Ray Dalio Discusses Major Financial Crises (Podcast)

world look like throughout history. He does detailed case stories about three of the biggest ones, the Great Financial Crisis of oid O nine, the Great Depression, and then what took place in Germany. And then there are forty eight case studies or forty six case studies about other debt crises. He really provides an education for central banks going forward as to what they need to do to avoid these sorts of problems in the future, and when they happen,

how to make them less painful. It's a master work and I expect it's gonna be on central bank bookshelves for decades and decades to come. This is would also be a good time to mention we have coming up Masters in Business Live with Ray Dalio. Uh and keep your ears open for that. We're gonna do a live broadcast going over the book. You could get the PDF of the book for free. The Kindle version is fifteen dollars in this behemoth is about fifty bucks, So free pdf.

It's hard to argue with that. With no further ado, my conversation with Ray Dalio. My extra special guest this week is Ray Dalio, founder of Bridgewater Associates out of his apartment over forty years ago. He is presently co chairman and co c i O of the firm, which manages a hundred and sixty billion dollars in assets. Bridgewater perhaps has made more money for clients than any other hedge fund in history. Rather than waste a lot of time with the introduction, I just want to say, Ray Dalio,

welcome back to Bloomberg. Thanks for having me back. Before we get to the new book. Last year, you were here right after Principles came out, and knowing how you look at the world as a giant experimental learning opportunity. What did you learn on the tour to promote the book? I was I was surprised at how curious and interactive people were. Um, I went on social media and that's a place that I thought I'd never go on. And uh and I thought probably was a snarky place and

a little um hasn't been for me. You know, there are a lot of curious people out there were eager to learn, and I'm good people. I'm having great conversations with them back and forth. Uh take a little bit of time to do it. And uh so I was most surprised about those things you embrace as part of your process, both radical transparency and a pure meritocracy. If someone has a good idea, it doesn't matter where it

comes from. Well, the markets teach you humility. You know, you're never a dent, you're being right in any way. And so that what that taught me is that I love to have my views challenged and so to learn the art of thoughtful disagreement. That's not a fight, it's a curiosity experience. That's a great phrase, the art of thoughtful disagreement. So now you write a second book, I have to ask you go sixty years without ever writing a book, and then you put out to really, this

is a really substantive book in three years. What what is the hurry? What's the rush to get all this

writing done so quickly? Well, like my other book, a lot of the principles that I had in this book were written over a long period of time, a lot of the research, and then I was asked by a number of policy makers on others UH to write this book on for the tenth anniversary of the financial crisis, because um, they said that there's no book that you can go to that really gives the lesson that happen

over and over again. Now other words, we're going to focus a lot on the two thousand and eight financial crisis, and that's good, but um, it's like looking at one case of a disease. If you really want to understand that how the disease transpires, you have to see pretty much them all and then understand how they work on average and how they deviate. And that was the purpose of the book. So the timing was the big thing,

and then a shove from other people. You don't want to get too lost in the weeds on any one particular financial disaster. What we're trying to find is the consistent thread, the best ways to respond to them, the best ways to manage them, and even heaven forbid, possibly avoiding them in the future. Statement. Yeah, well, let me give you an example in this particular financial crisis, a

lot hinged on bank capital. No other words, how he rectified bank capital, liquidity and how much well capital capital. Liquidity is different from capital, but so in other words, basically, capital is on your income statement, what your balance sheet look like. Okay, are you out of money? Then you get shut down. Liquidity is the money that comes in. You can have no bank capital and plenty of liquidity and be fine if they don't have marked the market accounting.

So like by going through the crisis, which by most measures was of severe or comparable severity in terms of that, one of the big differences was they didn't have marked the market accounting. So because they didn't have marked the market accounting, the solvency issue wasn't as big a deal because they didn't account for it as being insolved where the liquidity issue was. So my point is that when you go from one to the other, you start to

understand what levers and what patches. So the whole notion is look at the one on average, what's the typical one, and then look at the deviations and see what causes them, and then you understand how these things work. And that's what the books about. So when we look at the oh you don't crisis. We see most of the banks had a lot of capital, but they also had a ton of assets leveraged on top of the capital. How significant is that leverage ratio of of capital to additional

leveraged assets. Well, it tells you how much of a downward movement in the assets you can take. Right. If it's if it's a bank is leverage ten to one and the average assets go down ten percent, you're out of money. Right, that's the counting. And and if you don't account for that like that period of time, you don't count for that exactly that way, you treat them differently, then you're really dealing with a liquidity case. But these things happen over and over again. The same basic structure

