The All In Podcast on X ALL IN INTERVIEW Ray Dalio joins David F

It's always a blast to be here. Thanks for having me.

I studied these big cycles in history going back 500 years, and there are five big forces that are intertwined to determine the answer to your question, which is: there's the debt money one, and I'll take you into that in a minute. There is the domestic gaps, the wealth and values gaps that are causing irreconcilable differences between the left and the right that is affecting how taxes, democracy, and everything works. There's the international great power conflict, the classic rising of a great power, challenging existing great power, and changing the international world order. Then there's technology. All through these cycles there has been technology. And then there's acts of nature, droughts, floods, and pandemics. So when we think of orders, we're talking about there's always a monetary order. And all monetary orders have broken down for the same reasons. All political orders, domestic political orders, they always change. In the United States, less so. We have 250 years here, but they always change. There was one civil war in there. And internationally they always change. All orders change. And the international geopolitical order going from a multilateral to a unilateral world order is changing, and certainly technology is changing.

Okay. So getting the fact that they're all on there, now I'll go down to explain the government's finances and answer your question. The economics of a country are basically the same as the economics of a company or an individual, except the government has an ability to print money. Look at it like a company or like your own. Basically, it's projected to spend about $7 trillion, take in about $5 trillion. So it's running a 40% deficit, 40% of its spending. Has been running deficits for a long time. So it has a debt that is 600%, six times the amount of money that it takes in, and we can project that number. The problem with debt cycles, and you can see them transpire, they're almost like the circulatory system of the body. The capital markets bring credit to different parts of the economy, and if that credit is used to be productive and produces an income that pays for the debt service, it's a healthy process. But what happens is that if the debt service grows relative to the income because it's not paying for it, it's like plaque in the system growing up and it squeezes out spending. And so we now have that $2 trillion deficit. Half of that is interest payments, plus we have to roll over $9 trillion of debt that has been accumulated and is maturing.

Okay. So now if you were to look at a company like that or an individual like that, you have that problem. So as a handy number, 3% of GDP would sort of stabilize the situation. Very unhealthy condition. It's not just unhealthy because it's squeezing out those spendings, but also because there's a supply and a demand. In other words, you have to roll over the $9 trillion of debt that's coming due and you have to sell two trillion more, something like that.

Okay. So now you go to the buyers, and the buyers, who are the buyers? There are some domestic buyers and there are foreign buyers. About a third are foreign buyers, and now it's a riskier situation from their point of view. It's riskier. First of all, it's a lot to acquire. The dollar-denominated debt is already a large percentage of their portfolio, larger than it would be if just decided on a prudent basis. But also we have political geopolitical risks that also extend to possibly the risks that the debtor and the creditor will have a conflict. You can imagine that with China. You can imagine that with Europe even. And you know, Europeans could wonder whether they will get sanctioned. In other words, the debt service payments might not be made as a sanction. And the United States has to worry about whether it's going to bring in that money. Now, the things that I'm describing have happened repeatedly through history. So, in other words, I'm not just making this stuff up. If you were to see particularly in the 1929 to 45 period, you saw this dynamic. You saw it before. So there is this financial piece which in and of itself is not healthy for the US government, and it's also problematic because of the other factors compounding the problem.

Yeah, you're talking about taking an inefficient government and making it efficient, okay? And having to do it quick because there are elections and if people don't like it, then you know, you lose your mandate. And in a society in which no matter what you do, you're criticized and torn down. So you know we have the fact of the question of does democracy and our system lend itself toward the sort of executive leadership that both makes it efficient and makes it acceptable for all people. You know there was a lot of cutbacks, things like school lunch programs and things, and then trying to do it surgically. So it's how do you do that effectively quickly in a manner that doesn't cause so much controversy that the government falls. So if you look at history, that's why I deal with the political. If you deal with history and you deal just even common sense, think, like are you going to have the executive leadership that's going to be able to make this satisfactory with most people? And do that quickly. I think that's a hell of a trick to pull off, right? So it might just be structurally a little difficult at this stage.

Yeah, it's both the stage of the cycle. And if you're going to have something well-managed, are you going to have the government well-manage it? I mean, how well-managed, go to the Department of Motor Vehicles for your... It's so big and complex and such a mess. Like, is this a surprise to you that there's all of this stuff going on all over the place in terms of inefficiency? Is that a surprise to you?

It's the big cycle. And what you have to understand is that gold is not a precious metal that's speculated on like most people have come to think of it as. It is the most established money; it's the second largest reserve currency that central banks hold. And so what we've seen is for various reasons that I pretty much covered, the economic, the supply demand, the political, the geopolitical, for those reasons, central banks themselves have acquired gold to build that up, and individuals and others are looking for an alternative money. The question is what is money? So when we're thinking about this, money mechanistically, money is debt. What I mean by that is that if you're holding money, you're holding it in the form of a debt instrument. And if you are holding a debt instrument, what you're getting is a promise from somebody to deliver you money. Okay? And as I mentioned in the beginning, the power of the central banks when they have too much debt is to print money. Okay. So if you've got that down, then you can understand what's happening. Because the question is, Dave, what money do you think is safe?

Given what I've just said.

