Ray Dalio on the Coming Crisis in US Debt

We saw billions. And I think this kind of illustrates one of the really difficult things about finance and debt, which is all of us, as you mentioned earlier, kind of struggle to grasp the scale of these numbers that are involved here, and one point eight trillions seems so abstract that we have to describe it using football field

analogies or whatever else. And if we can't really grasp the scale of the debt because it's just this number that no one really understands or even takes seriously, then it feels like it's difficult to tackle to solve.

people expect. And you can have countries with low debts and deficits, but because they have an internal political crisis because people no longer have confidence in the government of this to pay it back. You can have a crisis even at low levels. And so even thinking about what does it mean to solve a debt, talk about debt at the national level is simultaneously a financial discussion and one about political confidence.

these very big numbers. We're going to be speaking with Ray Dallio, the legendary founder of Bridgewater, the author of numerous books, including a new one titled How Countries Go Broke, principles for navigating the big debt cycle, and most importantly, a key player in the invention of the chicken nugget. I am very excited. Ray, Welcome to the show.

sort of. And what I did was I was in charge of institutional futures at one of these brokerage houses, and that brought me in contact with the mechanics of how hedging and how chickens and grain and everything worked. So fast forward, I got to meet the biggest chicken producers in the world, and McDonald's hired me as a consultant of sorts to advise them on how they were

going to safely price the chicken McNugget. You see. Their worry was that if they this was very volatile times then and their worry was if they bought the chicken and they put it on the menu and the prices changed, like went up a lot, they'd have to change the menu price. So they needed to know that they could have stable prices. And we walked and I knew that the mechanics of chicken. He had you produce it. There

were little chicks and they didn't cost much. And what cost most of the money to make a chicken was the corn and soyed meal that they produce as feed to feed them to get them to be big chickens and so on. And so I went to one of my chicken producing clients and McDonald's, and I showed how this chicken producing client could hedge the price and give them a stable price, and because of that, they were able to put chicken McNuggets on the menu.

on that. And I've changed my mind over the years. And you know, there are many good ideas in the world that people have on paper and labs and so forth that never exist because the financing mechanisms to bring them to place don't exist. And so I would say that if you like, especially in nineteen seventy five, when I imagine we didn't in the mid nineteen seventies, when we didn't have the same level of easy running computing

power in as liquid markets, et cetera. That someone who figures out how to create a synthetic McNugget price is as much the inventor of the McNugget as the person who figured out how to, you know, ball and fry the chicken.

follow markets. And on August fifteenth, nineteen seventy one, Richard Nixon Sunday Night, got on the television and told people that the monetary system was going to change, that the money that they thought they could get gold was thought of as money then, and paper money was like checks in a checkbook, didn't have any intrinsic value, no value that they would not get because there was a fixed

exchange ring. And he gave some sort of BS story about why that was, which it was really because they didn't have enough gold to back up their money claims. And I walked on the floor of the New York Stock Exchange. I thought, this is a big crisis. This is going to be terrible, and I thought the stock market I was going to go down a lot and I went on the floor and it went up the

most in years. And I didn't understand that. I didn't understand why, And so I started to do research, and I found that on March fifteenth, nineteen thirty three, President Roosevelt got on the radio and made the exact same announcement for the exact same reason. And I studied, then, why is it that they went up a lot? Okay, you devalue money. When you devalue money and you make

money very easy, things go up. And so I learned not just the nature of that mechanic, but I learned that things that surprised me in my life often were things that never happened in my lifetime, but they happened in times in history. So I studied the Great Depression. I figured, okay, I should study all big things that happened, and I studied that Great Depression. And as a result of doing that, in two thousand and eight, I was able to anticipate the global financial crisis ahead of it.