happens over and over again. And I thought it was really really important to have a book that shows what that classic diseases, like, how it works one thing leads to another in a certain way, and then to show

all of the cases. So it shows all forty eight cases of bad debt crisis is over the last hundred years, and you can go into them see them one by one, and then it takes you through three classic ones in detail takes you through them pretty much almost day by day, so you can viscerally feel what they were like, and you could almost imagine what you would do on that day. Um it starts with the it does it in the sequential order. So in the nineteen twenties the inflationary depression

um of Germany's Weimar Republic. And the reason I put that in is because depressions can be inflationary or deflationary, and in order to understand what makes the difference, what makes them inflationary versus deflationary, wanted to put that in. But the sequence is similar. Then then we go that's the end of World War One and the period in between that's interesting, and then we go to the after

World More one. We had the twenties, and with that we had the set up for the ninet thirties Great Depression. I love the way you structured this three segments. One is the archetypical debt cycle. The next is some detailed case studies. And you look at the Great Depression, you look at the Weinmar public, you look at a way A nine, and then you come up with forty eight

additional case studies. Each of these are a different volume in what effectively is a three volume set, tell us the thinking about this, and and tell us about the feedback you've gotten from people who had to manage the oh eight or nine crisis. Well, I believe the same things happened over and over again. And it's like a disease. If you don't watch all the cases you want to understand them. That's kind of like doctors in emergency room.

They do a twenty four hour shift just so they can see the disease run its full course over and over again, over and over again, right, and then you make the connections. You know how these things work because they're classic. They all happen basically in the same way. So that's that's what I did. That's why I put all of those case studies in there as a backdrop, and then I put the template the templates. Just sixty pages.

You read it, you get the template. Um, yeah, no, no, the people, Ben Bernankee said, Ray Dali's book is the most read uh as I must read for anyone who aspires to prevent or manage the next financial crisis. Larry Summers said, a terrific piece of work by one of the world's top investors who has devoted his life to understanding the markets and demonstrating that understanding by navigating the

two thousand eight financial crisis. Um Tim Geitner said, it's an outstanding history of the financial crisis, including the devastating crisis of two thousand eight. That's an amazing list of people who were actually actually there and and running this. And Hank Poulson is another person who had some comments in any way they I think it's um. I think it's accur it. And the most important thing isn't the book.

The most important thing that I'm really trying to get at is the mechanics of the disease has described here. Because if we can just understand and agree on the mechanics of these things, we make a giant leap forward. A lot of the mechanics are not agreed to, and

they're not studied. They don't look at cases. For example, at the time, there was a lot of argument that printing money would bring back right, but which which showed a fundamental misunderstanding of what showed a fundamental misunderstanding because when when more money comes into the system at the same time as credit is contracting, the actual amount of purchasing power is not rising, and so what causes inflation is when more money is spent than goods and services

are produced. Okay, And what's happening at these times is that money creation is making up for the contraction and credit. So you're you're jumping ahead to the beautiful deleveraging. Let's go through the six steps as you outlined in the book, and just a quick overview the early part of the cycle, the bubble, the top, the depression, the beautiful deleveraging, the pushing on a string, and then normalization is did I

get that more or less right? That's right and um, And basically most cycles work the same way, but there's when you hit a zero interest rate, then you have the big one. Okay. So what happens is in the early part of a cycle, uh, the amount of lending that takes place produces a cash flow which is greater than the debt service payments on that that's a virtuous lending because credit gives buying power and depending on how you're using that buying power for using it to create

income that's greater than the debt service payments. Is a self reinforcing positive cycle that normally happens in the early part of the cycle. Then it pushes asset prices up. And what happens is that people start to extrapolate those things going forward, so as the debts continue to rise, and they believe this is going to go higher and higher.

In other words, the belief in um, the miracle of the new thing, and maybe the miracle of the the new Amazon or the new Tesla, or it's the nifty fifty in other years, in other words, that of the world, and that there's not careful calculation in terms of what could be paid back. We start to get into the bubble stage. The bubble stage is also um accompanied by a shadow The development of shadow banking is that consistent always always. We saw shadow banking very much in O eight,

o nine. I was not aware until I plowed through this that there was a shadow banking system. Uh in the Great Depression. There was a shadow banking system repeatedly throughout history, repeatedly throughout history. The way it works is the banks are regulated and they're controlled, and they're safe and they're overseen. But there are innovations that come outside of the banking system. For there's a shadow banking system.

