Dalio's latest lengthy article: World War "has begun," with over a 50% chance of breaking out within five years

Bridgewater Fund founder Ray Dalio has published a new article warning that the current conflict between the U.S. and Iran is not an isolated event, but a component of a larger-scale world war—and that this world war will not end in the near term.

Dalio cites his more than half-century of experience in global macro investing and his systematic research on 500-year historical cycles, saying that the current situation is highly similar to 1913–1914 and 1938–1939, and that it is in a critical phase of transitioning from “pre-war confrontation” to “full-scale combat.” He emphasizes that the typical trajectory of conflict in this stage is escalation rather than de-escalation, and he judges that the probability of at least one major multi-region conflict breaking out within the next five years is more than 50%.

Within this framework, Dalio questions several commonly assumed premises in the market: first, that the market’s expectation of “the war ending quickly and everything returning to normal” underestimates the risks; second, that the view that “closing the Strait of Hormuz would cause a clear impact on China” is not accurate; and third, that although the United States has the strongest military power, it is also the side that is most overextended and weakest in its ability to bear the long-term costs of war.

The following is a full-text translation, with some parts omitted or reduced in certain places:

First, I wish everyone the best in these challenging times. At the same time, I want to clarify that the scenario my upcoming observations describe is not one I hope will become real, but rather the scenario I believe is real based on the knowledge I’ve learned and the metrics I use to observe things objectively.

As a global macro investor with more than 50 years of experience, I need to study all the factors that have affected markets over the past 500 years in order to meet the challenges of the future. In my view, most people tend to focus only on today’s headline-grabbing events—such as the current situation in Iran—while overlooking those larger factors that have deeper, more far-reaching, and more enduring effects. These are the drivers of both the current situation and future direction. For now, the most important thing is that the U.S.-Iran war is only one part of the world war we are living through, and this world war will not end quickly.

Of course, how the situation at the Strait of Hormuz unfolds (most importantly, whether Iran will lose control over its shipping lanes and what countries are willing to pay, and how much) will have a huge impact on the entire world. In addition, there are questions such as whether Iran still has the capability to threaten its neighbors using missiles and nuclear weapons, how many troops the U.S. will deploy and what actions it will take, gasoline prices, and the upcoming U.S. midterm elections, among others.

All these short-term issues are undoubtedly important, but they cause people to overlook what is truly major—even more important. Specifically, because most people lean toward this kind of short-term perspective, they now expect (and the market also reflects this expectation) that the war won’t last long and that after it ends everything will return to “normal.” Almost nobody talks about the early stage of a world war that will not end soon. Since I hold a different view, I want to lay it out here.

Here are the major things I think we need to focus on:

1、We are in a “world war” that will not end soon

This may sound somewhat exaggerated, but it is undeniable that we are now living in a highly interdependent world where various conflicts are breaking out at the same time (for example, the Russia-Ukraine conflict in Europe and the U.S./Europe conflict; the Israel–Gaza–Lebanon–Syria war; the Yemen–Sudan–Saudi Arabia–UAE war—this war also involves Kuwait, Egypt, Jordan, and other related countries; and the U.S.–Gulf Cooperation Council–Iran war). Most of these conflicts involve major nuclear powers, and in addition, most countries are also drawn into other intense non-military wars (for example, trade wars, economic wars, capital wars, technology wars, and wars for geopolitical influence).

Taken together, these conflicts form a very typical world war—similar to previous “world wars.” Past “world wars” were made up of interconnected wars; these wars typically did not have a clearly defined start date or formal declaration of war. Those wars became intertwined with one another, creating a typical world-war dynamic that affects all parties involved—just as is true in the current situation.

In Chapter 6, “The Great Cycle of External Order and Chaos,” of my book Principles for Dealing with a Changing World Order, which I published five years ago, I described this kind of war dynamic in detail. If you want a more comprehensive description, you can refer to that chapter. That chapter covers the trajectory of the events we are witnessing and what may happen next.

2、It is very important to understand the positions and relationships of all sides

By using indicators such as treaties and formal alliances, United Nations voting, leaders’ statements, and actions, it is easy to objectively see where each side stands. For example, we can see alliances among multiple major powers, and this bloc largely opposes the United States, Ukraine (Ukraine is allied with most European countries), Israel, Gulf Cooperation Council member states, Japan, and Australia.

These alliance relationships are crucial for predicting the future developments of the relevant parties. Therefore, when observing the current situation and future direction, we must take them into account. For example, we can see this in the actions of China and Russia at the United Nations regarding Iran’s request to open the Strait of Hormuz.