And the reason is is because when you have a debt crisis and interest rates go down and hit zero, so they can't go down anymore. Cutting interest rates anymore is no longer going to work. And what I learned from studying this event in nineteen thirty three is that when that happens, the government prints money and buys the bonds. So what happened in two thousand and eight was exactly that, and I wouldn't have understood it if I didn't study

what happened back then. So that changed my whole approach to decision making, which is also why I did this study recently, and that came out as the book that you're referred to, you know, Principles for dealing with the Changing World Order. I needed to study things that hadn't

happened in my lifetime. So we'll get into it. Yeah, there are things that are happening to us in our lifetimes that haven't happened before that you have to go back to the thirties or other periods of time to understand. And related to that is this money debt thing.

of the word. There's also the other thing is you know you mentioned stock surged because of these moves represented this big fiscal loosening. We are in an era in

which inflation has been high for several years. Inflation is still above target, and many people would say this still most persistent issue right now is this issue of too much money and that there's still things are too expensive, et cetera, and so there's still this impulse to titan So when you think about these lessons that you're talking about, then when you look at our fiscal position in twenty twenty five, what do you think about what? When you look at our fiscal position, what do you see?

term debt cycles. You know things economies, we inflation goes down, they make credit available, things go up, stocks and everything goes up until you get too much and you get inflation. Then they tighten credit and so on. But the big debt cycle isn't understood. And yet we're there, We're at the brink of one of these. And so what I think about this is that there are really three factors that drive the big debt cycle, and I want to convey those. I'm a part of my life that I'm

trying to convey those. And so, okay, most people think interest rates go up because of inflation tightness or ease of monetary policy, but they don't realize that there are limits to dick growth. And here's how it happens. One man's debts or another man's financial assets. So when you're holding a lot of bonds, that's a large percentage of the portfolio, that's also a large debt. And think of the credit system like a circulatory system that brings nutrients

to all of the parts of the body. So you give mind power. And if that buying power is used to create productivity, then what it does is it produces incomes that are large enough to pay the debts back and give you productivity and everybody's app But if the debts are too large and don't produce the productivity, you don't have the income that's necessary to service those debts. And so in this circulatory system, if it's healthy, you're seeing incomes rise with the debts, and you're seeing the

system work well. When debts rise relative to incomes that are needed to service the debt, it's like plaque in the system, building up in the circulatory system because it means that first of all, you have a debt service problem that you have to pay the debt service, and

that's like plaque in that it leaves less room for spending. So, for example, the US government has an interest bill that's about a trillion dollars a year, and if they didn't have a trillion that didn't have that interest bill, they'd have a trillion dollars more spending, and that process gets worse and worse over time. In addition, one has to roll over the debt that was last accumulating, so we have to roll over this year about nine trillion, a

little over nine trillion dollars of debt. That means the new you know, they get it runs out, then you have to sell it again. And when they have a lot of that debt, that's a problem. And when you're doing putting a lot more debt on top of that pile of debt, so it's not just the existing debt that's a problem, but you have to add more debt sales, which equals essentially the budget deficit, which now is going to be about seven and a half percent of GDP.

You've got to sell those. You have to sell those to people or institutions or central banks or sovereign funds that hold these bonds while they're already holding too many bonds and now they have to roll them over, and you have to sell these new bonds that are coming on, and that can be a problem, and it can be worse than that, because if they don't have if they say, hey, there are too many of these bonds and i've got enough and I don't want to buy it, or worse,

there could be some reasons that they don't want to buy it, like for example, sanctions. Okay, we're living in a world similar to the nineteen thirties, and if I was the Chinese, I would worry that what would happen to me might happen what happened to the Japanese in the nineteen thirties, which is that we froze their bonds,

a meaning they didn't get their money. And so nowadays, with sanctions and too many bonds and so on, when I calculate who are the buyers and how much do we have to sell, I find a big imbalance, and

I know how that works. You know what happens is central banks buy these bonds, They print money and buy the bonds, and then they lose money on the bonds, and you get a negative network at the central bank, and you get this spiral when you reach the part of the cycle that you have to borrow money to pay debt service, and then the holders of those bonds say, okay,

it's a risky situation. In the private credit market, we call that the debt spiral, the debt debt spiral, because when you have to to roll over the debts but it's risky, the credit spreads go up. And when the credit spreads go up, then it adds to the debt service and it becomes a spiral. That's a problem. So the way I calculate it is that we're quite near that point.

debt doom fatigue. We've had warnings over the deficit for decades. Now, how do you actually go about figuring out when the cycle will turn or what specific things do you look for as the proximate catalyst for that inflection point?

the supplied demand analysis. Simple when that dynamic I describe starts happening, you can see it because the amount that is sold is not bought by the private sector anymore of those other buyers, and then the central bank has to come in and then print money and make up that difference, and then that the value is money. So we saw let's call it a palpitation. I give this example.

