Ray Dalio, the legendary hedge fund manager, joins me in this episode to talk about the economic and political cycle of the world, and why the United States is in one of the worst economic cycles in history. We talk about why this is happening and how to deal with it.
00:00:00.160Ray Dalio, thank you very much. We spoke last year in exactly this place and you outlined in part kind of the cycle that you see in civilizations vying for supremacy of the world.
00:00:13.180And not everyone, I think, kind of bought into your views on this and you were derided as, you know, Jeremiah's scaring people and everything.
00:00:21.160A year later, you have a new summary of ideas that you've been formulating for a long time out this week and about 18 people have sent it to me.
00:00:30.580And so I think we've reached a moment where people are ready to hear what you're saying.
00:00:33.440So if you wouldn't mind outlining in whatever detail you like the cycle that you see the countries go through and where our country, the U.S., is in that cycle.
00:01:26.640And it builds up over a period of time.
00:01:28.680And it's a mechanics that when debt service payments rise relative to incomes, it squeezes out other spending the way it would do for you as an individual, the way it would do for companies, except governments can print money.
00:01:45.460But that squeezes out spending, and that becomes a problem.
00:01:49.940And then you also have a supply-demand problem.
00:01:53.560So when you have a new monetary system, which the United States had the new monetary system, and the dollar was the world's reserve currency, then you can sell a lot more of the debt.
00:02:06.720So there's a supply and a demand, right?
00:02:09.540And so when that builds up, and everybody's one man's debts or another man's assets, and they build up holding a lot of dollar-denominated debt, and then they sell a lot more debt, then there's a mechanics of that supply-demand.
00:02:24.000And then when you have politics and world politics, geopolitics enter into it, that monetary system is more at risk for those reasons.
00:02:33.860But the first force of these five forces is the mechanics of this process, which is the monetary system.
00:02:42.260The second is there's a domestic political order.
00:02:46.240All countries have an order, a system, and all these orders change, and they evolve.
00:02:51.380And, of course, that is connected to the economic system.
00:02:56.360And so when you get large wealth and values differences, and there's a sense that the system isn't working for them and there's greater polarity, there's the emergence of populism, like in the 30s, you know, the left and the right.
00:03:11.040And that populism gets to the point that there are irreconcilable difference.
00:03:16.740In other words, the lack of willingness to compromise, the lack of willingness to accept loss, losing one's vote, and so on.
00:03:27.040But a fight and win for me at all costs.
00:03:30.020Like in the 30s, four democracies chose to be autocracies because the polarity was so great and the willingness to go along with that democracy system ceased to exist.
00:03:42.400So that dynamic has happened throughout history.
00:03:45.900And then the third is the geopolitical order, how countries work relative to each other.
00:03:55.380And after World War II, we created a system, a multilateral system, in which it was in some ways naive, but it was very different than existed before,
00:04:06.200in that by being multilateral, having United Nations, a World Trade Organization, a World Health Organization, a World Court, and all of those,
00:04:14.620the idea of being representative and they would make decisions in a certain rule-based system was the path.
00:04:23.960And, of course, the problem of that is that any system has to have its enforcement.
00:04:30.580And if the system as a whole, a multilateral system, is not consistent with the interests of those who are the most powerful, you know, power rules,
00:04:40.640and so you have the dynamic of the breaking down of that order, right?
00:04:45.440So we're breaking down the monetary order in a very classic way.
00:04:49.620We're breaking down the political order in a very classical way.
00:04:53.100We're breaking down the geopolitical order.
00:04:55.420So those orders, we have to recognize throughout time, all of those orders have changed.
00:05:01.040There's never been a time that they haven't changed and haven't broken down in their issues,
00:05:05.260and they're getting back to how they were in some ways in the past.
00:05:46.720There are tests of these powers, and we're in a power type of dynamic.
00:05:51.260Now, when you understand that that dynamic works through time, and you get down to its individual symptoms.
00:05:59.760In other words, there's, in my book, Principles for Dealing with the Changing World Order, which I wrote about five years ago.
00:06:07.280I took, and I broke that cycle into five parts of the cycle, six parts of the cycle.
00:06:13.660And like a disease, you can see the symptoms in those parts, and you can see it progress, and you can see the choices that exist at those stages.
