Ross Douthat: Ray Dalio, welcome to
"Interesting Times."
Ray Dalio: Thank you. It's interesting to be in interesting
times.
Douthat: 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?
Dalio: 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 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...
Douthat: For empires.
Dalio: For anybody!
Douthat: Yep.
Dalio: That squeezes out spending. That's a problem.
For example, the United States now spends about $7 trillion. It
takes in about $5 trillion, so it spends about 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.
Douthat: Right. Which is an important difference.
Dalio: An important difference! OK.
Douthat: Just speaking personally, I can't print money to pay my
mortgage.
Dalio: Right. But what that does is it also devalues money.
So
that's the mechanics. That's why there's 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...
Douthat: Meaning, between rich and poor?
Dalio: 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.
Douthat: How does the international aspect factor in?
Dalio: And then international is the same thing. Following a
war, there is a dominant power, and the dominant power creates
the new world order. The order means the system.
So that began in 1945.
Douthat: For us. The United States was the dominant power
establishing that system.
Dalio: That's right. And it established a system, which was
largely modeled after the United States system in that it was
meant to be representative. The United Nations, for example, was
a multilateral world order. And so all different countries would
operate and there was supposed to be a rule-based system.
But the problem with that is, without enforcement, it's 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 rules.
Douthat: Right. But even at the height of what we think of as
the rules-based international order, first, for most of that
history, the U.S. was in conflict with the Soviet Union.
Dalio: That's right.
Douthat: So there was an ongoing Cold War. 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,
sort of the decisive force. Right?
Dalio: Of course. Because the Soviets did not have real power.
They had military power, but at the end of World War II, the
United States had about 80 percent of the world's money. It had
half the world's G.D.P. It also had the dominant military power.
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. Certainly insignificant.
Douthat: So the military balance of power was real, but the
financial balance of power just put America in charge,
basically.
Dalio: That's right. Fortunately, when there was mutually
assured destruction, we didn't use that military power.
Although, I remember the Cuban missile crisis - as a kid, I
watched and we didn't know whether there would be a nuclear
exchange. But it never came to that, and then the Soviet Union
collapsed.
Douthat: What role do contingent events play in this cyclical
view of history?
Dalio: 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 to resolve it, either
domestically or internationally?
For example, what's happening in the Middle East - particularly
with Iran - there's a conflict, and then there is a war, 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?
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.
Russia and China and Iran tend to be more supportive of each
other, just as there are supports on the other side.
Douthat: And again, just to emphasize what is distinctive about
this moment relative to the past few decades, it's the strength
of the alignment on the other side?
Dalio: 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. So are interdependencies.
In other words, in this world of greater risk, then you have to
have self-sufficiency. Because history has taught us that you
can be cut off. Either side can be cut off.
Douthat: Yeah. I'm very interested in how the pieces fit
together. Suppose the end game in Iran is that we are perceived
to have lost the war or at the very least failed in our
objectives. Maybe the Strait of Hormuz is open, but the Iranian
regime is still in power, and there's just sort of a perception
that America tried this thing and it didn't work. You think that
then bleeds back into people's perceptions of whether we are
trustworthy to pay our debts?
Dalio: 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.
Douthat: Right. This was in the 1950s.
Dalio: That's right. 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...
Douthat: Popular. Right?
Dalio: Popular.
Douthat: Which our wars don't tend to be these days.
Just to stay with the Suez analogy for a minute, though, because
I think it's interesting. I've heard a lot of people offer that
analogy. 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 and confidence for the British Empire
and the British pound and everything else was connected to this
realization that this was, as you said before, the post-World
War II order, and America is in charge.
Do you need that to happen now 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 for people to
abandon the old one?
Dalio: By the way, I don't think China will end up being the
classic hegemon, which we can get into in a few minutes.
Douthat: I'm interested in that.
Dalio: 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 because there was a recognition
that the United States was in a financially better position, as
well as a world power.
Douthat: So if there is value in that analogy, what is the
equivalent now? If people decide the U.S. 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 they're a new hegemon - 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?
Dalio: 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, capably strong. They lost, and it caused the
shift from the Dutch empire, which at the time had the reserve
currency and the debt. And it's happened repeatedly the same
way.
So you don't need the particular of, let's say, President
Eisenhower...
Douthat: No, but you need a successor power. That's what I'm
asking about.
Dalio: Then I think what happens is - in answer to your question
of where the money goes, or where the wealth is - you could
still be or have a dominant power, and you could still have
financial problems.
Like the breakdown of the monetary system in 1971. The United
States was still a dominant power. In 1971, you had too much
debt, you couldn't back up your promise to deliver gold, and you
had a breakdown of the monetary system. And we had the '70s
stagflation. You could still have that.