Now you know, in other words, private lending that takes place out of the side of the banking system in various ways, and it's not regulated, and there's an incentive to go outside the banking system because the banking system being regulated and being controlled can't make as much money as going outside the banking system. Safer but capped right,

watched over um. But you know, not necessarily totally say, but you always have the going out to that, and you always have the development of new vehicles, always new vehicles, and they grow in a very fast way. Doesn't mean they're not healthy, but they grow in a very fast way. And you see a growth in that in lending that becomes an unsustainable growth rate that feeds on itself because

the middlemen make money on making these kinds of loads. Um, those who are buying them have them go up in value, and everybody is happy at that point. What we always try to do is do the pro form of financial statements, in other words, how much cash is going to come in and come and you don't have uh, you have a problem. And there's the lending of seeds, the ability to services that's right. And in addition, you come to

the late part of the cycle. You know, when there's not much capacity to grow as fast, but the markets continue to discount a fast growth rate. The funny thing about markets is that they discount what they've experienced more than what's likely. Like you would imagine when an economy is really depressed that buying large that they would discount that it would be pick up because it's at the low part of the cycle, or when when you run into the late part of the cycle, they would say

it can't sustain that particular growth rate. And they certainly can't sustain that growth rate on a lot of debt, But yet the their price to discount that, And so the the irony is asset prices are higher. There's much more leverage in the mark in the system. And so why would asset prices be higher or credit spreads be lower when there's a lot more leverage in the price of everything is higher. Doesn't make sense, But that's where the bubble is. These are the good times, these are

the great times, it seems right. So so then you get the top and then bang, the next stop is depression. Well, most typically then the top. The top usually comes through a combination of a tightening of monetary policy because you're later in the cycle. Are the central bankers historically always

late to the party. Is there anything they could do to sort of slow it down in real time or has history shown own they always are are at a step History is shown that they're pretty much always allowing the rate of growth to be rate faster than the rate of capacity to produce. And so we see a shrinking labor force. We excess labor, we see as shrinking utilization of excess utilization of capacity. You see those types of things that to put on the brakes enough ahead

of the capacity limitations. Um, you know, hardly ever takes place. They can't, they don't get it right, and and that's partially related to this economy, but it's also partially related to the asset prices. The asset prices go first before the economy goes, so private equity competes with public equity and everything, and so you like in this cycle, you've seen those asset prices go down and projected returns of

all those assets prices go lower. You see the duration of the assets length and duration means also price sensitive. A lacing um longer bo more sensitive than the product

to the movement of interest rates. So the interest rate UM, so as it's become more sensitive, and then what happens is classically you have enough of a tightening um to create the crack that usually also happens when they cash flow is not in um, not positioned because there's too much debt relative to the cash flow, and it starts in the periphery of the credit markets, and then it

works itself down through that. So sorry, you're suggesting it starts in the shadow banking market and then works its way into the mainstream, so you get colts. So what we saw, no, you know, nine these non bank lenders, the model was uh underwrite mortgages to sell to securitizers. They started going belly up in pretty big numbers in oh six, oh seven, long before you saw any problems

with with the big banks. That that's typical of all these cycles because at the periphery there's more aggressive lending. It's unregulated the leverage, right, I think about the investment banks being more leveraged than the traditional banks. By way of example, traditional banks are all part of the party. I mean, it's it's the same thing now, every everybody is in the same hot up together. All of these cycles,

the upward cycle is self reinforcing. So let's let's get to the I want to jump to the beautiful deleveraging, which is your phrase, which I've always found to be somewhat of a romantic phrase about something that's a fairly dry economic process. Tell us about the beautiful deleveraging post O eight o nine And in previous cycles, well, um, in a normal cycle, when you have the downward move to get it reef moving on the positive side, they

get the good cycle going. You lower interest rates enough so that the present value discount rate for asset prices goes up. You may a um it cheaper to have new borrow because the monthly payments are less because of the interest rate is less. You and you make everybody richer. That's how the cycle goes. And that seems to have happened posted eight o nine. Yes, it happens in all

these cycles. That's the normal way to happen. But what's different about the eight oh nine, which is the same as the nine team to thirty two period, is interest rates. It's zero. When interest rates it's zero, the game changes, okay, because monetary policy cannot operate that way. And so two times that century, that happened. And that's when century or or century, that's the that's the time it happened. And

then what that means is the game changes. And the game then has to be that you print money and you buy financial asset central banks you got to do that ZERP and KWI. Yeah, and that they do that all over the world. And in that since then, they built, uh,

they brought about sixteen trillion dollars. Central banks have bought about sixteen trillion dollars, put about sixteen trillion dollars of liquidity out in the system in financial markets, and that causes financial markets to go up and produces plenty of liquidity in the um. In that crisis, they also guaranteed about two thirds of all of the debt in the United States. And that's that's just an astonishing figure. You've been using nineteen thirty seven as the parallel for today.

