It was the government that was the big buyer. Then you get everybody leveraging up. Then you got a problem.
Do you own Bitcoin, right?
Yeah, I have some. Not nearly as much as gold. The AI war, it's a war that no country can lose. If China or the US really lose this war, it's more important than profits. We're at a civil war internally and we're at an international war simultaneously. Just have people behave logically. Maybe that's too much to ask. We hope.
All right, besties. I think that was another epic discussion. People love the interviews. I could hear him talk for hours. Absolutely. We crushed your questions in a minute. We are giving people ground truth data to underwrite your own opinion. What do you guys think? That was fun. That was great.
I'm going to start off by sharing a couple stats. Today, the US has $36.44 trillion of federal government debt and GDP of 29.1 trillion giving a debt to GDP ratio of 125%. And this ratio has climbed steadily since the pandemic began in 2020 when the federal government debt was 20 trillion and GDP was just 21 trillion. So since the pandemic, federal government debt has risen by 80% while GDP climbed 38%. And steady inflation from the large stimulus of money from both central banks and the US government caused the Federal Reserve, which is the US central bank, to raise interest rates, driving up the cost of borrowing. And despite recent efforts to cut interest rates again, markets have traded treasuries down, causing the long-term interest rates of US debt to spike up to levels that we have not felt since just before the 2008 global financial crisis. To keep the economy growing, the US government's now running a nearly $2 trillion annual deficit, nearly 7% of GDP, while paying over a trillion dollars per year in interest alone, on just the existing outstanding debt. The Congressional Budget Office, the CBO, projected last week annual budget deficits are expected to be equal to 6.1% of GDP through 2035, which the CBO noted is significantly more than the 3.8% that deficits have averaged over the past 50 years. The national debt slated to rise by nearly $24 trillion over the next decade. A sum that does not even include the trillions of dollars in additional tax cuts that the current administration may put into place. Is the US headed for bankruptcy? What are the mechanics of the looming crisis ahead? And can we avoid it? To talk about this what I consider to be the most important topic in the world at the moment is Ray Dalio who I consider to be the preeminent thought leader on this matter. In 2021 as everyone knows Ray published the changing world order why nations succeed and fail. I declared it the book of the year and I thought it was the most prudent and important thing that everyone should read. And unfortunately, I feel like many in politics, many in government have largely ignored some of the prudent warnings shared in that book. This week, Ray is releasing a new book called How Countries Go Broke in which he analyzes and shares his studies on this particular topic. And I'm really excited for Ray to join me here today. Ray, thanks for being here.
Thanks for having me here to talk about this important issue.
Well, so so let me just start by asking why you wrote the book, why you putting it out now, and maybe we can just talk about the timeliness of all this from your point of view.
Through my roughly 50 years of being a global macro investor. I would keep to myself and then now I'm 75 and I want to pass along the things that have helped me and the bond markets global mar markets I've been involved with all over the world for a long time and there's a mechanical process which is not understood about the question when is enough debt when does it matter how does it work mechanistically and I feel compelled to get that understanding out. Now, how do the mechanics work for countries, for the United States, for other reserve countries? I want to make sure that's understood.
Thanks for doing it. And the basis of the analyses is your work at Bridgewater and outside of Bridgewater. Is that right? You you've kind of gathered quite a bit of material together for this book and you've shown a lot of historical context. maybe just share a little bit about where the data came from and and how you've kind of conducted these studies over what period of time.
You know, Bridgewater and I up until my passing along Bridgewater uh maybe a little over a year ago has been indistinguishable you know and the same and so over through that period of time we've been involved in the markets I've been involved in the markets and thinking about such things. So the data is largely public data that's available for anybody. We just, you know, collect it from all different spots and go back through history like I did in changing world order. We were in some cases in the changing world order because we were dealing with data that was hundreds of years ago. We would go through archives and pull data out. The data is all available to everyone.