00:06:24.220So when you're in a different stage, the leadership has a different stage.
00:06:28.860And all I wanted to do, whether it's in that book or in our conversation here today, is to try to let people see that.
00:06:40.400And I'm just a practical investor, right?
00:06:44.620I've been, for 60 years, I've been a macro investor.
00:06:48.080So I have to bet on what the future is going to be like.
00:15:50.800What is that way of working together so we do not do each other harm?
00:15:56.940Because we are at a point, let's say, as we come to the next midterm elections, you know, and there's a significant probability that the Republicans would lose the House and talk of even could be the Senate.
00:16:14.360OK, now when you go after that and you imagine what the conflict can be like, how will that conflict work?
00:16:23.360Will it be rule of law or will it be a win at all cost?
00:16:28.260And as that win at all cost and what that means, is there rules?
00:16:40.300It's not easy to get to that point because you have to deal with, you know, how do we stop fighting with each other and how do we do the right things to get strong?
00:16:49.860And that's a great challenge in history.
00:16:53.440So where are we now, given the five factors that you outlined, where is the United States or even really the West will include Europe in this very familiar cycle of rise and fall?
00:17:04.420In my book, I show 18 measures of health having to do with education, military, reserve currency, a number of measures that show strength.
00:17:22.340And the United States is the strongest power, which has been in relative decline and experiencing these conflicts.
00:17:34.080And that's measured if you go in the book, how principles for dealing with the changing world order, you'll see a number of charts.
00:17:41.460So I don't want to just pronounce it that way.
00:17:44.080I just want to say that like if you were to take education and you take scores, piece of scores and so on in statistics, you will see that there are rising powers, there are declining powers, there are large wealth and values differences.
00:18:02.120And we are in what is what I call stage five, which means we are sort of at the brink, but not over the brink.
00:18:12.320In other words, we're not there's a capacity to it's before a period of great disorder when there can be a monetary breaking down of the system.
00:18:27.620You know, what is money? We should talk at some point.
00:18:30.360What is money and can I can money be an effective storehold of wealth and what happens if it's not?
00:18:35.220And so we are at what I would call stage five in a six stage cycle.
00:18:42.900The sixth stage is when there's a breaking down of these orders.
00:18:46.720We're not there yet, but we are close to there and headed in that type of direction.
00:18:53.720What does a breakdown look like? What does stage six look like?
00:18:56.840Well, from the monetary point of view, it is that the demand for the reserve currency is not sufficient to meet the supply.
00:19:16.500So what that means is you see a supply demand problem.
00:19:25.380You produce a lot of supply and the demand's inadequate and all things being equal, there will be a rising long rate while the central bank is trying to hold that from down by easing the short rate and shortening the maturity of the debt that it sells.
00:19:45.940Okay, that dynamic and that then the currency, these debts and the currency falls relative to the non-fiat currencies, in other words, like gold.
00:19:59.180In other words, you are seeing a movement by central banks and countries to hold gold as an alternative reserve currency, partially because of that supply demand situation and partially because they worry that there may be a payments problem.
00:20:23.460And the payments problem, like it happened in Japan prior to World War II, you had an economic problem and the United States, sanctioned essentially, didn't pay the Japanese their debt, the money in terms of that, like a debtor creditor problem.
00:20:44.220And they didn't make those payments, much like Russia, you know, they basically took control because they have the ability to take control of the treasuries and other things.
00:20:56.020And so there is becomes more of a reluctance to hold that money as a movement more into the non-fiat currency, which is gold.
00:21:10.000So in other words, other countries perceive a risk in holding dollars because, well, for lots of reasons, but one of them is like if the United States government at the time doesn't like you, they can grab your dollars.
00:21:38.380So you may not feel secure about holding treasury bonds, both for two reasons, because you could be sanctioned or you also, because there's a supply demand problem.
00:21:49.800So you start to see the movement in that direction.
00:21:52.960And then, of course, it's also in that situation, governments want to control their supply demand.
00:22:00.480So they might establish foreign exchange controls.
00:22:03.560They might do certain things like that.
00:22:08.620The United States can feel vulnerable if they can't sell enough of those bonds to others.
