I think everybody should be most worried about what they don't know about the future. OK?
OK. I am worried about that.
That's why I'm asking you to tell me. So what I'm saying is: I think we know that we are in increasingly disorderly times.
Lately, I feel like we're having an "end of the American empire" moment. In part, it's our stalemated war in Iran. The Strait of Hormuz is closed. The nuclear material is still in their hands. Americans are being crushed. In part, it's just the strain that Donald Trump is putting on American alliances and the whole post-World War II order, or whatever remains of it. And in part, it's the sense that our biggest rival, China, is patiently biding their time, watching us flail around, waiting for us to just collapse.
My guest this week has been on this beat for a while now, and he has a grand theory of history that predicts that America is headed for a fall. He's kind of an unlikely Cassandra. Ray Dalio built one of the world's largest hedge funds, Bridgewater Associates, from the ground up. But these days, he mostly wants to talk about our imperial decadence and whether there's anything we can do to pull the American empire back from the brink. Ray Dalio, welcome to "Interesting Times."
Thank you. It's interesting to be in interesting times.
So people say. So you're someone who spent your career making bets, and a substantial number of them have paid off over the last few decades. Lately you have been arguing that the United States of America is maybe not such a good bet at the moment. So if someone is looking at America right now, trying to decide, let's say, whether to bet on the American empire as a dominant force in the 21st century, what are the big forces or factors that they should be looking at?
I'd correct that. I'm not saying that America is a bad bet or a good bet. I'm just describing what's going on. And what I learned through my roughly 50 years of investing is that many things that are important that happened to me didn't happen in my lifetime before, but happened many times in history. So I learned to study the last really 500 years of history to find what caused the rises and declines of reserve currencies, their empires, and so on. And you see a pattern over and over again. There is such a thing as a big cycle, and the big cycle starts when there are new orders. There are three types of orders. There's a monetary order, a domestic political order, and an international world order. These are three big forces that evolve.
So on the first force, as we look at that monetary order, there's a debt cycle. When debts rise relative to incomes, and debt service payments rise relative to incomes. For countries, for individuals, for empires, for anybody! That squeezes out spending. That's a problem. For example, the United States now spends $7 trillion, about $7 trillion. It takes in about $5 trillion, so it spends 40 percent more than it takes in. It's been running those deficits for a while, so it has a debt that's about six times its income, the amount that it takes in. And you can see throughout history that that produces problems. It's a very simple thing: The debts for a country work the same as the debts for an individual or a company, except the government can print money.
Right. Which is an important difference.
An important difference! OK. Just speaking personally, I can't print money to pay my mortgage.
Right. But what that does is it also devalues money.
So that's the mechanics. That's why there is a long-term debt cycle, as well as short-term debt cycles and money cycles and economic cycles that take us from one recession to an overheating to another recession. Related to that is the domestic political and social cycle that relates to the money part. And when you have very large wealth and values differences, big gaps in those.
Meaning, between rich and poor?
Between rich and poor, and those with different values. And you get to the point where there are irreconcilable differences. Then you have political conflicts that are such that the system is at risk. OK, I think we have the first cycle going on. I think we have the second cycle going on, the political left and right and their irreconcilable differences. We can get into those. And then so then how does the international and the international is the same thing. OK, internationally there is always following a war. There is a dominant power. And the dominant power creates the new world order. The order means the system. And so that began in 1945 for us. The United States was the dominant power establishing that system.
And it established a system which is largely modeled after the United States system in that it was meant to be representative. The United Nations, for example. This was the multilateral world order they call it. And so all different countries would operate. And there was supposed to be a rule-based system. But the problem with that is that without enforcement is not going to be an effective system. It was an idealistic system, and it was a beautiful system while it lasted. But we no longer have a multilateral rule-based system. We have what existed prior to 1945 through most of history, and now you're going to have geopolitical disagreements, such as even what is existing with Iran. How are those disagreements resolved. You don't take it to the World Court and get a verdict and get it enforced. It's power, that rule right.
But just on that point, even at the height of what we think of as the rules-based international order, first, for most of that history, the US was in conflict with the Soviet Union. So there was an ongoing Cold War. So it was a relatively narrow window of just that system existing independent of great power conflict. And even then, American power was, in the end, the decisive force because the Soviets did not have real power. They had military power. But at the end of World War II, the United States had 80 percent of the world's money, it had half the world's GDP, and it also had the dominant military power. So as a result, we could give away money. And those who received the money appreciated the money. And then they had the Soviet system, which was a very limited part and financially almost broke or certainly insignificant. OK, so the military balance of power was real, but the financial balance of power just put America in charge, basically. And when fortunately, when there was mutually assured destruction, we didn't use that military power. Although I remember when the Cuban Missile Crisis, as a kid, I watched and we didn't know whether there would be a nuclear exchange, but they never came to that. And then the Soviet Union collapsed. And then what role do just contingent events play in this kind of cyclical view of history.