And so I think that's really important because this isn't just an opinion piece you're writing as an analyst. You're sharing quite a lot of empirical data that's publicly available that anyone can go access and you're taking a look at that data and saying this is the pattern. This is the trend that we've seen historically. It has repeated over and over again. I think you make a really important point at the front of the book. Only about 20% of the 750 currency debt markets that have existed since 1700 still remain. And all of them that still remain have devalued through the mechanistic process you describe in the book. That's really important to note. You know, we all think that we have this kind of privileged position in the United States and the US is different and this time around is different, but you highlight how so often everyone thinks they're in a good place and then the cycle repeats. You speak about and the primary premise of this is what you call the big debt cycle and you highlight that these big debt cycles typically last about 80 years. They're more easily forgotten than the short-term debt cycles, which last about 6 years on average, plus or minus three years, you say. And we're now 12 and a half cycles of the short-term debt cycle since 1945. So, we've kind of been in this big debt cycle in the US for about 80 years at this point. But maybe we could start by talking about what the short-term debt cycles are that you highlight make up the long-term debt cycle.
Yeah. And I want to emphasize just based on what you said that they're mechanical. They can watch you can watch it. You can do the calculations. So if you read the book, you can see these it'll either make common sense to you. You see the con calculations. To me it's almost like the circulatory system, you know. I think that credit is like blood that brings nutrients to all of the parts of the body and it passes through a system that is like arteries and then credit creates debt. And the key question if it's healthy is does the debt create an income that is more than enough to service the debt and that's like eating vegetables or something. It's a healthy process. And if not credit begins to build up this debt. It becomes like plaque in the arteries. And you can measure it just like you could measure it in the arteries. And you can see how it constricts that circulatory system because as credit and debt service rise, you see that it eats up more and more consumption because you have to spend that. So you could watch the government do that. You can see that how interest is eating up and debt service is eating up and that means there's less money and then you also can see how heart attacks take place and they're very economic debt heart attacks and the way they take place is by looking at the supply and the demand. If you have a lot of debt and then you have a large supply of debt that has to be bought. Somebody's got to buy it. So that when you get to the point where there's debt risks, there's not only the new supply that has to be offered, but there is the possibility of holders of those debt assets selling those debt assets. And so the supply becomes overwhelming relative to the demand. And then what that means is it's the same dynamic as it for the government as it is for an individual or a company except the government can print money. So when that debt service burden rise or there's a big supply demand imbalance, if the government, most importantly the central bank doesn't print money and buy it, then there has to be a rise in the price of the debt to constrict borrowing. And that borrowing constricted that credit that is not going to come will weaken the economy and cause bad economic conditions. And so they can let that happen or they can print money and buy the debt and monetize it. When they do that, that's inflationary and it lowers the value of the debt. In either case, you don't want to hold that debt because either there's a debt service problem or there's a depreciation, you get paid back with a greater supply and cheaper money. And that is the dynamics and that's the mechanism. And because it can be measured, it can be seen in all countries, you can watch it happen. And so like you're going to your doctor, you can measure these things, you can see them, and you can know what needs to be done.
So yeah, I want to just talk about two things real quick. One is just to provide an analogy for folks watching or listening on what it means to have interest levels be so high relative to one's income. So, you know, the United States this year is expected to service debt with over a trillion dollars of interest payments on the outstanding US Treasury bonds. And the government's only going to bring in just under 5 trillion of revenue. So nearly a quarter of every dollar that's being collected by the federal government is going out the door just to pay interest on the existing debt. So in order to fund new programs, the government needs to take on new debt. And the folks that are having to issue that cash to the government end up saying, 'Wait, that's pretty risky now. I need a higher interest rate.' And over time, that interest rate climbs. And then there's this separate entity called the central bank that comes in and says, 'Well, I'll buy the debt ultimately to give the government the ability to continue to operate or give the economy the ability to continue to move.' And the central bank, when you say the word monetize, you mean the central bank ends up, when you say monetize the debt, that means they're buying the bonds, they're buying the debt that's being issued in the market. Is that the right way to
That's right. They're essentially making the money up, right? And buying.
