Empires rise and fall in predictable ways, following established patterns that have been repeated throughout history. These economic and geopolitical indicators, which we can also identify today, are the prelude to a paradigm shift.

Ray Dalio is a renowned American investor and founder of Bridgewater Associates who has dedicated his career to analysing economic trends and cycles throughout history. He is also a prolific author of best-selling books on economics where he explains the ideas and reasoning that have marked his successful professional career and have made him an influential voice in the world of finance. Through his reflections, he reminds us that no system is immutable and that economic, social and political changes can transform the established world order.

According to his theory, empires emerge when a country becomes an economic and military superpower, achieving global hegemony and establishing its currency as the international benchmark. However, as this hegemony faces internal and external challenges, the empire begins to decline in a process he describes as a natural cycle of growth and decline.

The intent of his studies is to analyse the longest possible historical period to find patterns of economic and social change that can help us understand why empires fail. So that politicians, businessmen and the rest of the population have at their disposal valuable clues to prepare for a paradigm shift that is inevitable, since, according to Dalio, “history repeats itself in an archetypal Great Cycle” that sooner or later will be consummated.

When the public debt burden becomes unsustainable

Dalio identifies several causes that contribute to the decline of empires. One is the rise of economic and social inequality. As inequality grows, social cohesion is undermined, generating internal tensions that weaken the empire. Moreover, excessive public and private debt, as well as inappropriate monetary policies, can lead to financial crises and general economic decline.

Similarly, the renowned investor notes that historically, the major powers have had a reserve currency, but as their economies lost global weight – often due to a lack of confidence in their economic and monetary policies – this reserve currency also lost its pre-eminence.

Applying this to the current context, he points out that the main reason why the dollar is in danger is because of the large fiscal deficit in the United States. This has led to massive indebtedness, which is sustainable as long as the world continues to have confidence in the ability of the US to pay its obligations. Still, if this confidence wanes, investors and countries that now buy their debt may look for other alternatives to diversify their currency reserves.

The Bridgewater founder argues that this could already be happening because the US is in the late stages of a debt crisis and believes the government will find it difficult to find enough buyers for newly issued bonds: “We are at the beginning of a very classic late big-cycle debt crisis when you’re producing too much debt and you also have a shortage of buyers”.

China challenges Washington’s hegemony

In this context of distrust in the US government’s ability to control its spending, the new emerging powers are trying to reduce their dependence on the dollar through a process of de-dollarisation that decouples their economies from the US-dominated international monetary system and by diversifying their reserves into safe-haven securities such as gold.

The BRICS group is working on its own currency. China is the big driver of a currency that, unlike the dollar or the euro, could be supported by gold and other commodities. A scenario that follows the pattern of imperial decline that Dalio has observed throughout history and warns: “All this that has started as a trade and economic war could lead to armed conflict”.

This scenario cannot be ruled out given the numerous examples where belligerent US rhetoric has been followed by economic sanctions and military action against any other global actor that threatens its hegemony. The US administration’s escalation of tensions with China seems to follow the same pattern that has culminated in a de facto armed conflict between the US and Russia on the European continent. As Dalio states, “Dominant powers do not fall without a fight”.

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