All the events that come along, I guess the question is, do they lead to a dispute, and how is the dispute resolved in a world where there's not the court system that you go to resolve it, either domestically or internationally. So, for example, what's happening in the Middle East, particularly what's happening with Iran. There's a conflict and then there's a war as because there's no other resolution. And what the world is looking at right now is will this war be able to be won by the United States, or will it be lost. And when we look at that, it'll be measured in almost black and white terms of who will control the Strait of Hormuz and who will control the nuclear materials. Will the United States win a war. And we should also recognize that there are alignments here, so that China and Russia and Iran tend to be more supportive of each other just as there are supports on the other side.
And that, again, just to emphasize what's distinctive about this moment relative to the past few decades.
Certainly right. It's the strength of the alignment on the other side. Like, what? Well, it's the relative strength. And the breakdown of that order. In addition, there are big debtor creditor relationships that enter into it. For example, when the United States runs large deficits, it has to borrow money. And that is very risky during periods of conflict. And so are interdependencies. In other words, in this world of greater risk, you have to have self-sufficiency, because history has taught us that you can be cut off and either side can be cut off.
I'm very interested in how the pieces fit together. So suppose the end game in Iran is that we are perceived to have lost the war, or at the very least failed, failed in our objectives. Maybe the Strait of Hormuz is open, but the Iranian regime is still in power. And there's just a perception that America tried this thing and it didn't work. You think that then bleeds back into people's perceptions of are we trustworthy to pay our debts.
I was just through Asia. I just spent about a month in Asia going and meeting different leaders and others. It has a very big implication, very much like the implication that happened when the British lost the Suez Canal because Egypt took control of the Suez Canal. And that was perceived to be the end of the British Empire. In other words, very significant. And this was in the 1950s.
And that's also when there was not a willingness to hold the debt and so on. What's happening now in different countries is the question of will the United States defend us, or is the United States not in a position to defend us because the population does not want to fight a war that lasts long. So the war has to be quick and not expensive and popular, which our wars don't tend to be these days.
So just to stay with the Suez analogy, just for a minute, though, because I think it's interesting and I've heard a lot of people offer that analogy. So this was a case where Britain and the French and the Israelis basically tried to retake the Suez Canal after it was nationalized by Egypt. So obviously there's parallels to Iran. You have a choke point in global trade. You have a conflict over it between Western powers and a regional power. But in that case, the key element of Suez, it seems to me, was that Dwight Eisenhower and the United States basically told the British, no, you're not going to do that. And so part of the crisis in confidence for the British Empire and the British pound and everything else was connected to this realization that this is, as you said before, it's the post-World War II order and America is in charge. Do you need that to happen with China. Do you need to have a similar moment for people to really lose confidence in America. How much do you need a new hegemon to emerge, I guess is what I'm asking for people to abandon the old one.
By the way, I don't think China will end up being the classic hegemon, which we can get into. I'm interested in a few minutes. But what I would say is there was the combination of the British debts and the fact that it clearly lost power. The decline began before the Suez. There was a recognition that the United States was in a financially better position as well as a world power.
But so how does that, but then how does, if there is value in that analogy, what is the equivalent. Now if people decide the US is no longer as trustworthy as we thought, it's less likely to pay off its debts and so on. And maybe this goes to your point about China and whether there are new hegemons. Do people go to China. Do people abandon the dollar as a reserve currency. Where does the money go.
If people lose confidence in America, I'll get in. I'll give you my thoughts on that. But I also want to say this is typical of every cycle. So when the British took over from the Dutch, it happened in the same way. The British were financially strong, capable, strong. They lost. And it caused the shift from the Dutch empire, which had the reserve currency at the time, and the debt. And so it's happened repeatedly the same way. So you don't need the particular of let's say, President Eisenhower.
No, but you need a successor power. That's what I'm asking about.
Then I think what happens is in answer to your question of where the money goes or where the wealth is, OK, you could be a dominant power. You could still have a dominant power, and you could still have financial problems like the breakdown of the monetary system in 1971. OK, United States was still a dominant power. 1971 you had too much debt, and you couldn't back up your promise to deliver gold, and you had a breakdown of the monetary system.
I have directed the Secretary of the Treasury to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability.
And we had the 70s in stagflation. You could still have that. So you can have a crisis. So that is a situation where you have a crisis. You don't have a successor power yet. The Soviet Union didn't take over in the 70s.
That's right. We just went through a really bad 10 years.
You still have lousy finances. And what that means is holding the bonds is not a good storehold of wealth. So money to answer your question, there are two purposes of money. Medium of exchange and a storehold of wealth. I think that you're seeing right now. China's currency increasingly become a medium of exchange for a number of reasons. But I very much doubt that China will, Chinese debt or whatever, will be a serious storehold of wealth because of their history and not protecting wealth. And I don't think any of the fiat currencies will be effective storeholds of wealth.
