Author: Ray Dalio

Translation: Shen Chao TechFlow

Shen Chao Guide: Ray Dalio, founder of Bridgewater Associates, has rarely published a lengthy article on the trajectory of the Iran war, with a highly clear argument:

The only key variable in this war is the control of the Strait of Hormuz, and the cost of losing control may not just be a defeat—he likens it to the 1956 Suez Crisis, a turning point in the decline of the British Empire.

The article discusses the interconnected logic of reserve currency, debt, gold, and geopolitics, which has direct reference value for macro asset judgments.

The full text is as follows:

Comparing the current events with similar situations in history and cross-referencing with well-informed leaders and experts has always been my way of making better decisions. I find that most wars are filled with huge disagreements over their trajectory and unexpected developments.

However, in this Iran war, the conclusion is obvious and is almost a consensus among all parties: everything ultimately comes down to who controls the Strait of Hormuz.

The judgment I hear from leaders of governments, geopolitical experts, and people around the world is the same: if Iran retains control over the passage rights of the Strait of Hormuz, or even just retains it as a bargaining chip:

1. The United States will be seen as having lost this war, and Iran will be seen as the winner.

This is because Iran's control of the Strait of Hormuz and its use as a weapon will clearly demonstrate that the United States has no ability to resolve this situation. Allowing Iran to block the world's most important strait—this is a route that must be secured at all costs—will cause enormous damage to the United States, its regional allies (especially Gulf allies), countries that rely most on this oil passage, the world economy, and the world order.

If Trump and the United States cannot win this war—and the measure of victory is very simple: can they ensure safe passage through the Strait of Hormuz—they will also be deemed as having created a disaster that they are powerless to fix.

Regardless of the reasons for the United States' failure to win control of Hormuz—whether it is anti-war politics threatening Trump's political control before the midterm elections prompting him to back down, his and American voters' unwillingness to bear the cost in lives and money necessary to win this war, the United States lacking sufficient military strength to seize and maintain control, or his inability to rally other countries into an alliance to keep the strait open—it doesn't matter.

Trump and the United States will be seen as having lost.

My interpretation of history and my judgment of current developments lead me to believe that if the United States loses in this way, the loss of control of Hormuz could very well replicate the impact of the Suez Crisis on the British Empire (in 1956), as well as similar failures impacting the Dutch Empire in the 18th century and the Spanish Empire in the 17th century.

The patterns of events leading to the collapse of empires are almost always the same. I have a more comprehensive discussion on this in my book, "Principles: Navigating the Changing World Order," but I can tell you here: there are countless historical cases where a weaker power challenges the dominant global power for control over a key trade route (for example, Egypt challenging British control over the Suez Canal).

In these cases, the dominant power (such as Britain) threatens the weaker power (such as Egypt) to open the waterways, while everyone observes and adjusts their positions and funding flows based on the outcomes.

This decisive "final battle"—to determine victory or defeat, and the survival of empires—reshapes history because people and capital quickly and naturally flow away from the losers.

These shifts impact markets, particularly the debt, currency, and gold markets, as well as geopolitical landscapes.

So many similar cases have led me to derive the following principle: when the dominant power holding the world reserve currency overextends itself financially and exposes its weaknesses by simultaneously losing military and financial control, be wary of allies and creditors losing confidence, the loss of reserve currency status, debt assets being sold off, and currency devaluation—especially relative to gold.

Because people, nations, and capital will quickly and naturally flock to the winners—if the United States and Trump cannot control the flow of passage through the Strait of Hormuz, it will threaten America's global power and the existing world order.

For a long time, it has been taken for granted that the United States is the dominant power, capable of defeating its opponents militarily and financially (including of course mid-tier powers); however, the cumulative military, financial, and geopolitical consequences of the Vietnam War, the Afghanistan War, the Iraq War, and this potential Iran War are not good news for the sustainability of the United States and the US-led world order since 1945.

Conversely, when the world’s dominant power showcases its military and financial might, it enhances confidence among all parties and their willingness to hold its debt and currency.

Reagan immediately facilitated the release of hostages from Iran upon his election, and then during the Iran-Iraq War, when Iran attacked Gulf shipping, ordered the US Navy to escort tankers, demonstrating his and America's strength against Iran.

If Trump can prove that he and the United States have the ability to fulfill his promises—that is, winning this war by ensuring free passage through the Strait of Hormuz and eliminating Iran's threats to its neighbors and the world—it will greatly enhance external confidence in his and America's strength.

2. On the other hand, if the Strait of Hormuz remains in Iran's hands, used by them as a weapon to coerce America's Gulf allies and the broader world economy, then everyone will become hostages of Iran, and Trump will be deemed to have actively provoked a war he did not win.

He will place America's allies in the region in a tremendous predicament and lose credibility—especially considering what he has previously said.

For example, Trump has said: "If mines are laid for any reason and not cleared immediately, the military consequences for Iran will be unprecedented."

"We will easily destroy those vulnerable targets, making it almost impossible for Iran to rebuild as a country—death, fire, and fury will be visited upon them."