Nineteen thirty seven was kind of a scary time in history. It was before the rise of Nazism, was before World War two. A lot of bad things were going on in nineteen thirty seven. Why do you draw that that parallel, Well,

I think things happening. There's a list of things happening in nineteen thirty two, nine nine, nineteen thirty two as in two thousand and eight to two thousand nine UM, there was a debt crisis and that UM where an interest rates at zero and central banks had to print a lot of money to buy a lot of financial assets, which produced UM big rallies in the stock market and a big pickup in economic activity. And in seven the federal reserves started to tighten monetary policy of law, and

there was an interest rate sensitivity associated with that. Was it premature UM, It's not so much premature as much as highly impactful in my opinion, maybe a bit of both, UM. But the point at that time is that in doing that, that contributed to the wealth gap, because financial assets are owned by people who have financials and poor people don't have that, and to produced a wealth gap in which UM, like now, the top intent of one percent of the

population's net woralth is equal to the bottom combined. So so there was a there was a giant wealth gap. And at that time there's tension between the left and the right, and this is true in all countries around the world, and so we have the emergence of populism now four countries decided to go from democracies to dictatorships.

That happened in Italy, feet and then it happened in Germany, it happened in Japan, it happened in Spain, and that that tension produced tension inside the country and tension outside the country, and it produced a certain type of leader, which was a populist leader. So we have populism in other words, of gap there that I think is very important to understand. Politics now is more important than at any time in my lifetime. And I've been doing this

for fifty years. So what are we seeing in today's today's um worlds of politics between the rise of Trump is m and what we've seen in the Philippines and and Britain and Brexit. Are you saying, hey, your world post crisis is now dealing with a very similar ninety

seven UH form of popularism and leading to dictatorship. Populism is um when a strong individual is brought in by a segment disenfranchised segment of the population, partially because of the economics, partially because of a sense that their culture is being threatened and that there are it's anti elites, and it is nationalistic it is protectionistic and is military istic, and the populist has a fighter mentality. So that's that's

what populace. That's every financial crisis, it's the same thing. Well in the big ones. In the big ones, you tend to get that polarity. So we have a situation that's like that. I think everybody would agree that the nature of the situation is like that. It's producing more domestic conflict around that UM the the right becomes more right and the left becomes more right left, and then

also more international conflict. Another key element here in the thirties which were not used to is that you have a rise of a country to of existing power, to have challenged the exist the existing power rise of a new country. That was that was Japan versus the Europeans, or Japan versus the US, and the Japan versus the

European powers that had colonies in the Pacific area. A lot of them had colonies that and the United States UM had interest there where they were competing for natural resources. And so when UM Japan, then UM had its economic problems and wanted to grow. It needed resources to beyond Japan because Japan has very limited resources, so it goes into takes over man Choria, northern China. There is that competition. So now we're worried about resources and we start to

put in you know, blockades and things. And then when World War two begins to break out, really nine, so we have the same phenomenon happening in Europe, where the rising power was Germany. It was hobbled at the end of World War One, hobbled and humiliated, and as a result of that, it became stronger, and it became strong relative to the existing powers, and that was particularly the

UK and France. And as a result, we had UM that conflict, that that type of conflict, and over the period of time, it first started economically, like in Japan, they UM, we would put sanctions in place, and eventually when it got um more serious, then Japan took advantage of that because they couldn't those colonies couldn't defend themselves in Asia, and so they invaded those areas and so expanding to also get materials, rubbers and things like that.

And then UM we had then embargo their assets and then eventually we embargo their oil and that led UM to Pearl Harbor. So thirty nine was war in Europe and forty one was um Pearl Harbor, and in the beginning of that, I'm not saying we're going down that path along those lines, but I'm saying, let's say key points. Okay, first, you're you're later in a short term debt cycles. So there are two debt cycles. I'm referring to. One is the short term debt cycle. I think we're acquainted with that.