00:22:15.300And if the demand isn't, because then interest rates would have to rise because of the supply demand, too much supply relative to the million.
00:23:01.000So if foreign countries don't want to buy your debt and your central bank decides we're going to print more money and buy our own debt with it, which is what we're doing, wouldn't the people doing that stop and say, wait a second, this sounds like an electric windmill.
00:23:40.920Or you print the money and you make up the difference.
00:23:44.980And so since the breakdown of the monetary system in 1971, that was when there were too many claims on gold and we had a system attached to gold.
00:23:54.460And because they were in August 15th, 1971, I remember, well, I was clerking on the floor of the New York Stock Exchange after college, before I went to graduate school.
00:24:06.560Richard Nixon gets on August 15th, Sunday night.
00:24:10.040He gets on the television and he says, we're not going to allow the conversion of that paper money into gold and we're not going to, you won't get your gold.
00:24:22.580I mean, I walked on the floor of the Stock Exchange the next morning.
00:25:05.500So, and at the end of the day, since 1971, when we went off the gold standard and we went to a fiat monetary system, we have always done that.
00:25:17.980And, you know, the Fed put, you know, that's the way it is.
00:41:21.300Because I think people pay too much attention to the spot price of whether it's a spot going to go up or down or whatever.
00:41:29.680And what they don't do is think, if I didn't have any view on gold, what amount should I have in my portfolio?
00:41:38.320In other words, if you did a portfolio construction exercise and you said, what is an effective diversified portfolio and what assets should I have and what amounts in that?
00:41:51.860Because gold is a very effective diversifier and also a protector of this, during very bad times, gold does very well.
00:42:02.460When the rest of your portfolio does poorly because, let's say, the 70s being a good example or the 30s being a good example, during those times, it's a diversifier.
00:42:14.500Okay, so the optimal amount to have for an individual or a central bank might be different, but an individual would be, depending on what's in their portfolio, between 5% and 15% of a portfolio.
00:42:29.880And so what I would say is, if you approach that question that way and you think, what should I have, you should have what we talked about before, a year ago, I guess, and so on.
00:42:43.160You should have that particular amount somewhere in that neighborhood, depending on what your portfolio is like, because it's an effect of diversifier and it is a money, okay?
00:42:54.600When the traditional money does badly, this money does well.
00:42:58.520When the traditional money, which gives you an interest rate, then it's the reverse.
00:43:05.720So that's the thing that I would try to convey to people, you know, okay, do you have some of that?
00:43:12.960What's the amount that's your comfort level, you know, but have some?
00:43:17.680So if you were running the United States or a country like the United States in its current position,
00:43:25.780what would you need to do to protect your country in the midst of these changes, some of which are inevitable, some of which maybe aren't?
00:43:33.820Like, what are the steps specifically that you would take to help your country?
00:43:37.480I would be dealing with achieve something like a 3% budget deficit, not more than a 3% budget deficit.
00:43:52.840I would try to minimize or eliminate, but minimize the risks of that dynamic I was talking about.
00:44:07.040So you would get the budget deficit to 3%?
00:44:08.580Yes, but, and I would say to every, I've said to legislators, I go down to Washington and, you know, leaders of both parties,
00:44:20.320and I said, it's like being on a ship and everybody on the ship is headed to a rock and that,
00:44:34.800and everybody knows that if you have a deficit of 6% or 7% of GDP, you're going to have a supply demand problem.
00:44:44.800And I have the conversations, and by and large, this is the agreement.
00:44:49.320And I don't care whether you turn left or you turn right in terms of that, but do not hit the rock.
00:44:55.360And what if I would do is I would take a 3% pledge, in other words, say I will get it down there,
00:45:00.940and if I can't agree on how, I would do it proportionately with three things.
00:45:05.940I would, proportionately with taxes, spending, in other words, if you raised taxes by 4%,
00:45:14.440if you cut spending by 4%, and you lowered, which would lower interest rates because it improved the supply demand
00:45:23.620and it would also convey the message that it's being dealt with, you would also lower the interest rate on the debt.
00:45:30.160And those two things would begin to get it to approach about a 3% budget deficit and so on.
00:45:38.140But doing that would require, would be politically impossible.