So there's a central in in the US, it's our Federal Reserve and the US government are the two players here. And the Federal Reserve ultimately would in this model and historically obviously during the pandemic and during 2008 they would go into the market they would buy bonds by issuing cash that they're making up effectively.
Very well described and you know a good example was in COVID money. There were two waves. The first wave was the COVID wave in which they put out the government wanted to and actually did deliver a lot more money to people companies than there was a loss of income. So they first wave a lot of that money. Where did they get the money from? They had to borrow it. The central bank then came in and lent them. That was the primary. Then the second when President Biden was elected, there was a second wave of that after COVID it was mostly like a universal basic income thing. In other words, hand people money and we're going to be better off. And so they handed people money doing that same exercise again. And so naturally all these people got a lot of money and so they put them they deposited them in banks they went out and spent and so on and it therefore shouldn't be surprising that we had a big wave of inflation and we also had a lot of banks buy government bonds which they lost a lot of money on and that was that crisis. So that's how the mechanics work.
Right. And when that money gets printed, it finds its way into the economy and the money supply goes up. And the way I kind of think about it, and you've got a nice image in your book that I really appreciate, here's a kind of overview of the big debt cycle that you talk about, which is there's small expansion and contraction waves as debt comes into the market. Debt should drive productivity. But at some point, you accumulate so much debt that you can't drive productivity anymore. And then you effectively have to monetize the debt and everything gets devalued. But as I kind of think about the introduction of money into the economy, the increase in the money supply, I always tell people and everyone screams, 'Oh, the markets are going up. The markets are going up.' But I say the markets are going up in dollar denominated value and there's more dollars. So, you know, the nominal meaning that the actual, you know, index might go up, the NASDAQ might go up, the Dow might go up. But if you've got a lot more dollars, a dollar is worth less. The real question is, has your purchasing power gone up? Have you actually increased your net worth as the markets go up? And when you do the studies, it turns out that inflation goes up, meaning the cost of everything goes up when you pump money into the system. So, of course, it looks like the markets go up. Of course, it looks like asset values go up, but ultimately, if everything's going up, your purchasing power goes down. It's almost like I tell people you have a hundred clams and you use seashells and you're using seashells to buy stuff and then you know there's only five things to buy. Now if you have 500 sea shells to buy stuff the price of the things you're trying to buy goes up because everyone's got more sea shells. Doesn't that ultimately kind of describe what happens as the money supply goes up? The inflation drives the purchasing power down of everything and everyone kind of gets inflated away.
Very well said, Dave. You can't get richer by making money, you know, and the purpose of money purchasing power is what matters at the end of the day. What your money's worth, what you can actually buy with it.
That's right. And there are two purposes of money, which is as a medium of exchange and a storehold of wealth. Saving is very important. And if you don't have savers who have it as an effective storehold of wealth, then you don't have a viable long-term credit market. People don't understand that the bonds become a bad deal. You need that like any marketplace. You need purchasers and sellers to be able to have an efficient negotiation to achieve a balance without the government coming in and printing a lot of money and messing up make a me big mess.
It was the government that was the big buyer.
Okay. So the government takes it on and they make negative rates. So what happens is then you get everybody leveraging up. Yes.
Then you've got a problem.
And so that's how that's how it works. And it's a global issue. It's not just an American issue. Well, that's what I want to get to that in a minute because I want to talk about the relative strength of the United States and how this plays out globally. Firstly, in your book, you describe the big debt cycle following five stages. You call it the sound money stage when net debt levels are low and money is sound and the country is competitive. And then you talk about the debt bubble stage where debt and investment growth are greater than can be serviced from the incomes being produced. And then you call it the top stage. the bubble pops and the credit and debt and markets contract and then this deleveraging stage where the central bank comes in and they start buying all the debt and issuing more cash and the inflation goes up and the value goes down and then finally the big debt crisis recedes and we start over again. But you speak about in the top stage a debt crisis. Can you describe the debt crisis? You know like how do we talk think about the mechanics of what is a debt crisis? Where are we in the United States today with respect to facing a debt crisis and what are the red flags that you look for?
