The Five Stages Of A Sovereign's Life-Cycle

Tyler Durden's picture

Bridgewater's Ray Dalio believes four factors drive relative economic growth: competitiveness, indebtedness, culture, and luck. The returns from his machine-like investment process clearly indicate he is on to something as he notes that the most powerful influences of this relative income (and power) are 1) the psychology that drives people’s desires to work, borrow and consume and 2) war (which we measure in the “luck” gauge).


Via Bridgewater:

Throughout history, Dalio advises these two influences have changed countries’ competitiveness and indebtedness which have caused changes in their relative wealth and power. He goes on to add that since different experiences lead to different psychological biases that lead to different experiences, etc., certain common cause-effect linkages drive the typical cycle of a nation's growth, power and influence.


To summarize, we believe that countries typically evolve through five stages of the cycle:


1) In the first stage countries are poor and think that they are poor.


In this stage they have very low incomes and most people have subsistence lifestyles, they don’t waste money because they value it a lot and they don’t have any debt to speak of because savings are short and nobody wants to lend to them. They are undeveloped.

2) In the second stage countries are getting rich quickly but still think they are poor.


At this stage they behave pretty much the same as they did when they were in the prior stage but, because they have more money and still want to save, the amount of this saving and investment rises rapidly. Because they are typically the same people who experienced the more deprived conditions in the first stage, and because people who grew up with financial insecurity typically don’t lose their financial cautiousness, they still a) work hard, b) have export-led economies, c) have pegged exchange rates, d) save a lot, and e) invest efficiently in their means of production, in real assets like gold and apartments, and in bonds of the reserve countries.

3) In the third stage countries are rich and think of themselves as rich.


At this stage, their per capita incomes approach the highest in the world as their prior investments in infrastructure, capital goods and R&D are paying off by producing productivity gains. At the same time, the prevailing psychology changes from a) putting the emphasis on working and saving to protect oneself from the bad times to b) easing up in order to savor the fruits of life. This change in the prevailing psychology occurs primarily because a new generation of people who did not experience the bad times replaces those who lived through them. Signs of this change in mindset are reflected in statistics that show reduced work hours (e.g., typically there is a reduction in the average workweek from six days to five) and big increases in expenditures on leisure and luxury goods relative to necessities.

4) In the fourth stage countries become poorer and still think of themselves as rich.


This is the leveraging up phase – i.e., debts rise relative to incomes until they can’t any more. The psychological shift behind this leveraging up occurs because the people who lived through the first two stages have died off or become irrelevant and those whose behavior matters most are used to living well and not worrying about the pain of not having enough money. Because the people in these countries earn and spend a lot, they become expensive, and because they are expensive they experience slower real income growth rates. Since they are reluctant to constrain their spending in line with their reduced income growth rate, they lower their savings rates, increase their debts and cut corners. Because their spending continues to be strong, they continue to appear rich, even though their balance sheets deteriorate. The reduced level of efficient investments in infrastructure, capital goods and R&D slow their productivity gains. Their cities and infrastructures become older and less efficient than those in the two earlier stages. Their balance of payments positions deteriorate, reflecting their reduced competitiveness. They increasingly rely on their reputations rather than on their competitiveness to fund their deficits. They typically spend a lot of money on the military at this stage, sometimes very large amounts because of wars, in order to protect their global interests. Often, though not always, at the advanced stages of this phase, countries run “twin deficits” – i.e., both balance of payments and government deficits.

5) In the last stage of the cycle they typically go through deleveraging and relative decline, which they are slow to accept.


After bubbles burst and when deleveragings occur, private debt growth, private sector spending, asset values and net worths decline in a self-reinforcing negative cycle. To compensate, government debt growth, government deficits and central bank “printing” of money typically increase. In this way, their central banks and central governments cut real interest rates and increase nominal GDP growth so that it is comfortably above nominal interest rates in order to ease debt burdens. As a result of these low real interest rates, weak currencies and poor economic conditions, their debt and equity assets are poor performing and increasingly these countries have to compete with less expensive countries that are in the earlier stages of development. Their currencies depreciate and they like it. As an extension of these economic and financial trends, countries in this stage see their power in the world decline.