Douthat: 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.
Dalio: That's right.
Douthat: We just went through a really bad 10 years roughly.
Dalio: You still have lousy finances. And what that means is
that holding the bonds is not a good store of wealth. 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 Chinese debt or whatever
will be a serious storehold of wealth because of their history
of not protecting wealth.
Douthat: Right.
Dalio: And I don't think any of the fiat currencies will be
effective storeholds of wealth.
Douthat: A fiat currency, for our listeners, is just a currency
issued by a nation state that isn't backed in gold or anything
else, right?
Dalio: And where they can print the money.
Douthat: Where they can print the money.
Dalio: 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 is 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?
Gold has been the leading candidate of that out of default,
because it's been the winner over thousands of years.
Douthat: So alternatives to the dollar become more attractive
without there being this shift to we're just buying Chinese debt
instead?
Dalio: From transactions' point of view, the way it works
traditionally is that countries, as they start to transact in a
currency, will build reserves in that currency. 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?
Douthat: 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 - a stagflation. 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?
Dalio: I think everybody should be most worried about what they
don't know about the future. OK?
Douthat: OK. I am worried about that. That's why I'm asking you
to tell me.
Dalio: So what I'm saying is: 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.
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.
To give this 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 in one's portfolio as a hedge against the other
stuff.
Douthat: 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 a kind of
bottoming out or reset, that maybe we bounce back from it, but
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 a stagnation and a
persistent unhappiness, or is it more like crisis and clashes in
the streets kind of thing? Because the '70s versus the '30s seem
like different examples. That's all.
Dalio: 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.
As I
look at the clock, we're going to come into the midterm
elections and I think that the Republicans will probably lose
the House. I think from that point on, you're going to see an
intensification of political and social conflict that'll take
place in that period, particularly 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
Douthat: People...
Dalio: I'm not predicting - let me complete my thought, if I
may.
Douthat: Yep.
Dalio: 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. 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.
You asked me the question, I'm giving you my answer, and I think
for those reasons, [have] a good diversification of a portfolio,
and be alert to those types of things.
Douthat: 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. They have a much
longer list of things they're divided about.
I'm just curious: Interest payments go up, they crowd out other
forms of investment. What is the economic force that interacts
with social disarray here?
Dalio: 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 Democratic and the Republican
Parties, and everybody agrees on those mechanics.
When I go down and I say to them, you've got to get to 3 percent
of G.D.P. deficit through some mix of raising taxes, cutting
spending and controlling interest rates - because that's how you
have to do it mechanically.
Then they say, Ray, you don't understand, in order 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."
What the country's divided on is, let's say, the
multibillionaire 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.
Douthat: So you're talking to politicians about this, 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.
That people who rely on Medicare and Social Security
think this is the guarantee of equality, and people who rely on
low taxes to build a business think this is the guarantee of
opportunity.
If you are trying to sell those people on cutting deficits to 3
percent of G.D.P., what do you tell them you're saving them
from?
Dalio: You're saving them from a financial crisis.
Douthat: And what happens in a financial crisis in the U.S.?
What does that look like?
Dalio: 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. You'll be very
constrained.
And 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
the central banks trying to balance that by printing money,
which will also devalue the money and create a stagflation kind
of environment.
Douthat: OK. So it sounds like in the worst case, it's
the 2008 financial crisis yielding 1970s-style stagflation? I'm
sorry to try and demand...
Dalio: No, no, I'm happy to try to give.
Douthat: Just to put it in perspective for you, I am 46 years
old. I have lived my entire life in the shadow of predictions
about the U.S. deficit being unsustainable. The first
presidential election I really remember is Ross Perot's campaign
in 1992, which was run in part on those themes.
But like a lot of Americans, that means that I tend to tune out
the deficit argument. The first time I feel like the deficit's
overspending became a really big issue for people's pocketbooks
since the 1990s was the wave of inflation in the first couple of
years of the Biden administration.
So I just think it's useful for me and for listeners to
understand concretely why are the 2030s or the late 2020s
different from the last 20 years, when we've also had these
deficits?
Dalio: Thank you for your curiosity! And I feel compelled to
give you that answer.
It is like the plaque building up. It's like you saying, "I
haven't had a heart attack yet."
Douthat: "I feel OK."
Dalio: And I can say: OK, I understand you haven't had a heart
attack yet. Can I show you the M.R.I. of this plaque building up
in your system? And can you understand what I'm saying about
that plaque, that you will have a heart attack if that plaque
then starts to get there?
Can you understand that? Can you
understand where the numbers are, and where you are? Look, it's
your life. It's your choices. Ask yourself, "Is that right or is
that wrong?"
That's what you need to do for your own well-being.
