"WORSE Than 2008..." - Ray Dalio

I think we're going to come into a period of greater disorder as there's a confluence between the monetary part, the domestic social and political part where there's irreconcilable differences, and the international world order part. I should bring in two other factors. One of them is acts of nature through history. And if you take, most people think about what's happening to climate, it's not a movement toward improvement, it's a movement toward worsening. And then technology and AI. I think that we have to talk about technology and AI as it enters into this picture because it plays a role. Three ways. It can be a tremendous productivity enhancing result that can help to mitigate, maybe a lot of the debt problems and so on and so forth. Perhaps we can get into this. I don't think it's going to come across with that speed and so on because produce the incomes, let's say, and the incomes can help debt service payments and the like. So, I just want to say that's one of the three effects of AI. The second effect of AI, it is now creating enormous wealth gaps. Those who are the beneficiaries, we're approaching who will be the first trillionaire. The wealth gap thing has increased at great amounts and so on. And it will replace a lot of jobs. So that's number two as a factor, right? So those gaps are an issue. However we deal with them, they will have to be dealt with. And that's going to become probably a political question, but that's an issue. And then number three is the technologies themselves can be used for harm. A lot of power. It could be used by other countries. It can be used by those who want to inflict harm. It could be used by those who want to steal money. It can be used for harm. And how that balances, and we won't know what it is like in the future because it's beyond our human capacity to anticipate what it'll be like in 3 to 5 years. So, I think that for all these forces, these five forces, I think over the next 5 years it'll be like going through a time warp. It'll be huge changes over the next 5 years in all of these forces coming together. And at the other side of that it'll be almost unrecognizable. Be very different. It'll be a period of a great turbulence.

And then, okay, so what does one do knowing that one is not going to know what that's going to be like. Then my own approach to this and our recommendation is knowing how to balance positions. They're divided about who has what money and who gets it, which is very much related to the deficit. I wrote my most recent book to explain how it works with 35 examples. It was called How Countries Go Broke. And I've been speaking to top levels of both the Democrat and Republican Party. And everybody agrees on those mechanics. And then when I go down, I say, 'You got to get to 3% of GDP deficit through some mix of raising taxes, cutting spending, and controlling interest rates. That's how you have to do it mechanically and so on.' And they say, 'Ray, you don't understand. In order for us to be elected, I have to make at least one of two promises. I will not raise your taxes and I will not cut your benefits.' Okay. So, what the country's divided on is, you know, let's say the multi-billionaire class and those who are struggling financially, the left and the right, and populism and so on. And that has a money component. So, the deficits and the money part is a very big part of the social conflict part. The financial crisis will mean that the capacity to spend will be very limited. In other words, you can't afford military expenses and social expenses and so on. So that you'll be very constrained because the demand won't meet up with the supply. You'll have interest rates going up, which will curtail borrowing, will hurt markets and so on. And that will lead to central banks trying to balance that by printing of money, which will also devalue the money and create a stagflation kind of environment. Plato talked about this cycle in the Republic and he talked about the democracy and the problems with the democracy because the people don't vote for what is good for them in the strength. 60% of the American people have below a sixth-grade reading level and there's a problem with productivity and so on. And they vote and they determine a lot. And so, the question is how in a democracy can that happen? And you know, his view is that's when you have, ideally, the benevolent despot, somebody who is going to take control, be strong, and give for the country, in a sense, bring people together. However, that happens, what you need is a strong leader of the middle who recognizes, essentially, that the partisanship and the conflict is going to be a problem, but has the strength to get people and everything working in a way that it needs to work. So that there can be a debt restructuring of some form. There can be an improvement in our education system. There can be the structural changes in efficiency. It's difficult to run a big company. Imagine what it's like to run this country and to run it well. So, a lot has to be done. You have to have a remarkable person with great strength and you have to have strong leadership that is then followed rather than subverted by either of those sides.

I think you raised two questions and I want to treat them separately even though they're related. The first is about the higher living standards and us being richer. That has been true through all history. So, all of these times when before World War II, that has been true and the big issue is how people deal with each other. If you take per capita any measures, life expectancy, any measures of well-being and you do a chart from the 1400s. In the Dark Ages, it was relatively flat and so at every moment in time, we as a world, as a society, have been richer than before, making your point, okay? That didn't prevent World War II, didn't prevent the debt problems, didn't prevent any of those things because the most important thing is how people deal with each other. Can they together deal with those problems? And because realistically, so what if we had 10% decline in our living standards as part of a healthy adjustment. That is the first thing. Doesn't alleviate the debt problem, doesn't alleviate the fighting for who control. This is much more like the 30s, okay, for a variety of reasons having to do with the measures. If you were to say the severity of the debt, the severity of the internal conflict. I mean, I lived through these. Our debt is worse off and the United States dominance in the world order and the conflict is worse off. So, I would say that's objectively the case. I'm not trying to make a bad case. I'm just trying to be analytical because my job is to bet correctly. The Japanese situation is two main things, very interesting. The Japanese debt is an internal debt. In that particular case, the way it was dealt with is that the central bank printed a lot of money and bought the debt, okay? That's how they did it. And as a result of that, the Japanese yen declined and so they had a tremendous depreciation in the value of the wealth because of the depreciation in the value of the money and the debt. So yes, we can see something happening like that. But one third of our debt is held by foreigners. So that's a different thing. And we as a country, you know, owe money. And if you think that that's a good outcome, it's like decline of the British Empire. I think we can't frame it as like in the beginning of what I objected to was the United States going to win or lose or any of that thing. I think we know what healthy is. There are only three things any country has to do in order to be healthy. And this is throughout history. First, educate your children well in terms of their capabilities, the quality of their ability to be productive, and their civility. Number two, have them come out to a country in which there's order and that people work together to be productive so that there's broad-based productivity and prosperity. And don't get into a war. Don't get into a civil war or don't get into an international war. That's all you have to do.

Then you can look at the fundamentals of that. Are we educating our children well so that they can be productive and capable and they're civil with each other, that we have a civil population. Do we have an environment where there is productivity and we can get along? I think we have terrible circumstances. I live in Connecticut and my wife helps kids trying to get through high school. The gaps in education, the gaps in these things and civility are real problems. So I think that it really comes to that. And you know, it's basics. Do you earn more than you spend? What is your balance sheet like? These are basics. You know those basics. So if we can have those basics, yes, I thank God that I grew up in the United States because oh my God, it was unbelievable. It was the place that anybody from anywhere in the world could come and truly be a citizen. So, it had that real meritocracy. And I grew up in a lower middle class family. My dad was a jazz musician. I could go to a good school and I can, I don't know, make my way. And I think of that creativity and all the wonderful things, broad base and education, a middle class that we had a middle class and we had those things. And so, I've seen the difference. And so, I know what the fundamentals are and I look at measures and I'm worried about that.