That's a business cycle. You have recessions, economy gross because of stimulations, you run out of capacity, central bank titan monetary policy, markets start to decline, then the economy declines, and then you have a session and you do that over and over again. Those things are usually you know, maybe ten years in that facility, a little less. Then

you have a long term debt cycle. And the long term debt cycle is um the accumulation of those short term debt cycle, but it kind of reaches its end when first interest rates at zero because you can't puff things up with interest rate declines anymore. And then you have QUI, which is then the purchase of those assets to cause those prices to rise a lot. And with those asset prices rising a lot, you can't From that point have the same impact. I want to emphasize, UM,

that's the pushing on the string. That's the pushing that's that's the pushing on a string phase, which is a wonderful metaphor. You try and do something and nothing happens. You push on it, it doesn't go into the system. And so UM, just let's take a moment here and realize, UM, that we have a system in which demand is produced by credit and that UM most people are long in

other words, and their leverage law. UM. So the balance that you're looking for a healthy economy to obtain is sufficient credit consumption so that consumers are out buying, businesses are expanding, but not such reckless issuance of credit that things go haywire and you get the bubble and then debt cycle that leads to a giant collapse. How do you get that balance? Can? Um? Is debt rising faster than the income to service it, that's a bad sign.

There maybe a lead lad but at the end of the day, it has to rise there UM, So that you have UM debt being that service payments growing faster than the actual excuse me, the income growing faster than the debt service payments. So you're gonna need that growing faster than you could service stuff. That's that's good. That's that's a good economy. That's the way the capital markets should work. So when you have debt growing faster than

the debt service payments, that's unsustainable. And at some point that stops and you lose that demand. So that's point one. Point two is what is the power of the central bank to keep that thing going to in other words, repair that situation by lowering interest rates or buying assets to produce liquidity in the system, to build it up, because a debt is a promise to deliver cash, and when they put money into the system, it makes it easier to service that debt. It lowers interest rates, causes

set prices. So what is the capacity of the central bank when we get into serious problems, really serious problems. We have a situation in which we can't service that debt, and we're in a situation where the central bank policies aren't are not as powerful because either interest rates are close to zero or the power of quantitative easing has largely been used up because that balloon has been expanded,

and also what you can buy is limited. So that's when you're at more at the end of the longer term debt cycle, I wanna I want to ask you about the current circumstances. Can you stick around a little bit. We are tumbl questions we've been speaking with Ray Dalio. If you enjoy this conversation, be sure and check out the podcast extras, where we keep the tape rolling and

continue discussing all things debt crisis. You can find that at Apple iTunes, Bloomberg dot com, Stitcher, overcast, wherever your finer podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Check out my daily column at Bloomberg dot com slash Opinion. You could follow me on Twitter at rit Holts. You could follow Ray on Twitter at Ray Dalio. I'm Barry Ritolts. You're listening to Masters in Business on

Bloomberg Radio. Welcome to the podcast, Ray, Thank you so much for doing this. I've been looking forward to following up with you since our last conversation, and I have so many questions we did not get to before we move away from big debt crises. I just have to ask you here it is. It's has anybody learned anything about financial crisis? Do you think we're better prepared next time? Or are we gonna get tenue to make the exact same mistakes over and over again. We've learned some things,

but not enough things. I think that I think people more cautious, cash is higher, the lending is different. Um, I think the banks have more capital. Uh, those things are good. I think we also, I think may put some regulations in place that limit the policy makers flexibilities to be able to deal with things. I think every crisis is a bit different, and you can't write the rules so precisely that you can deal with it anyway.

I don't think we've materially changed those things. If I'm looking forward, I would say when we do our financial numbers pro forma, generally speaking, there's much less of a bubble around. Back in two thousand seven, when we did those numbers, we could see that a lot of debt problems and a debt crisis was going to come. So how do you contextualize something like the student debt crisis which is at all time highs or is that not

the sort of bubble that leads to a systemic issue. Well, what we do is we look at each of the different types. There are parts here that look like bubbles to us, and the question is what is how big are they and what are the contagious and so um you're so methodical, you really you bring an engineer's approach to this. It's the economic machine, which you've described previously.