Douthat: In your story, it sounds like if you combine that
diagnosis with your sense - and my sense - of how the American
political system currently works, that you're going to get at
least a mild version of the heart attack before you get change.
You said at the outset, you weren't really betting against
America, in spite of my podcaster's framing. Are you optimistic
that we could have, I guess you could call it, a minor heart
attack and recover?
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 would say then, I should bring in two other factors. One of
them is acts of nature through history...
Douthat: Pandemics.
Dalio: Droughts, floods and pandemics. And if you take what 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 A.I.
We have to talk about technology and A.I. as it enters into this
picture because it plays a role. And it does so in three ways.
It can be a tremendous productivity enhancing result that can
help to mitigate maybe a number of the debt problems - perhaps.
We can get into this. I don't think it's going to come across at
that speed.
Douthat: Well, I hear this from A.I. people. They will say that
in the best case, if A.I. just adds X percent to G.D.P. growth,
X percent to productivity growth, that it reduces your original
problem.
Dalio: That's right. That's right.
Douthat: It makes the debt easier to bear.
Dalio: That's what I'm saying. Because it can produce the
incomes, let's say, and the incomes can help debt service
payments and the like. So that's one of the three effects of the
A.I.
The second effect of that A.I. is it is now creating enormous
wealth gaps. Those who are the beneficiaries of it are
approaching "Who will be the first trillionaire?" The wealth gap
thing has increased at great amounts, and it will replace a lot
of jobs. So that's No. 2 as a factor. 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 No. 3 is that 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.
Douthat: Right. But in your pattern, in your cycles, you can
see, in that last sense, that it increases geopolitical tensions
potentially. That it heightens Cold War dynamics. That it
increases domestic tensions.
Dalio: That's right.
Douthat: But it could ease fiscal tensions.
Dalio: Right, it could produce the productivity.
Douthat: But if it has some of the bad effects, it will probably
have some of the good effects too.
Dalio: And how that balances.
Douthat: Yeah.
Dalio: 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 three to five years.
For all these forces, these five forces, over the next five
years it'll be like going through a time warp. There will be
huge changes over the next five years, with all of these forces
coming together. And on the other side of that, it'll be almost
unrecognizable. It'll be very different, and it'll be a period
of great change and great turbulence.
So what does one do? Knowing that one is not going to know what
that's going to be like, my own approach to this - and my
recommendation - is knowing how to balance positions.
Douthat: For politicians, though, listening to that account,
maybe it makes them say: Well, I know Ray Dalio wants us to cut
deficits to 3 percent but he also thinks we're going through a
five-year time warp unlike anything in human history, so maybe
we'll just wait and see what the world looks like in five years,
before we painfully restructure Medicare and Social Security.
Dalio: I don't think they're going to think about what Ray Dalio
thinks. [Laughs.]
Douthat: Well, no. But...
Dalio: I think they're going to think about what the ballot box
thinks.
Douthat: Yes, absolutely. I've talked to people in Washington,
D.C. - there's always legitimate concern about the deficit. And
there are actual attempts to do something about it.
I guess what I'm interested in is, in your account of the rise
and fall of empires - Spanish Empire, British Empire, the Dutch
mini empire, and so on - you don't have these case studies of a
great power going through this cycle, hitting what you think of
as the bottom, and then bouncing back and having another run. Or
do you?
Because, look, as Americans, that's our goal. If someone buys
into your narrative, they would say: OK, but history isn't
determinist. We can make choices and we can have ourselves
another cycle. Right?
Dalio: Yes. I think that's possible, but here's what has to
happen - and history would suggest it: Plato talked about this
cycle...
Douthat: Yes.
Dalio: 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 and the strength. About 60 percent 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.
The question is: How in a democracy can that happen? 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 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.
Douthat: So you're looking for the Franklin Roosevelt, maybe the
Ronald Reagan figure of this particular crisis?
Dalio: Well, I think it's tougher now than it has ever been.
Douthat: Because we're further down...
Dalio: Everybody's got an opinion. Do you know how difficult it
is to lead? [Chuckles.]
I mean, can you imagine?
So can you lead people down the middle, bring people together,
and get them to do difficult things?
Douthat: Right. But this is something that I think about with
these debates: We're also extremely rich. The United States is
much richer than it was even in the 1980s. It's certainly much
richer than it was during the Great Depression. And as much as
people feel the bite of inflation or feel the struggle of a
spike in the unemployment rate, that itself is a kind of
stabilizer.
It seems like you can also see scenarios where, take the example
of Japan. Japan is a country that has carried a tremendous debt
burden for a long time, and I wouldn't say it's done so with
great success. It has become less economically dynamic. It's
more stagnant. It's not where it was in the 1980s or 1990s when
people were talking about Japan taking over the world. But it
also has this kind of wealthy, older society stability. Do you
think that's a plausible scenario for the U.S.?