00:45:44.720So I have these conversations, and the answer is, you know, like, Ray, you don't understand the world of politics.
00:45:51.940If I'm, I have to give at least one of two pledges, the pledges, and probably both.
00:46:03.320The pledges is, I won't raise your taxes, and I won't cut your benefits.
00:46:10.940Okay, you don't raise the taxes, you don't cut.
00:46:13.760So there's a big move here, primarily, to try to grow your way out of it.
00:46:19.980In other words, again, you know, stimulate fiscal and monetary stimulation and hope that that produces,
00:46:28.660perhaps with the new technologies and so on, that's the idea, enough income growth and so on,
00:46:35.960so that this moves toward that 3%, which is, in my opinion, a not likely occurrence.
00:46:44.540Why is it not, it's not likely that technology will turn out to be so beneficial and lucrative that it kind of erases these problems?
00:46:54.420Well, the artificial and technology miracle is a great miracle, okay?
00:47:05.220And I've gone through, studied great miracles.
00:47:09.860The invention of electricity, I mean, wow, imagine where we'd be without that.
00:47:16.020But if you, anyway, you know, I could describe what the 20s would like and 2000s and like and so on.
00:47:23.360The ability to convert that to enough of a productivity miracle is not, I think, probable in the, also the time frame that we're dealing with.
00:47:37.820So this is an issue, the debt is, and that dynamic remains an issue.
00:47:42.780And then, of course, what there is, is the dynamic of how that prosperity and productivity is shared.
00:47:49.820In other words, there's the, it creates a great wealth gap.
00:48:19.660And, okay, now, how are you going, you still have to deal with the nature of that dynamic of how it comes.
00:48:26.100So the question is, what is the amount of productivity converted into income?
00:48:30.960How does the government get that income to deal with its debt so the holders of the debt get an effective real return and don't have the problems?
00:48:39.720How does that happen, you know, in a politically acceptable way?
00:48:43.060There are lots of things that make that, you know, very, very difficult.
00:48:47.760I want to say something about wealth and wealth taxes, which is, I think, worth understanding.
00:48:54.700There's a big difference between wealth and money.
00:48:58.760And I want to just highlight it, okay?
00:49:04.200Wealth is very easy to create because it's almost accounting.
00:49:14.560What I mean by that is I could put out a raise $50 million or individuals can raise $50 million at a billion-dollar valuation.
00:49:28.140And they will call that that person's a billionaire and that there's a billion dollars more wealth, okay?
00:49:36.320It's not literally that you have to have those transactions.
00:49:40.700And wealth is not worth very much unless you convert it to money.
00:49:47.120In other words, you have all of that wealth, but you can't spend wealth.
00:51:31.260So the wealth issue is a political issue.
00:51:40.320The wealth gap issue is a political issue, and it's a market issue, and it's an important issue to understand.
00:51:49.320Is it inevitable that you would see, given the way our wealth is allocated across 350 million people, that you would get the rise of wealth taxes?
00:52:18.320In other words, everybody would say, wait a second, all these people are having all the wealth, and they're not paying any taxes on their wealth while this is going on.
00:52:26.820Okay, we need to go where the money is, right?
00:53:18.420You're not judging another way, you're just describing what's happening.
00:53:20.380But because that is happening, and people are moving, and not just within the country, but outside the country,
00:53:26.480do you have any guesses as, or observations about where people are moving?
00:53:31.000So clearly in the country, it's Texas, Florida, but Wyoming, but in the world, where are people moving?
00:53:37.280Generally speaking, they're moving to where there's civility and opportunity, and there's not much fighting.
00:53:44.400You know, they want to be in places that have a, I don't know, they go to places that have lower taxation, but also vibrancy.
00:53:56.960You know, they go, Texas and Florida, as you say, and here in the Middle East, or in, you know, places that are also vibrant, and things are happening.
00:54:10.060And so you could see the patterns of those kinds of movements.
00:54:13.480And then the problems that that creates is a hollowing out in those places, the other places.
00:54:18.960Because when they leave, the tax base is, you know, roughly speaking, you know, the top 10% pays about 80% of 76% or something of the taxes.
