Is Ray Dalio’s conflict cycle useful today?
Does unrest come in cycles?
A previous post suggested that inflation is, essentially, a distributional mechanism by which the settlement of a society over who gets what undergoes a series of profound changes. We later argued that we are in such a position today and that, as inflation becomes more and more entrenched, so we are likely to see more and more instances of societal disharmony. In order to understand what is happening, and to get a sense of what comes next, it might be useful to refer back to a model of societal conflict to help our understanding.
We have previously set out our understanding of Ray Dalio’s use of cycles to understand the process of societal change. Central to this is the debt model that we also outlined. The third element to this structure is the conflict cycle by which change occurs. In this element, debt and inflation are central to the framework.
The conflict model is a process of six stages. In the first stage, a new leadership, or paradigm, becomes established, takes over, and consolidates power. This often entails a refinement of the resource allocation systems in society and the economy - those who are in, and those who are out - which give rise to some form of bureaucracy to administer this new system. The new distributional system is a feature of the second stage. The new system then works well for a time. There is a degree of economic prosperity and societal harmony in the third stage, as it is generally accepted and few are unable or willing to challenge the prevailing consensus.
However, the growth of bureaucracies lead to excesses in spending and the growth of debt in the fourth stage, which also sees widening gaps in wealth and political power. Eventually, in the fifth stage, the repayment of public debt destabilises the established harmonious consensus. It gives rise to conflict around the consensus over who should pay what taxes for which benefits. This eventually leads to open conflict in the sixth stage that undermines the existing consensus, giving rise to a new consensus at the outcome of the conflict, taking us back to stage one again.
The model not only outlines the six stages of conflict, but also suggests that they may occur in five key areas — the economy and trade, who gets to use different technologies, a geospatial conflict, conflict over the distribution of capital, and straight out hard power conflicts.
The economy and trade conflicts are disputes over goods, services, and finance. They focus on who gets what, who does what, and who pays for what. Included in this category would be the sort of budgetary politics we are all accustomed to. Questions of who gets taxed and by how much. Who receives funding and what for. The every day business of government, except with a much harder focus. In the private sector, this ends up as a tussle involving companies, their staff, their customers, the regulators, and their suppliers, both at home and abroad. Again, the question of inflation adds an edge to these conflicts.
Although technology is part of the solution to these conflicts, there are also issues around the sharing and production of technological assets. This adds a dimension to the distributional question, especially over the introduction of labour saving technology. The impact of the technological question does not occur evenly from a geospatial perspective. It brings into question issues of territoriality, political boundaries, and the dimension of alliances. We do not live in the ideal world of liberalised trade, and there are some places, people, and goods in which trade is not allowed.
Of course, the question of trade has to be seen in conjunction with that of capital flows. We live in a world of asset freezes and seizures, blocks to capital market access, and trade embargoes. This is a feature of the late conflict cycle, as society turns inwards from looking outwards. It brings up the issue of the use of force to settle disputes. That is very much a feature of the late conflict cycle. By the time we reach this point, the prospect of reconciliation will have broken down.
It is interesting to take each of these lenses to map against each of the stages of conflict. That is a matrix worth pursuing in the future. For now, we need to concern ourselves with where we are today, and what that suggests for the future.
We have previously stated the view that we believe that we are somewhere in the region of stages five and six of the debt cycle. Money across the globe is being printed without any reference to the real economy. An inflation has started, and has some way to go. We are seeing some evidence of a flight into hard currencies, as evidenced by the strength of the US Dollar (up almost 32% in the past decade), and into physical stores of wealth, such as gold (up 57.2% over the same period), as faith in more peripheral currencies starts to wane. The financial stress is accompanied by large and increasing wealth gaps. In stage six of the debt cycle, the currency breaks down and stands in need of reform. We are some way from that point, but it is the direction in which we are headed.
Where would that put us on the conflict cycle? There is evidence to suggest that we are firmly in stage five of the conflict cycle. The societal consensus around a number of key issues is starting to break down. We have previously written about three of these — the dire state of the public finances, the generosity of the public settlement for an ageing society, and the cost of heading towards net zero. In each of these areas really tough decisions need to be made. Possibly two of the three ambitions can be achieved, but not all three, and the conflict zone is likely to be over which ones are dropped.
The immediate prospect is for politics to become a bit more nasty and confrontational than it already is. If the public finances are to be addressed, that could entail some steep tax increases at a time of relatively high taxation, or some fairly deep cuts to public spending, at a time when much of the public sector appears to be dysfunctional. If the generosity of the public settlement for an ageing society is to be addressed, that opens up the possibility of the growth of an age based form of populism, which was just under the surface in the vote for Brexit. Or if the cost of heading towards net zero is addressed, the we could see enhanced non-violent public disorder from organisations such as Extinction Rebellion or Just Stop Oil. Which ever way we turn, some form of disruption appears to be in the offing.
This doesn’t paint a picture of a happy future in the near term. Part of it is the continued slow decline that we are accustomed to. However, the one light of hope is that out of the impending turbulence, the seeds of renewal are likely to be sown. Until these become evident, we continue to ask: “Who would want to win the next general election?”
© Stephen Aguilar-Millan 2023