"The new leadership in Iran must obtain our approval; otherwise, it will not last long." I often hear senior decision-makers from other countries privately say, "He talks a good game, but when it comes to difficult moments, can he fight and win?" Some observers await this confrontation as if Romans sat in an arena, or sports fans waiting for the ultimate championship showdown.

Trump is currently calling on other nations to join the United States to jointly ensure free passage through the Strait of Hormuz; whether he can do this will reflect his ability to build alliances and rally strength—if successful, it will be a significant victory.

With only the strength of the United States and Israel, it is difficult to ensure the safe passage of vessels without reclaiming Hormuz from Iranian control, which is likely to require a large-scale campaign to achieve.

The outcome of this war is critical for the Iranian leadership and the largest, most powerful groups in Iran.

For the people of Iran, this war largely concerns revenge and holding onto certain things that are more important than life.

They are willing to die—because demonstrating the will to die is crucial for their self-esteem and for displaying devoutness that can bring the highest rewards—while at the same time, Americans are worried about high oil prices, and American leaders are fretting over midterm elections.

In war, one’s ability to endure suffering is often more important than the ability to inflict suffering. Iran's strategy is to attempt to prolong the war and escalate it, as it is well-known that the American public and even American leaders have a very limited capacity to endure suffering and prolonged conflicts.

Thus, if this war becomes painful enough and drags on long enough, Americans will abandon this fight, and their Gulf "allies" and other "allies" around the world will see that the United States will not protect them at critical moments.

This will damage the relationships between the United States and similarly situated countries.

3. Despite discussions about ending this war through an agreement, everyone understands that no agreement can truly resolve this war, as agreements are of no value.

Whatever happens next—whether leaving Hormuz in Iranian hands or taking control of it—is likely to be the worst phase of the conflict. This "final battle" will very clearly distinguish which side gains control and which side loses control, and it is likely to be a large-scale campaign.

Quoting the Iranian military command: "All oil, economic, and energy facilities in the region that belong in part to American-owned or American-partnered companies will be immediately destroyed, reduced to ashes."

This is what they will attempt to do. If the Trump administration successfully brings other countries in, sending naval ships for escort—while these waterways have not yet been mined—we will see if this can become a solution.

Both sides are aware that the decisive battle that will determine the final outcome still lies ahead. They also know that if Trump and the United States fail to fulfill their promise of reopening the strait, the consequences will be extremely severe.

On the other hand, if Trump wins this final battle and eliminates the Iranian threat for at least the next several years, it will leave a strong impression on everyone, enhance Trump’s authority, and demonstrate America’s strength.

4. The direct and indirect impacts of this "final battle" will ripple globally, affecting trade flows, capital flows, and geopolitical trends with countries like China, Russia, North Korea, Cuba, Ukraine, Europe, India, and Japan.

This current war, along with recent other wars, is part of a broader classical "big cycle" evolution, having financial, political, and technological implications.

The best way to understand these implications is to study cases of past wars with similar contexts and apply the lessons learned to the current situation.

For instance, a country's capacity to wage war financially and militarily is influenced by the number and intensity of wars it participates in, the domestic political climate, and the relationships with nations whose interests align (for example, those among Iran, Russia, China, and North Korea).

The United States is incapable of waging multiple wars simultaneously (no country can), and in this highly interconnected world, wars can spread rapidly in unimaginable ways, just like a pandemic.

Meanwhile, internally, especially within democracies where there are huge disparities in wealth and values, the struggles over what should be done, how much burden should be borne by whom, and in what form (be it money or loss of lives) are endless.

These direct and indirect relationships and consequences will almost certainly emerge and are very difficult to predict, but they will not bode well.

In concluding this article, I want to emphasize: I am not a political figure; I am merely a pragmatic person who must make judgments about what is to come and learn from history to do so better.

Now I am sharing my principles and thoughts in the hope of helping others navigate this turbulent period.

As I have explained before: by studying the rise and fall of empires and their reserve currencies over the past 500 years—this is the research I have conducted to make better global macro bets, and I have shared it in my book and YouTube video "The Changing World Order"—there are five interrelated forces driving the evolution of monetary order, political order, and geopolitical order. They are:

1) Long-term debt cycles (discussed comprehensively in my book "How Countries Succeed or Fail: The Big Cycle"),

2) Related cycles of order and chaos in political contexts (evolving through clearly identifiable stages, possibly leading to civil war in the worst-case scenario),

3) Related international geopolitical cycles of order and chaos (also evolving through clearly identifiable stages, possibly leading to devastating world wars in the worst-case scenario),

4) Technological advancements (which can improve or destroy lives), and

5) Natural events.

Everything happening in the Middle East right now is just a small part of this big cycle at this moment in time.

While it is impossible to predict and grasp all the details, it is relatively easy to assess the health and evolutionary phase of these five forces and the overall big cycle.

For you, the most important thing is to ask yourself: is the evolution of this big cycle real, and do these indicators reveal our position within the big cycle—if so, what should I do?

If you wish to ask me questions in the comments section, I am always ready to engage with you on these issues.