In addition, although some people believe that closing the Strait of Hormuz would have a clear impact on China, that is not accurate. China has abundant energy resources (coal and solar energy) and a huge oil reserve (enough for about 90 to 120 days of use). In terms of the oil/energy economy, the U.S. has a relative advantage because it is in a enviable position as an energy exporter.

There are many ways to measure these alliances, including United Nations voting records, economic ties, and major treaties—all of which align with the situation I described earlier.

3、Studying similar historical cases and comparing them with what is happening now—though this is not common, it has always been extremely valuable for me and may also be valuable for you

For example, examining several similar historical cases and logical analysis clearly shows that in a war with Iran (a middle power), the performance of the United States (the dominant power in the post-1945 world order)—including the money and military equipment it投入 and consumes, and its defense (or lack of defense) of its allies—will be closely watched by other countries and will have a huge impact on the evolution of the world order. More importantly, we know that the war between the United States, Israel (and now Gulf Cooperation Council countries), and Iran will have far-reaching effects on the actions of other countries—especially those in Asia and Europe—thereby significantly influencing the evolution of the world order.

These changes will occur in the same repetitive ways as in the past. For example, by studying history, it is easy to identify overextended empires, establish indicators to measure how overextended they are, and understand the losses they suffer from overextension. When examining the current situation, we naturally focus on the United States. The United States currently has 750 to 800 military bases across 70 to 80 countries, and its global commitments create costly vulnerabilities.

It is clear that overextended great powers cannot succeed in fighting on two fronts or multiple fronts, which inevitably raises the question of whether the United States is capable of fighting on other fronts (such as Asia and/or Europe). That naturally leads me to think about what the current war with Iran means for the situation in Asia, Europe, and the Middle East. For example, problems emerge in Asia that test and reveal the willingness of the United States to meet challenges—this is not surprising. Since Iran carries out a wide range of distracting military tasks in the Middle East, and because the U.S. public lacks support for a war with Iran on the eve of the midterm elections, it is difficult for the U.S. to fight on another front at the same time.

This dynamic may lead one to expect that as other countries closely monitor the U.S.-Iran situation, they might change their own calculations and behavior, thereby reshaping the world order. For example, leaders in countries that host U.S. military bases and expect the U.S. to defend them may likely draw lessons from the developments in the Middle East involving countries that also host U.S. military bases, and then adjust their behavior accordingly. Similarly, any country near a strategically significant strait, or any country with U.S. military bases on its territory, that is located in a region where major conflict could occur, will closely watch the progress of the Iran war and draw lessons from it.

I can say with confidence that world leaders are currently thinking in this way, and that this phenomenon has occurred many times in similar stages of previous great cycles. These considerations by world leaders are one of the classic steps that lead to major wars—steps that have happened repeatedly in the past and are now repeating again. Looking at today’s situation and based on our understanding of classic international order/conflict cycles, I believe we have entered Stage 9.

Here is the classic sequence of steps:

2. The economic and military strength of the world’s leading power declines relative to that of an emerging power, causing their strength to become roughly comparable; then they begin to confront each other in economic and military conflicts due to their disagreements.

3. Economic warfare escalates dramatically, mainly through economic sanctions and trade blockades.

4. Economic, military, and ideological alliances form.

5. Proxy wars increase.

6. Fiscal pressure, deficits, and debt keep rising—especially for those leading powers that are fiscally overextended.

7. Key industries and supply chains increasingly come under government control.

8. The strategic choke points of trade are weaponized.

9. Powerful new forms of war technology are developed.

10. The frequency of multi-region conflicts breaking out at the same time is increasing.

11. Inside each country, people are demanded to support the government leadership unconditionally, and opposition to war and other policies is suppressed—because, as Lincoln famously quoted from the Bible, “a house divided against itself cannot stand,” especially during wartime.

12. Direct military conflict occurs between great powers.

13. To raise funds for war, taxation, debt issuance, money creation, foreign exchange controls, capital controls, and financial repression all increase substantially. In some cases, even markets may close. (For a more detailed explanation of wartime investing, please read Chapter 7 of Principles for Dealing with a Changing World Order.)

14. In the end, one side defeats the other and gains absolute control over the new order, which is set by the winning side.

Many indicators suggest that we are at a stage where the monetary order, some domestic political orders, and the geopolitical order are breaking down within the great cycle. These indicators suggest that we are moving from a pre-war stage to a wartime stage—roughly similar to the two periods of 1913–1914 and 1938–1939. It needs to be made clear that these indicators, the picture they depict, and the exact timing are not precisely exact.