So the US (and much of the advanced economies of the world) are clearly in Stage 5 (or perhaps delusional still in Stage 4) and now we hope for a 'beautiful deleveragin vs an 'ugly deleveraging'

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kalasend's picture

I thought stage-2 was describing China until I read this: " e) invest efficiently in their means of production, in real assets like gold and apartments, and in bonds of the reserve countries "

Dr. Engali's picture

Stage 6) society collapses , civil wars ensue, then the rebuilding begins.

francis_sawyer's picture

Stage 5a) Jews create 'false flags' & propaganda in order to instigate the societal collapse from which civil wars ensue (think Bolsheviks)...

Stage 5b) They steal & hide the gold in the process...

Stage 6a) Rebuilding begins with history being rewritten ~ a new Hegelian dialectic emerges...

Vampyroteuthis infernalis's picture

Russia under the Czars was never weathy or productive. It was always poor. Bad example.

francis_sawyer's picture

Well then ~ thank goodness the Bolsheviks arrived on the scene to make it all better...

Even if you're correct, [& I'm not really arguing with your statement], the only thing the Bolsheviks brought to the table was to STEAL what wealth actually was there & then keep it for themselves... Which is typical Jew behavior & which confirms my original point...

TahoeBilly2012's picture

First I lost 80% of my business sales, then my liberal friends all went "brainwashy" at the same time...

francis_sawyer's picture

You had me [junking you] at Ritholtz...

DavosSherman's picture

Dalio & Gross got the last fucking lampshade at the gold party.  And I fucking doubt either could find an ounce of silver with both hands and a flashlight.'s picture

The real question is what happens after step 5. The dark ages like after the fall of the western roman empire, a gradual decline like the end of the British empire or something else entirely?

Being Free's picture

No disrespect to the authors but ... so what?  I get it.  We're screwed.  How about some creative thoughts on what to do about it.

Atomizer's picture

5 weeks & one day ¿¿. That's just fucking rich. 


topspinslicer's picture

just heard on a radio interview today we are still paying interest on our world war 1 debt!!!!!!!!!!!!!!!! world war freaking one!!!!!!!!

DaveA's picture

In 1978 Sir John Glubb wrote a much better treatment of this subject, called "The Fate of Empires". There are still free copies floating around the Internet. Take two hours to read it; it's one of those rare books whose every word rings true.

Seer's picture

"Bridgewater's Ray Dalio believes four factors drive relative economic growth: competitiveness, indebtedness, culture, and luck."


No fucking mention of "resources!"  And people want to know why our economic system, the very one that doesn't factor in that we're on a finite planet (while espousing perpetual growth), the one that's SUPPOSED to account for resource distribution, is failing?  UGH- FUCK!

AldoHux_IV's picture

While it may explain the phenomenon of soverign debt cycles, it certainly doesn't encapsulate everything else that needs to be accounted for-- a financial system that has benefited during stage 4 (doing work that would make drug dealers blush) and policymakers that encourage it because it creates a wealth illusion (read effect) and for the interest of "price stability" a central bank that helps fund this behavior.  All a cover for a wealth transfer con that merely leaves the sucker holding the bag while the con men look for another mark (ahem China).  While Dalio's explanation accounts for one side, the other side needs to be accounted for otherwise we don't have a tango.

In the end, we are screwed to suffer the developed world syndrome where crony capitalism runs as rampant as the idiotic economic group think amongs policymakers parading in front of an otherwise docile and thoughtless populace unless we are able to replace the policymakers with ones willing to treat the problem for what it is: an out of control situation of debt and unattainable promises that can only be met with the destruction of the former.

alfred b.'s picture


    Step 6:  Your Reserve Bank turns its printing press over to GROUPON



e.blair's picture

Ray Dalio is rather delusional.  Does he think that nobody has thought about these questions before?  He's given them maybe 20 hours of thought, if that.  Others have devoted lives to them.  But hey lets read what Ray says.  He's rich you know.  Waste of our time Tyler.  Stick to what Zero Hedge knows.  Hint: It ain't history.