00:54:34.340And so when you lose, let's say half of them, you lose a big amount of tax revenue, and then that becomes a, you know, a dynamic.
00:54:45.660Could you see, given all the factors you've described, like democracy, representative democracy continuing in a country like ours?
00:56:41.040I see people not worrying and sort of blithely throwing it out.
00:56:44.480Like, almost like the way they talk about some foreign policy operations is go in and, you know, kill these guys, put these guys in, it'll be fine.
00:56:51.180And that same attitude I hear a lot about the United States.
00:56:55.060Like, well, we're going to have to fight it out at some point.
00:56:58.540You've taken a close look at civil wars throughout history.
00:57:03.180Well, civil wars and international wars are so horrendous that the most bold people who were, you know, trumpets blaring and going into that,
00:57:21.180and so on, everyone came out of it with deep regret.
00:57:25.360I mean, we can see while we see it on the news and you can see that, but just imagine how horrendous the wars are.
00:57:37.780So, I think it's a cycle, you know, your confidence and your boldness is increased by the distance that you have to your last wars, you know?
00:57:56.560You were saying earlier, there's a difference between money and wealth, and wealth, you said, is not necessarily easily convertible to money.
00:58:11.560In a society like ours, where is the money?
00:58:41.140And, and the central bank really controls the money.
00:58:47.720And then you could look at who has that increasingly, like you could look at M0, M1, and you could see money market accounts, and you could see those very liquid, you know, money, safe money, treasury bills, those kinds of things.
00:59:04.540And so that, you know, but ultimately it's the central bank because they control the supply demand.
00:59:12.400So, I mean, if in a period of volatility, it would seem like the central bank would clamp down on the money supply circulating among people.
00:59:29.780Or 1971 when there's too many claims and so on.
00:59:41.360The trade-off is that people need money, and they may need money to pay debt, and they may need money for whatever reasons.
00:59:52.640And so they are tempted, therefore, to create money.
00:59:57.600And so you see the coordination between fiscal policy and monetary policy.
01:00:02.480So you saw two big waves of large budget deficits and large supports of central banks, first under Trump when the COVID began, and then under Biden when they got in, because he also wanted more universal basic income.
01:00:22.260In both of those cases, the government sent out lots of checks, and that's also a popular thing to do.
01:00:30.300Discipline, financial discipline is not what the population typically likes.
01:01:27.380And, but what happens in the digital currency, of course, it's easy to transact and so on, almost, and it'll be like money market funds, I think.
01:01:40.220The question will be first, will they be able to offer interest?
01:01:45.520So there's a debate now as to whether they will be interest.
01:01:49.320If they're not able to offer interest, and there will be a debate, probably they won't be.
01:01:55.940But then they're not an effective vehicle to hold it in because you'll have the depreciation.
01:02:58.280And if you're politically disfavored, you could be shut off.
01:03:01.520Politically disfavored, you could be shut off, yes.
01:03:03.780So those kinds of issues enter into it.
01:03:08.020For those reasons, I don't, and they're very tiny, I don't think that you're going to see the development of central bank digital currencies to be of a magnitude that it's going to be, you know, that big of a deal.
01:03:25.340So I think that doesn't mean it won't grow, but I don't think it's going to be a big deal.
01:03:34.220So my last question is, given your description of the United States as in stage five in a process that only is six.
01:03:49.640It's the time that it's time to worry.
01:03:51.960So you go to Washington, you try to convince policymakers, members of Congress, people, administration, here's what you need to do.
01:03:59.060You've described the reception you get as like, hey, you don't understand politics, we can't do that.
01:04:03.400So that's, you know, not a lot of headway made, obviously, for obvious reasons.
01:04:08.220Do you have advice for people watching who are not policymakers, who are just Americans, as to what they can do to prepare for whatever comes next?
01:04:54.520And most importantly is raise your children well, you know, so that they're well-educated and able to be productive and also civil so that they can be, be effective.
01:05:13.120And as I say, there are only three things a country needs to do, and that's the same for the individuals.
01:05:18.380You know, raise your kids well so that they're well-educated and can earn an income.
01:05:24.320And operate, go to places that work well so that they, there's civility and productivity and there's opportunity.
01:05:33.700And stay out of civil wars and international wars.