Dalio: I think you raise two questions and I want to treat them
separately, even though they're related. The first is about the
higher living standards and the U.S. being richer. That has been
true throughout history. So all of these times before World War
II, that has been true. And the big issue is how people deal
with each other.
Douthat: Meaning that at the peak of debt, the empire is richer
than ever before?
Dalio: Yes. If you take per capita income, many measures
- life
expectancy, any measures of well-being - and you do a chart from
the 1400s, or 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.
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? Because realistically, so
what if we had a 10 percent decline in our living standards as
part of a healthy adjustment?
I'm almost finished, but I want to get this out.
So that's the first thing. It doesn't alleviate the debt
problem, doesn't alleviate the fighting for who controls...
Douthat: But maybe it does a little. Like the '30s —
Dalio: No, no, no. Just wait a second. I didn't interrupt
you. Please don't...
Douthat: OK. Go on. Sorry.
Dalio: I'll finish, and then you'll reply.
So on the Japanese case - or do you want me to answer this one
and then we'll go to the Japanese case?
Douthat: Wait on the Japanese. Just one question on that: Don't
you think, though, that if you look at the '30s, the '70s, and
the aftermath of the financial crisis in 2008, each a period of
some kind of economic crisis, it was better. The '30s were worse
than the '70s, and the '70s were worse than the 2010s, so maybe
things can stabilize a little bit because we've gotten richer.
Right?
Dalio: Yes. If you were to look at per capita income, life
expectancy - any measures of standard of living or whatever it
is - and you would've seen a graph...
Douthat: I'm just saying, even the fighting was not as bad in
the '70s as it was in the '30s. That's all I'm saying.
Dalio: Well, I wouldn't make too much of that.
Douthat: OK.
Dalio: In other words, I would say this is much more like the
'30s 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. And I would
say...
Douthat: So you think we're worse off than the '70s?
Dalio: Our debt is worse off.
Douthat: That's true.
Dalio: And the United States dominance in the world order and
the conflict is worse off.
Douthat: OK.
Dalio: 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.
Douthat: All right. So how about our Japanese future? Could we
have a Japanese future?
Dalio: 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. 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 we also,
one-third of our debt is held by foreigners. That's a different
thing. And we as a country owe money to other countries.
Douthat: And here I'll...
Dalio: And if you think that's a good outcome... [Chuckles]
Douthat: No, I don't. Well, I think it...
Dalio: It's like the decline of the British Empire.
Douthat: No, I don't...
Dalio: You can have the decline of the British Empire. The same
sort of thing.
Douthat: No, I don't think it's a good outcome. I'm interested
in it because, in the case of Japan, it's sort of a sustainable
stagnation rather than crisis and collapse.
But I think where I
would agree with you is that, for various reasons that are
beyond the scope of this conversation, Japanese society seems
more likely to accept a depreciation in living standards than
American society. In that sense, it probably isn't a model.
Let me ask you a last question in the form of a comment about my
own optimism that you can respond to. I mentioned earlier that
I've lived my entire life in a world of people worrying about
deficits and deficit spending, and I think it is completely
reasonable to say, as you've said, that just because the crisis
hasn't arrived doesn't mean that you aren't going to have a
heart attack tomorrow.
And so I totally expect everything you're
describing to have significant negative impacts on the United
States.
At the same time, I do think it's a weird moment where the U.S.
looks weak if you look at certain indicators, but we can also
look very, very strong in many ways. If you look at the last 10
or 15 years, our G.D.P. growth has substantially outpaced
Western Europe, Canada, peer economies. We still have the
world's most profitable cutting-edge technology companies. We
still have the world's most capable military.
And then socially,
we have a lot of problems, but are there other big countries in
the world that are better at assimilating immigrants, that have
higher birthrates, that are geographically isolated from major
wars and refugee streams, and so on? I'm not sure there is a
better bet.
If I'm looking forward 50 years, isn't America still, in the
context of the whole world order, a place to have a certain kind
of confidence in? What do you make of that?
Dalio: I think we can't frame it as, like in the beginning of
what I objected to, "Is the United States going to win or lose?"
or anything like that.
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.
No. 2, 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 the poorest 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 it's basics. Do you earn more than you spend? What's your
income like? 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 could make my way, OK? And I think of that creativity and
all the wonderful things - a broad-based education. A middle
class - that we had a middle class, and we had those things.
So I've seen the difference. I know what the fundamentals are,
and I look at measures and I'm worried about that.
Douthat: All right. Ray Dalio, thanks for joining me.
Dalio: Thank you for having me.