First, when there's a lot of borrowing to service debt, there's what's called, you know, the death spiral is we typically refer to that when a company has it, the government can have it too. And that is that dynamic where there's too much debt and you have to borrow to service the debt and then people investors know that that's a problem to service the debt. So the credit is worse and that means that interest rates go up which is the worst thing that can happen to a heavily indebted entity. And then as they rise you get that spiral. you need to borrow more and so on. So that is also noticed when then there is the key spot is when the debt service becomes large and then like the real red flag the biggest red flag is when there's then the selling of the debt beyond the new supply but the holders of it sell it. And then you can see it in the market action because you can see that long-term interest rates rise while short-term interest rates aren't rising or go down. So it's the free market losing its desire. You have a balance problem in the free market out there. And then you start to see that when the currency then depreciates particularly relative to gold or Bitcoin or other assets and sometimes other currencies. But typically these things happen broadly speaking together in which all currencies go down relative to other things like gold, Bitcoin or tangible values. And so that's what it looks like. That's that edge. Then you start to see the dynamic. So you either see the central bank comes in very quickly and does the buying and when that happens you see then the currency to take a Japan for example if you were a holder of Japanese bonds you lost about 80% of your money relative to gold and about 60% relative to US bonds because you received an interest rate that was 3% less than the corresponding interest rate in the United States. So you lost the interest rate and interest rates in the United States as you know were very low relative to inflation for most of that time. Plus you had a depreciation in the currency. So you lose you know you lost a ton of money in the debt that way because the central bank came in and printed the money. It's very bad for holders of the debt. So and it's a basic thing. You don't have to even get too technical. It's just a supply demand thing, you know.
Well, so are we seeing that in the US today? So the Federal Reserve cut interest rates as of a few months ago. As they've cut interest rates, the market has sold off US bonds rather than buying them. And which is normal when you know rates go down, the price of bonds is supposed to go up. And we are now seeing rates actually climb in the market relative to where they were while the Fed has been cutting rates. Is that a dynamic that's a red flag for you?
While gold has gone up and the Bitcoin has gone up and so that is that kind of market action I'm talking about and you've seen it in other countries too. The UK very classic the dollar has been a relatively strong currency but not measured in gold or bitcoin. All right. So all currencies have gone down and then you've had that dynamic you're talking about and you see it also in like sterling is a good example. Sterling has gone down while UK bond rates have gone up and central banks have held it steady. And so you see it in the market action. You also see it in terms of who the buyers are and who you've seen central banks for example and sovereign wealth funds shift to have lesser amounts of US debt bonds and so on at the same time as they've accumulated gold or hard values.
Yeah, gold is the third largest reserve currency by the way, dollars, euros, gold, and then yen. So, yeah, you're seeing that supply demand shift. And it's partially for all the reasons we're talking about and also partially because of issues like geopolitical issues. Countries sometimes worry about sanctions. Countries China is worried about holding US bonds. Japanese bought a lot of bonds even as a percentage of portfolios the bonds themselves have become such a large US treasury bonds and US debt has become such a large part of the portfolio that it's even from a portfolio rebalancing point of view you don't want so much concentration. All of those factors are in play for the supply, demand, and bonds. That's why I emphasize the you have to look at the supply and demand of bonds.
You've got a table in the book where you look at central government debt level to deficit level across these major markets. So you've got the US, Japan, China, France, Germany, and the UK. And the US is running a deficit 7% of GDP. So the federal government is spending more than it makes at a level that's about 7% of the total size of the economy in the United States, which is the highest of all of these industrialized markets. Second is France at 6%, third is the UK at 6% as well, and then China at 5%. And then these countries are all approaching 100% debt to GDP. Japan obviously is at 215%. So from a relative perspective, one of the points that I've heard a lot of people make is everyone's got this problem. Everyone's got rampant spending. Everyone's got rising debt levels. They're increasing their debt levels to pay the interest on their existing debt and to stimulate their economy. The US is the best strongest currency amongst the group that we just showed. Why would anyone trade out of our currency? I guess from a market perspective, Ray, where else do people go with their worth, their net worth? Where do they transfer their value into if it's not dollars? And doesn't it have to be some denominated currency? And isn't the US ultimately the best? Maybe you can talk about what these alternatives are, gold, Bitcoin elsewhere, but is that realistic at scale? Like is there enough of gold, enough Bitcoin for everyone to transfer all their net worth into those assets versus hold some currency denominated asset? Maybe we can just talk about that dynamic of how do I make the decision about where to store my value, where do I store my net worth.