These indicators are for reference only. For example, history tells us that wars usually do not have a clearly defined start date (with exceptions where major military events are followed by a formal declaration of war, such as the assassination of Archduke Franz Ferdinand, the outbreak of the Boer War, and the Pearl Harbor incident). Economic, financial, and military conflicts also often appear before any formal declaration of war. Major wars are typically accompanied by the following developments and signs: 1) military reserves and funding decline; 2) increases in fiscal budgets, debt, money issuance, and capital controls; 3) hostile states observe the belligerents and assess their strengths and weaknesses; and 4) overextended world-leading powers face the challenge of fighting on different fronts that are far apart. All these factors matter, and my assessment of them suggests that we should be concerned.

At this stage, the typical trajectory of conflict is to intensify rather than ease, so the next developments will be influenced by how the U.S.-Iran war plays out. For example, some countries’ confidence that the U.S. will protect them has declined, and combined with the recognition that nuclear weapons are both powerful defensive and offensive tools, senior decision-makers in various countries are talking more about acquiring nuclear weapons and expanding their stockpiles of nuclear weapons and other weapons (especially missiles and missile defense systems).

Let me reiterate: I am not saying that events will necessarily unfold into a full-fledged world war along this cycle. I don’t know what the future will bring, but I still hope the world can develop peacefully—based on mutually beneficial and win-win relationships—rather than being derailed by a lose-lose outcome. I do what I can to contribute. For example, I have maintained good relationships over 42 years with senior policymakers in both China and the U.S. (and some people who are not leaders), so in the past—especially during this controversial period—I have been trying to support mutually beneficial win-win relationships in ways that both sides’ leaders can accept. I do this because I care about the people on both sides, and because mutually beneficial win-win relationships are far better than lose-lose relationships. Even though it is becoming harder to do so now, because some people believe that “the friend of the enemy is the enemy.”

In this stage of the great cycle—right before major wars break out—situations such as irreconcilable disputes that cannot be resolved through compromise often push the cycle from one stage to the next in an almost unavoidable way, until it is ultimately resolved through violence. Therefore, understanding typical great cycles and closely monitoring developments is crucial. I hope that by providing my analytical framework and comparing it with real events, I can help you understand what I am seeing—and ultimately decide what actions you want to take.

Based on this, I believe we must recognize this: the world order has shifted from a multilateral rules-based order led by the U.S. and its allies (such as the G7) to a kind of order where there is no single dominant power propping up the principle of order, which means we can expect more conflicts. A historian would realize that today’s world order is closer to most of the historical periods before 1945 than to the order we are familiar with after 1945—and understand what the most important implications are.

4. History shows that the most reliable indicator of which country might win is not which country is strongest, but which country can endure the most pain for the longest time

This is undoubtedly an important factor in the U.S.-Iran war. The president assures the American public that the war will end within a few weeks, that oil prices will fall, and that we will return to past prosperity. There are many indicators that show whether a country can endure pain over the long term—for example, public opinion polls (especially in democracies) and/or the ability of government leaders to maintain power (especially in authoritarian regimes, where public opinion matters less).

In wartime, victory only counts as truly arriving after surrender, because it is impossible to eliminate all enemies. The lessons of the Vietnam War, the wars in Iraq, and the war in Afghanistan are clear. Victory is signaled when the victorious side can withdraw safely, while the defeated side no longer poses a threat. Although the U.S. appears to be the strongest country in the world, it is also the most overextended great power, and it is the least adept at enduring pain for the long term.

5. All of this happens in a typical great-cycle way.

By “the classic great-cycle way” I mean that events are driven mainly by five forces:

• The role of money, debt, and the economy in the great cycle of monetary order and chaos;

• Political and social order are collapsing due to vast differences in wealth and values;

• Regional and world order are breaking down due to vast differences in wealth and values;

• Huge advances in technology are applied to peacetime and wartime purposes, as well as the related financial bubbles—which usually burst;

• Natural disasters, such as droughts, floods, and epidemics.

Although I won’t explain in deeper detail how the great cycle works, or the five driving forces and the 18 key determinants behind it, I still recommend that you understand it. I also recommend my book or YouTube videos—both titled Principles for Dealing with a Changing World Order.

6、Building effective indicators and following them is extremely valuable

Many of the indicators I use to track developments are covered in Principles for Dealing with a Changing World Order. I especially recommend Chapter 6, “The Great Cycle of External Order and Chaos.” If you’re interested in investment-related developments that are hard to imagine in peacetime but usually occur during wars, I recommend Chapter 7, “Investing in the Context of a Great Cycle.” I recently shared these chapters online, and you can find them here and here.

That is my current understanding of the big picture. Taking all these potential conflicts together, I believe the probability of at least one multi-region conflict breaking out within the next five years is more than 50%.

Risk notice and disclaimer

        Markets are risky, and you should exercise caution when investing. This article does not constitute personal investment advice, and it does not consider any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Any investment made on this basis is at your own risk.