Fiat currency, just for our listeners, is just a currency issued by a nation state that isn't backed in gold or anything else where they can print the money.
Or they can print the money. So when we look at history, we see that in all such periods, all the fiat currencies go down. And gold goes up. Gold right now is the second largest reserve currency of central banks. In other words, the dollar's first. Then there's gold, then there is euros. Then there is yen. So I think the question is, what is money as a storehold of wealth, right. But gold now has been the leading candidate for that out of default because it's been the winner over alternatives.
So alternatives to the dollar become more attractive without there being this shift where you're just buying Chinese debt instead.
That would be the prediction. So then for Americans, I think from a transactions point of view, the way it works traditionally is countries as they start to transact in a currency will build reserves in that currency for it's like their cash account. So that they expect that when they pay for those things they just bought, they have enough cash on hand to do that. So I would expect that would increase the reserves. The issue of saving in that debt is a problem. So we are in a new world of saying what is a safe storehold of wealth.
How does this then for the average American looking at your cycle and saying, OK, yeah, this has happened before. It's happening again. We're going through a period when we've spent beyond our means and there's going to be a correction. What do you expect that correction to look like. There's the 1970s, which is a period of inflation and slow growth. Stagflation right. There's the Great Depression model, which is a financial crash and crisis that leads to poverty and deflation. Which one should we be most worried about in this environment.
I think everybody should be most worried about what they don't know about the future.
OK. I am worried about that. That's why I'm asking you to.
Well, I'm saying we do not know a lot about what the world will look like in three to five years. What we don't know is much greater than anything we know. I think we know that we are in increasingly disorderly times, and these are the greater risks. And so what do I think that answer should be. I think that answer should be to know how to have a well-diversified portfolio that is largely balanced for these kinds of uncertainties. I would say one element to give us simplicity. If you're saying, what is my typical portfolio. There's stocks, there's bonds, there's investments. In other countries, diversification is good. I'm not going to be able to go through all the things about how to structure that. But I think any portfolio should have between 5 percent and 15 percent in gold. Because when you get into the really bad times for the rest of it, that is when gold does best. So whatever it is, it's one of the reasons it's been such a great investment in a sense, over the last few years, because there's a movement in that direction. So I would say balance to know how to have good diversification as a hedge against the other stuff.
But so just, and I do as an investor myself, I do want the investment advice. But as a pundit, a columnist, whatever, I am, who's trying to describe or anticipate reality. Even accepting that, we can't know for sure if there are these lessons from history, if there are these cycles that repeat. And we're headed for, we can call it a bottoming out, we can call it a reset. Maybe we bounce back from it. I'm just trying to get a sense of what you think life looks like at the bottom of the cycle, and whether it is of stagnation and persistent unhappiness, or is it more like crisis and clashes in the streets kind of thing. Because the 70s versus the 30s seem different examples.
I'll give you my concerns. I think we have these big issues: the money issue, the political social issue domestically and the international geopolitical issues. OK, I think as I look at the clock, we're going to come into the midterm elections. And I think that probably the Republicans will lose the House. And I think from that point on, you're going to see an intensification of political conflict, political and social conflict that'll take place in that period, particularly there between that election and the presidential election in 2028. I worry that those can be irreconcilable differences. I don't know how they will go down. I don't know how the respect for rules and law and order and whatever will keep law and order. I am concerned about, but I'm not predicting broader based violence. You could have broader based violence. There are more guns in the United States than people. So I'm not predicting and let me complete my thought, if I may. I've seen the possibilities. I think that everybody around them can look at these things and judge for themselves. My general reaction is that we are entering a period of greater disorder to answer your question, I think greater risk than existed. And it is following that arc. And I'm now, we talk with words, but I plot things on charts in terms of what the patterns are. And these things are following those kinds of patterns. So for that reason, I think you asked me the question, I'm giving you my answer. And I think for those reasons, a good diversification of a portfolio and to be alert to those types of things.
Tell me how you think the debt picture and the political and social picture interact, because it seems like if you ask people what they're divided about right now, they don't say interest payments on the National Debt. And they have a much longer list of things they're divided about. And I'm just curious how you think. So interest payments go up. They crowd out other forms of investment. What is the economic force that interacts with social disarray here. 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 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've got to get to 3 percent 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. OK, so what the country's divided of is let's say the multibillionaire class and those who are not, 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.
But so, but so when you're talking to politicians about and they give you this spiel about how we can't raise taxes and we can't cut spending. I think the follow up that they would say is that people experience those things as threats to opportunity or equality. People who rely on Medicare and Social Security think this is the guarantee of equality. People who rely on low taxes to build a business think this is the guarantee of opportunity. So if you are trying to sell those people on cutting deficits to 3 percent of GDP. What do you tell them.
You're saving them. You're saving them from a financial crisis.
OK. What happens in a financial crisis in the US. What does that look like.