First of all, the United States and countries like China, you see that a particular dynamic. China, Japan, they're all educational and that means that the bonds, the debt are bad assets. So then what where you store it is in those assets that benefit rather than suffer from the reduced value of money and the buying of it. So and obviously you look at money and what is an international money that is why gold is in it and then there's a question of you know bitcoin or others are a conversation we can digress into that but it can be ideally it's international it's mobile ideally it's relatively private so it's relatively secure because in history. There's the value part of it and then there's the confiscation part of it too in some fashion or another. That confiscation can easily take the form of taxing on holding it. Right.
Because during a time of a debt crisis and I want to get to this in a minute. You talk about the four actions that can be taken tax or taxation, austerity where governments cut spending, restructuring where the debt gets restructured and then the central bank buying the debt. Obviously this notion of taxation it's always played a critical role during these moments and assets are seized or taxed in different ways and transferred away. What about commodities and how did commodity markets do non gold? Is there a difference in commodity markets hard etc?
It's so interesting. I've you know I studied history and I've of course I've been through a bunch of these like the 70s commodities. Ideally also those that might do well if the economy doesn't do well because you're dealing also with the inflation environment is are always gone to you don't want economically sensitive commodities as much but and if unless the sometimes maybe the economy will do pretty well. But there's usually the it doesn't. But in like in the Weimar Republic, give an example, rocks were used as storeholder wealth. Now that sounds really funny, but they were considered building ingredients. In other words, the rocks were used to build things with and so they would store the money in rocks. But any asset I should go store a bunch of GPU chips in my garage H100s from Nvidia except technology devalues them the new technology devalues them right so that's the question what is it it is those things that can't be devalued commodities by the way in real terms all commodities every single commodity in real terms over long decline long periods of time have declined because of productivity. Yeah. Well, every commodity and has declined in real terms because of productivity. So, you would like productivity producing assets that cannot be taxed, can move around from place to place. So, equities of a certain type tend to do that. That's why currency depreciations are associated with that combination of things. Currency depreciation, lowering interest rates and producing money causes equity assets to go up. Not necessarily in real terms. Like in the 70s, they didn't go up in real terms. They went down in real terms. But it is those kinds of storeholds of wealth that can't be taxed as easily that benefit from inflation rather than not.
Right. Okay. The purest play is gold because gold can be transferred between countries. It's used by central banks as a reserve. So central banks will go to it. They are going to it. They'll hold it. It can be private, right? More so than crypto. Crypto is very easily taxed. You know, in other words, the government knows where it is and who's doing what and so on. And it's also an effective asset to tax but it has you know benefits too. It was very interesting when we had negative rates. I was with a group of the central bankers in a discussion of how negative they can have rates and they described that they can have negative rates only to the extent that there's not enough capacity for paper money to be stored. So they estimated, it was funny actually four that they could have over a short period of time up to 400 basis points negative rates. That's crazy because there wasn't enough. They calculated how much vault storage space there was. And then they calculated that they would produce more vault storage space because it would be profitable to do that. And then they that and they said, 'And the good thing is we can tax it.' Yeah. Because if you have a digital currency, you can tax it.
Do you own Bitcoin, Ray?
