate, reflecting its increased borrowing and reduced competitiveness.
Wealth and opportunity gaps are large and resentments between classes emerge.
Stage 5: When There Are Bad Financial Conditions and Intense Conflict
The classic toxic mix of forces that brings about big internal conflicts consists of 1) the country and the people in the country (or state or city) being in bad financial shape (e.g., having big debt and nondebt obligations), 2) large income, wealth, and values gaps within that entity, and 3) a severe negative economic shock.
A classic marker of being in Stage 5 and a leading indicator of the loss of borrowing and spending power, which is one of the triggers for going into Stage 6, is that the government has large deficits that are creating more debt to be sold than buyers other than the government’s own central bank are willing to buy. That leading indicator is turned on when governments that can’t print money have to raise taxes and cut spending, or when those that can print money print a lot of it and buy a lot of government debt.
Those places (cities, states, and countries) that have the largest wealth gaps, the largest debts, and the worst declines in incomes are most likely to have the greatest conflicts. Interestingly, those states and cities in the US that have the highest per capita income and wealth levels tend to be the states and cities that are the most indebted and have the largest wealth gaps—e.g., cities like New York, San Francisco, and Chicago, and states like Connecticut, Illinois, Massachusetts,New York, and New Jersey.
Facing these conditions, expenditures have to be cut or more money has to be raised in some way. Who will pay to fix them, the “haves” or the “have-nots”? Obviously, it can’t be the have-nots. But when the haves realize that they will be taxed to pay for debt service and to reduce the deficits, they typically leave, causing the hollowing-out process.
History shows that raising taxes and cutting spending when there are large wealth gaps and bad economic conditions, more than anything else, has been a leading indicator of civil wars or revolutions of some type.
Other indicators are:
+ Decadence
What a society spends money on matters. When it spends on investment items that yield productivity and income gains, it makes for a better future than when it spends on consumption items that don’t raise productivity and income.
+ Bureaucracy
While early in the internal order cycle bureaucracy is low, it is high late in the cycle, which makes sensible and needed decision making more difficult.
+ Populism and Extremism
Out of disorder and discontent come leaders who have strong personalities, are anti-elitist, and claim to fight for the common man. They are called populists. Populism is a political and social phenomenon that appeals to ordinary people who feel that their concerns are not being addressed by the elites. It typically develops when there are wealth and opportunity gaps, perceived cultural threats from those with different values both inside and outside the country, and “establishment elites” in positions of power who are not working effectively for most people. Watch populism and polarization as markers. The more that populism and polarization exist, the further along a nation is in Stage 5, and the closer it is to civil war and revolution. In Stage 5, moderates become the minority. In Stage 6, they cease to exist.
+ Class Warfare
In Stage 5, class warfare intensifies. That is because, as a rule, during times of increased hardship and conflict there is an increased inclination to look at people in stereotypical ways as members of one or more classes and to look at these classes as either being enemies or allies. In Stage 5, these things become much more apparent. In Stage 6, they manifest themselves in open fighting. A classic marker in Stage 5 is the demonization of those in other classes, which typically produces one or more scapegoat classes which are commonly believed to be the source of the problems. This leads to a drive to exclude, imprison, or destroy them, which happens in Stage 6.
+ The Loss of Truth in the Public Domain
Not knowing what is true because of distortions in the media and propaganda increases as people become more polarized, emotional, and politically motivated. In Stage 5, those who are fighting typically work with those in the media to manipulate people’s emotions to gain support and to destroy the opposition. It is well-recognized this is now happening. The perceived truth in media, both traditional and social, is lower than at any other time in our lifetimes. For example, a 2021 Gallup poll found that only 7 percent of Americans surveyed have “a great deal” of trust in the media and only 36 percent of those surveyed have either a “fair” or “great deal” of trust in the media. That compares with 72 percent who trusted the media in 1976.
Even very capable and powerful people are now too afraid of the media to speak up about important matters or run for public office.
+ Rule-Following Fades and Raw Fighting Begins.
When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution. Late in Stage 5 it is common for the legal and police systems to be used as political weapons by those who can control them. Also private police systems form for self protection and to fight others. Late in Stage 5 there are increasing numbers of protests that become increasingly violent.
---
I try to measure all these things so I can view them objectively. Suffice it to say that we are seeing most of these things happening in degrees that we’ve never seen in our lifetimes before but have happened many times before that prior to civil wars. Politically, in the 2022 elections we will see losses by moderates and gains by extremists/populists as each of the parties will have fights between the moderates and the extremists that the extremist-populists will win because each side want fighters not compromisers and moderates will also choose not to run. Hopefully, but not certainly, we will get through this election with the election rules prevailing without a fight over them. That will set the stage for two more years of fighting that will likely lead to either irreconcilable differences and lack of progress or worse. During this time many decisions will have to be made. For example, the Supreme Court will make decisions on contentious issues that people are willing to fight over. There is a big risk that each side will view the decisions as unfairly made by the other side and not accept them, which will lead to tests of power. As time passes the money and credit that the central government and central bank made abundantly available will dissipate, making tensions worse. Challenges from foreign rivals might also pick up, bringing the US into the 2024 elections facing that set of circumstances. That election will most likely be a battle between the populists of the right and the populists of the left in which neither side will accept losing. Such a sequence of events will be consistent with the typical path that leads to civil war. The main thing we need to do is know what that typical path looks like and see if events are or aren’t tracking it.
How will we know if there is a transition from Stage 5 to Stage 6?
When one is in Stage 5 (like the U.S. is now), the biggest question is how much the system will bend before it breaks. While there are some classic markers I want to emphasize that nothing is precise. But here are some classic signs:
Crossing from Stage 5 (when there are very bad financial conditions and intense internal and external conflict exist) to Stage 6 (when there is civil war) occurs when the system for resolving disagreements goes from working to not working.
History shows that the biggest risk to democracies is that they produce such fragmented and antagonistic decision making that they are ineffective and disorderly which leads to bad results and revolutions led by populist autocrats who represent large segments of the population who want to have a strong, capable leader get control of the chaos and make the country work well for them.
The most obvious clear marker of going into a bad civil war is people dying. History shows that when people start dying in conflicts – even just a few of them – that one expect much worse because then emotions and the need for retributions fuel more fighting.
Looking Ahead and Following What’s Happening.
As I explained, I like to measure things to see them objectively and clearly. Many of the measurements that are shown in my book (and others) will be updated in my ongoing communications. I expect that we will watch what’s happening together.