But even when looking at a specific type of debt, you want to know exactly how problematic it is and is it something that's contained within its own silo or does it have the ability to infect the whole system? Where you need to do that and not just the you know, you have to be granular as well as a big picture. So yeah, that's what we do. And so when we go that, I think the biggest risks that we see are the corporate market has increased a lot. There's been a lot of funding to um private equity

firms and so on. Um is that a good thing or a bad thing? Well, funding is good. It depends on whether that debt is producing the cash flows and and and so on. If you have a decline in earnings, which will come from the next recession, fair much fair amount of that debt um will be stress tested and they'll be issues pertaining to that. And then the other UM particular imbalance that we see is the amount of sales that the U. S. Treasury is going to have

to make. And so when we look about what those numbers will be, particularly after the stimulus starts to taper off, we have we've had a big one time stimulus, particularly tax cuts and particularly the corporate tax cuts, and that will have a fading impact at the same time as the budget deficits. Hence the sales of bonds will increase at the same time as the balance sheet is being contracted. When I do the calculations of who are the buyers of that and one of their quantities, I see an

imbalance in that. And so UM, that is a form of problems that existing. So three types of debt. You have household, You've corporate, you have government. Where's the biggest problem? Um? Government? And UM, the government debt and the corporate debt are the biggest problems. So let me push back on you and that and UM please do But UM, and what I'm saying is not in total, okay, but government by and large in total. But UM, corporates, not in total,

but in existing in certain pockets. It's going to be the pushback because there seems to be a whole lot of corporate debt, some of which seems to be with good companies with good care flows and a strong ability to service that debt a rated and then I don't know, it's call at the bottom who are issuing a lot of debt that's a kind of junkie and of dubious serviceability in the future, Or am I just being too nat I think you're pretty you're pretty accurate on that.

In other words, if you did triple B or double by debt, and if you looked at UM leverage loans and which has become huge the past five years, that's right, and UM to finance also acquisitions a lot of private equity acquisitions and and so on, and you looked at the collateralized loan obligation mark CLO market UM in terms of those things, there are some there are vulnerabilities that exist there in terms of if incomes go down and

they're fairly covenant like, they're they're very convenent lie UM and so and the big growth in debt in this psycho has been the corporate debt too, because when interest rates were lowered to a level that was below the return on equity it paid to have buy backs or to make acquisitions or um, and to go out there and have a private equity because I get a higher return on the equity. So it's a great financial That's

what you do with free money. You take it and you put it to where it's going to generate the highest return. That's right, and so UM a lot of that UM that's where the big growth is. Two things about that is that can't continue. First of all at that pace, okay, so um that that problem under the market will be disappearing. And then because you get leveraged

up to a certain point, you can't extrapolate that. But then in addition to that, you know through experiences that there are some that you could see are going to be problems when earnings get hurt. And then there are some that you can't see because you haven't stress tested whether that was done well with good asset liability matches.

You know, for example, number of multinational companies bought companies in other countries and they financed that with dollar denominated debt, and when the dollar goes up and the incomes that they're receiving is in local currency, you have an asset liability mismatch. So there are a lot of asset liability mismatches that are out there that we sort of worry about. Those are the particular spots I would say that look vulnerable, not nothing like it looked to us in two thousand seven.

But then if you go a little bit longer and you take the movement. Um, we also have nonfunded, non debt liabilities in the form of pension liabilities and healthcare liabilities, both of which widnded, that are going to come. I mean, we're going to a lot of promises, promises either be paid back in the form of debt or promises to you have money to pay pensions and all and negati here that that all becomes limited and not all that produces, you know, a greater squeeze, So it doesn't look as big,

like a big bang type of thing. My concern has to do with the fact that it is coming at the same time as there's populism and the political because um, we're really right now at each other's throats, the left, the right, the UM. I want to I want to push back on that also, But before I do that, I just have to come back to the corporate debt. What you're describing is sort of an echo boom following the original bubble and crash. Is that echo boom historically consistent?