Yeah, I have some. Not nearly as much as gold. I'm, you know, that's kind of my diversifier. I try to find what are the I have to have some I'm I'm a but I'm a gold guy much more than I am a
Yeah. So, I'm like I'm a productive asset guy. I like owning businesses that make stuff. So, in this environment, what do I own that's a productive asset that's a business that can still see its revenue and its incomes grow as this inflationary effect and this devaluation occurs as we get through a debt crisis like this? What would be the best kind of productive? Is it a mining business? Is it a commodity trading business? What's the right
I'm with you. So, you know, that chart that we showed in the beginning has this line productivity going up, you know, and I think that we're in a um Yeah, that's it. And it and it and it tends to compound on on itself and I think that that's where AI and that is fantastic, but it it depends where you're referring to AI. I think the supercalers in this world have risk issues be be you know you think by you know the um the supercales of or uh video or or you know those I think that the tech war certainly productivity I'm with you man but you want to invest in productivity but there's disruption great disruption that's going to take place and they're going to be the disruptors and the disrupees and it's not necessarily those who are producing the vehicles but it's those who are implementing and changing as a result of having their big impact. I think that like the tech war for the AI war it easily is I think it is actually more important it it's a war that no country can lose. Because it's more important than profits. If you lose, if China or the US really lose this war, it's more important than profits. And so you have to play that war that way. And it could be like electric vehicles or or more in terms of Chinese electric vehicles and the like you can produce them. So I don't think and I think there's such expectations. I think we are going to see applications like I think the Chinese are a bit behind in the chips but they're ahead in the applications in terms
Yeah. Did you see the deepseek announcement this weekend and obviously that was known for a little while now.
Yeah. And so I think you're going to even see well the Chinese play is going to be chips very inexpensive chips embedded into manufactured goods. You'll see robotics. So you're you're going to see Chinese are unbelievably in making things inexpensively terrifically. They own 33% of all world manufactured goods which is more than the combined US German and Japanese manufactured goods Chinese produce more. So, you know, you're going to see that type of competition and it may be it's like solar panels or something, you know, right? It's profit doesn't matter. So you have to go where there's I I think that where there's productivity and innovation and disruptors to be essentially long those who are benefiting themselves through usage or creating the applications that are having the big effect is certainly one thing but you also have to look at different countries and places and things. Um most importantly is price. I think a lot of investors make the mistake of thinking I want to buy good things. You know, that's a great company, but a great company that gets expensive is much worse than a bad company that's really cheap. Totally. So, you have to look at pricing. This is all part of the cycle. You know, everybody says that's great and it's going to be great for the future and
Like you know, like the internet and do it, it was great. But the price has to be paid attention to. And I'm particularly concerned of those companies at a time when we are in a situation with the interest rates operating as we are. In other words, this looks quite a lot like 1998 or 99 where the assets of the new hot thing.
The productivity growth drivers. Yeah.
Are hot the prices are high. [snorts]
Yeah. And you have a rising interest rate environment. That is a classic issue. So we have to pay attention to the interest rates and the pricing of those assets and you have to think where is next. The other thing is I think diversification is very important because everybody's leverage long. Everybody thinks they're going to buy assets that are going to go up and if they're good, they'll do that in a leveraged way. So the world is so leveraged long, you have to pay at least as much attention to correlation. So that's why when I look at something like gold or these uncorrelated assets, it's interesting as you add it into the portfolio, it reduces the risk of the portfolio. So you have to pay attention to the uncorrelated assets in that kind of an environment, and those could be geographically looked at. But so that's part of portfolio construction.
Well, so there's no simple answer for the audience on what to buy, but I do think this portfolio point of view in the book you actually talk about having 10 to 15 uncorrelated bets at any given time. And I would imagine in your context, truly uncorrelated, whereas most folks buy US equities and think that they're in different sectors. But obviously there's a great degree of correlation when you're buying a bunch of US equities.
Equity prices, just to keep in mind, this many times equity prices in inflation-adjusted terms have declined 60 or 70%.
Yeah, that's incredible. That's an incredible fact for folks to take in. So when you adjust for the value of your dollar, equity prices have really taken a hit, even though the market's gone up. And I hear this a lot everywhere.
And from 1966 until 1984, you had a negative real return.