And particularly what you want is something that can be transferred from one place to another, because money is both a medium of exchange and a storehold of wealth. So in other words, if one country's central bank or government wants to pay another government, it can't just be in fixed assets like buildings. Okay? If you want to transact, you have to transact in something that you can transfer to them and so on. And gold is the only asset. It's the long-term historic asset for reasons that means that it can be transferred. They can't print a lot of it. And it is not dependent on somebody giving you something. In other words, most money, if you hold debt or you hold stocks or you hold something, you're holding a promise from somebody to give you buying power. Okay? So wealth is important to think about, to distinguish wealth from money. Wealth is in stuff. It's in buildings, it's in companies and so on. But you can't spend wealth. When you want to spend it, and that's the purpose of money, you have to sell it and then you get money to spend. And right now we have an awful lot of wealth relative to money. And the question is what is that money? And there's the risk that you go to convert your wealth into money and they're going to print money because that's what they've always done since we've had fiat currencies.

Two things that come to mind. What I look at is literally who has what assets, including like central banks, what is the money in, and what is that mix. And I look at the amount of wealth relative to money or I look at the amount of wealth relative to gold. And what we've seen is that there's an enormous amount of wealth and there was an enormous amount in central banks of the other money relative to hard money gold. And so we've seen about what I would call it go from an extremely small number to something that is a less small number. That price increase and that change in composition has brought it almost, not quite, but almost toward the average of what it's been over a period of time. So being out of balance, however, because total wealth is still so large relative to money, that's a real issue.

So let me give you a practical example of this wealth, taxes, and wealth being a risk. One question that might be asked: are we in a bubble? In other words, are AI stocks and other such stocks in a bubble? If you want to get into that, we'll get into that. But one of the things that we know from that is that one of the characteristics of bubbles is that there becomes a need for money that requires people to sell their assets to get money to meet that need. Now quite often that need comes from borrowing money to buy those assets. Okay? And then the assets go up in price and so on. But what happens is it can't be sustained because you have to make the debt service payments and they're not thrown off the cash to make that, and so they have to start to sell that. And when you have to sell it because you need money, you need cash to pay your debt service or to pay, nowadays, wealth taxes.

So now we have a dynamic. The bubble will burst. As that dynamic takes place, there are a number of things we could talk about about the bubble if you're interested. But just imagine if you put in wealth taxes. Everybody can talk about whether they like or don't like wealth taxes, but anything that if you put in wealth taxes, and there's a lot of fear of wealth taxes in and of itself, that can drive wealth to cash, and there's only one way you're going to get the cash with the wealth, and that's either sell it or to borrow against it, which causes its own cash flow issues. And we have a dynamic having to do with the social part of this, the wealth gap, that makes that politically an issue. So anyway, all I'm saying is people should worry and companies should worry or countries should worry. Do they have enough gold? I mean, if you didn't know what gold was likely to do and you had no view on gold, one should have between 5 and 15% of their portfolio in gold because of the fact of how it works with the other components. In other words, it's a diversifier when the shit hits the fan, gold does well and the other things don't, generally speaking. And because of that correlation, depending on what else is in the portfolio, if you put it through an optimizer, you'd have something like that. So I'm not trying to tout people on buying gold, but I would say what is safe? What is safe? And safe is somewhere, if you had no view, between 5 and 15%.

There's an important differentiating characteristic of Bitcoin, and then there's also who owns it and why they bought and sell. Okay. So Bitcoin does not have privacy; any transactions can be monitored and then indirectly perhaps controlled. Central banks are not going to want to buy Bitcoin and being able to hold it. So it's not just individuals, it's institutions and central banks. So there are attributes of that. There has been some question or thoughts of the development of new technologies like quantum computing and so on. Can there be issues regarding that? And then there's who owns it and what are the other exposures that they have in their portfolio. It tends to have a pretty high correlation with the tech stocks. So from an ownership, just the supply demand is affected by if somebody gets squeezed in one thing, they sell whatever else they have. So there are those dynamics. It's a long way. It's and it's a relatively small market that's a relatively controllable market. I think a lot of attention has been given to Bitcoin, but as a money, it's small in relationship to gold, and so those are the dynamics. There is only one gold.

Silver in its production is a residual commodity. The supply of it is difficult to increase, and through history, like the pound sterling, silver was perceived as a monetary item. But it has also taken on a speculative life of its own. So people are hot in it because it's been hot.

Because we have so much debt, federal debt, interest rates are one of the three main considerations. There's the taxes, there's spending, and then there's interest rates on the debt. But you can't make interest rates severely artificially low because one man's debts are another man's assets. And if you make those interest rates too low for the creditor, you will produce the dynamic that we understand. In other words, you'll produce a lot more borrowing. You'll put it into things and you can fuel a bubble. And so at the same time you can't have them so high that the debtor gets squeezed effectively. So there's a balancing act. Keep them high enough that they're adequate for the creditor but not so high that the debtor is squeezed. And so when you have a lot of debt assets and liabilities, because for every debt asset there's a debt liability, and when you have a lot of those, that balancing act is very difficult.

It's made more difficult because of what's called the K economy. In other words, there are bubble elements that are going on in the part of the economy where the question is who will be the first to be a trillionaire, and that top 1% of the population and all of that, at the same time as you have the other part of the economy where, for example, 60% of all Americans have below a sixth-grade reading level, and to make them productive, particularly as we are also having AI have replacements for them, is a particularly difficult thing to achieve. In other words, when you have so much debt assets and liabilities and then you have such a disparity in conditions between those that are at the top and let's call it the bottom 60% of the population, that's another hat trick, that's another difficult thing to pull off. So this is a challenging situation as far as monetary policy exists. The idea of setting an interest rate and having a fiscal policy and a monetary policy that's for the economy as a whole and doesn't deal with the differences in the circumstances may be more challenging.