Does that always seem to happen after a debt crisis and collapse? Do you always get hey, things start to repair and here we go again, or is this kind of unique to well? You always you always go through the cycle. And so when you're uh, when we we are in a position where we're nine years into the expansion and central banks have brought fifteen sixteen trillion dollars worth of assets and made that cheap, you then mechanistically have what you're calling an echo boom. You have that

big boom that has taken place. Happens, and that that always happens. That's why you always have cycles, you know, And that's why you come back to seven between the politics, it's ten years after that's twin years, almost ten years. We're late in the short term cycle, relatively late, although I would say we've got probably the seventh inning of the short term cycle this business cycle. We're late in the long we're late in the long term cycle. Meeting

the amount of ammunition is less. These are facts in other words, the interest rate, the quei thing um. And we do have um a lot of populism and uh and clashes about wealth and culture and those things internally much more than we did. And we're at the top or right near the top of the cycle and the markets and so on, so you can't imagine that things

would turn down. And when things turned down, UM, my big worry about that following these cycles is that political conflict, social conflict worsen's because at times get worse for everybody. And that's and that's that's an issue. So how do the politics play out? How how were we with each other? Can we can we approach that together or not? And then of course then there's the power of the central bank to be helping us, which is less. So so

let me do the little bit of pushback. And you know, we kind of all exist in a media world, in a social network world. But when we see these studies that talk to Americans about a lot of hot button issues, once you get away from the crazy rhetoric and the divisiveness, we kind of all more or less have you know, six agreement on some big issues. We all agree that there should be less abortions if there's a way to make that happen. We could disagree about whether or not

it should be mandatory, but there's some agreement there. There's some agreement about some pretty common sense gun control laws. There's some agreement about pollution and climate change. There's a small group of people who don't believe it's man made, and there's a small group of people who don't believe in small pox vaccination. But by and large, most of America things it's a bad idea to spew chemical exhaust into the into the atmosphere that we all have to

um breathe. So, taking what you've learned, when you've put these principles of of dead crisis together, how can we get people outside of Twitter and Facebook to focus on what we have in common? Hey, we're all Americans. We all share a certain common belief system. How come we don't focus on what brings us together as opposed to what divides us. Well, first of all, I would disagree with us um. I think we have a higher level

of conflict that created a conflict gauge. The conflict gauge consists of a lot of different measures of conflicts alone go over that. I was kind of leaning in that direction. Okay, but it would be UM. The polarity within the two political systems, the percentage of UM those who are adamantly in favor of their candidate versus adamantly opposed to the

other candidate. That it would be. There's a whole bunch of political things like uh, compromises in the bills that are there, UM, A whole bunch of those types of political things. UM. There are social value measures UM. In other words, UM lots of indicators of what the parties think of the other side, which is um uh antagonistic almost to the point of being violent in terms of measuring what one side is listening to the other side.

Any if you if you use UM, if you google the word google, count the word war as this thing from the word peace or compromise, and so on, all of those measures. I could rattle on a lot. Big differences in beliefs, Okay, big difference Uh. One of the things that used to bind us more together was UM certain religious produced certain UM common beliefs of Judeo Christian,

of relief system, the appreciation for the immigrant UM. These were things, in other words, where diversity was really the main sort of thanks anyway I could rattle off those. We so we created an index, and the Index of Conflict, which is just these measures biled up UM shows that the conflict gauge is both within the country and within most countries, is greater than it was since the thirties, and also between countries. So is it just the nature

of the debt cycle? Can we blame? Can you blame I don't know, social media, Fox News, Nancy Pelosi, Donald Trump? Who gets the blame for that? Or is this just what happens when you have a big debt crisis. Um. Yeah, I think it happens over and over again because of that disenfranchise and also I don't think they have much contact. I mean, it's totally understandable. I think in the sense that UM, capitalism right now is not working for the

majority of Americans. And I'm a hardcore capitalist. I wish I could. But if you take the bottom six I did a study of carving out what is it like the bottom I want to look at the majority. Those conditions are are bad. Another hasn't been income growth theory on a real basis. That's right, there's rising debt um Uh, there's rising death rates to rid death rates from opiates death rates, but from suicides and so on. In those

those conditions, less economic mobility, there's a whole ga. We used to have a middle class that was on the assembly line and it kind of worked. So we have a greater economic polarity you have. UM, so there's a disenfranchised group out there. That's important. UM, we're also we don't have that same sort of contact with each other. You know, I live in Greenwich, Connecticut, in Greenwich, so I think so exemplifies this. And my um we live

in Fairfield County, Greenwich, Connecticut. Um, it's I think still the wealthiest state in the United States anyway, right up there. Um, in that state there is one county that's rich and the rest of the count state pretty much as poor, and it's going in terrible situation. My wife, she does to work with the disengaged kids, the students who basically they're just kind of coasting through school and not in doing anything. Yeah, thank you for remembering. Yeah, it's um,

there's disengaged and there's disconnected. And the disengaged are the kid who attends school but he doesn't study, doesn't take tests, or he fails and that county is just so to getting through, and then there's disconnected, which means they don't know where they are. They're no longer coming to the school district. Twenty two percent of the high school students are one of those. Those kids are going to be twenty Those kids are going to be on the street.

They're gonna be there's a uselessness. They have to share books literally, I mean in some cases sharing pencils, they literally. Can you do to change that? Sounds like a broken system, both on the educational level and the family level. How

can you possibly fix that? Well, these are um I'm still answering the last question on the division right and that division and most people don't even have contact with it, Like I wouldn't have contact if it wasn't for my wife taking me there and they in their twenty five miles up the road. You know, you're in Grant, Connectic kit and then and there, and you go to Bridgeport or you go to Hartford, and you look at what

the daily shootings are killings in this place. Hartford, Connecticut used to be the yeah, and and uh, you know, a very fine place to be. So there is this polarity we're talking about the reasons for the polarity. There's a lot of reasons. I think to answer your question, what you need is to recognize that that that that's a national emergency, in other words, that capitalism has got to work for the majority of the people. First of all,

let's recognize that. Let's and let's establish what that polar metrics around that. You you have always been such a private individual most of your career. You're not a big in the past. When the books came out, you started doing a little more media. This sounds like politics. I can't imagine any interest in running for for office or

you the I can't imagine it. Now, some guy who sits about forty feet from where we're having a conversation has been talking about running in Do you think the sort of technocratic approach, the engineered approach that Bridgewater uses, or Mike Bloomberg, who is the owner of Bloomberg LP where we're sitting right now, do you think that approach can help solve some of these issues. And I was not planning on making a political commercial. I'm I'm sincerely

asking a question. These have been very, very challenging problems for generations. Nobody seems to have figured out how to fix that. Well, I think a big I think big progress can be made. First, UM, let's acknowledge it, let's measure it, put the statistics, let's use those measurements as metrics, in other words, to own it, so that now you say, if I change that number, I'm doing a good job, or if I'm not changing that number. And then let's

bring about the various peoples and parties. UM various parties people most importantly, who are experts who deal in those communities and understand them and make changes. Because I think there are a lot of things that can be done in my philanthropic efforts, and I think probably in Mike's philanthropic You guys just did something with the ocean X two hundred million dollar investment to help uh folk us

on keeping the oceans cleaner and resolving submission. That's right, And I think people, I think we're also dealing with that population and a we see all the time great return on investment type of things that could be done, and you just cannot imagine how the payoff can't be great on those types of things. I think you could put together public private partnerships and that that could be corporations or philanthropists together with the government to do high

return on investment. I could rattle off a bunch of these types of things that would help to eliminate, in other words, things that pay for themselves. And think about, you know, the cost of getting not getting through high school and getting not getting a job in an individual's lifetime. It's gonna, it's gonna be forever. It's a it's about

a million dollars per per per person. The that means everything from police to courts to jails and beyond incarceration is between eighty thousand dollars a year is what happens. And people if you don't have jobs and you're in a community that way, and like I support micro finance, and for every dollar that I give to micro finance, twelve dollars is lent out to people in the first five years and it keeps ongoing because they get paid

back and so on. If you look at um um that I could go on and on and on a listening and those things, but somebody's got to take it on right in other words, and then the other thing is um I think the important, the most important thing is to believe that we're there's a country that we are in it together, Okay, that we need to um, not fight about things, but to debate, argue and then move on to compromises and to run the country for the whole. We need to have thoughtful disagreement and principles

for dealing with it. Yeah, so you got me on a hot street, Ray, you got my vote. So I'll tell you that much I wish. I know, I have to. You have to head out. Promise me you'll come back. I have a thousand more questions for you. I can talk to you for hours and hours. Um, this has been absolutely delightful. Thank you for being so generous with your time. Thank you for having me. It's always a delight Um. We have been speaking with Ray Dalio, co

founder of Bridgewater Associates. If you enjoy this conversation, well, be sure to look up and entered down an inch on Apple, iTunes, Overcast, Stitcher, uh, SoundCloud, Bloomberg dot com, wherever your finer podcasts are sold. I would be remiss if I did not thank the correct staff that puts this together each week. Medina Patwana is my audio engineer and producer extraordinaire h A Tico Valberon is our project manager. Taylor Riggs is our booker, slash producer producer. Michael bat

Nick is my head of Reese Urch. I'm Barry Retolts. You've been listening to Masters in Business on Bloomberg Radio m