It's like a heart attack. We saw that when in twenty twenty, in twenty twenty one, when the government needed in twenty twenty to send out a lot of money, it actually sent out about twice the amount of money that people in their incomes lost or businesses lost. They sent out twice as much amount of money then and then in twenty twenty one they did it again without

the need. But there was a move from a right of center policy to a left of center policy in which universal basic income and the desire to do that put out that money. And so where did the government get the money from. They got it from the central bank that produced the money and sent it out, and so everybody's getting all this money and they're surprised that prices went up so okay, So you have that wave

of inflation that was like a warning heart attack. So what I'm trying to do in that book is show the dynamics and the mechanics that show how you can calculate what the supplied demand is and what will happen at what's likely to happen, and what has happened through time. So I go back through time and I show these many, many cases of it so that you can distinguish it, because I'm with you the alternative, which has been a problem.

You know, it's like somebody who's built up their cholesterol and lived this way and they say, I haven't had a heart attack, and they get that as positive reinforcement, and.

Do you see it? And so in our conversation, I can't show you the charts and numbers and so on, but I can tell you. And so we should be asking ourselves is that logical? Has it happened before? And then what do we do about it? Rather than say we don't have to worry about it?

so forth. Let's say it happens, and I don't know what it is, but what is the equivalent in twenty twenty five or twenty twenty six or twenty twenty seven of Nixon suddenly taking us off the gold standard?

in relation to gold or other currencies. Perhaps, although this is something that will affect all currencies because they'll all be in the same they'll all depreciate it get together, and you'll see the rates rising, even though the Federal

reserve is easy. Then you will see the Federal Reserve come in and buy and do another QE, and then you're going to see the kind of reaction that you saw back in twenty twenty and twenty one on where not only the inflation component but gold and other asset prices in the scent going up, it'll look like that.

But what you might have in preparation for that, like in nineteen seventy one, is certain actions taken to deal with that issue, such as extending the maturity of the debt. These are possibilities.

it's a default. They will say under this policy, we're going to be better off if we don't vault the fault. We won't change what you're going to get paid, but we're going to spread it out over more years. That'll be a restructuring of the debt combined with some monetization of the debt, in other words, a central bank policy where they're buying some of that debt. That'll look like that. If it gets bad, then you could have more extreme things happened.

Japanese yen. They have a huge amount of debt which they're monetizing and so on. There's China's REMMB and that's not going to be a safe soorehold of wealth. And none of those currencies are going to sort of be what you'd call strong. So I think it would be very much like the nineteen seventies, which is very much like the nineteen thirties in which they all go down in relation to gold or other hard assets like that.

And you know, what is the alternative money? Will be the question, what's the alternative money that is stable and supply But bitcoin might be a bit part of that, could be a big part of that. But what is the alternative money? Because debt is money and money is debt. When I say debt is money, debt is money. Cop you're holding this and you're people are going to give you money, and money is stored in a debt instrument. When you're holding your money, you're putting it in a

debt instrument, So they're one and the same. When you have too much debt, it goes down. So I would think it's more like gold bitcoin. What is the alternative money? Money has two purposes, right, a medium of exchange and a storehold of wealth. As far as a medium of exchange, it can keep working as a medium of exchange. In Germany's Ymar Republic or Argentina recently, you can you know, you can carry back barrels of wheelbarrows of money and it's you can still exchange it. They had so much

that they couldn't count it, so they waited. This is literally the case. So the money will can be used for medium exchange, but as a storehold of wealth, it's not going to be used, and people will look for other storeholds of wealth that are movable and tradeable. So like in the thirties and then the forties, what did countries do with each other. They're not going to trust that the other country is not going to print the

money or do that, So they exchanged gold. Because gold has the attributes, it's limited in supply, it's not easy to manufacture, and throughout history it's been held by central banks. It's used today. Gold is the third largest reserve currency.

It's the dollar, then the euro, then gold, and then the Japanese in and so that's why I'm saying I think that in that particular dynamic, you say, well, what is it that's the storehold of wealth, and you see and I emphasize gold, but bitcoin two has elements of that. It's not real estate because real estate is down. You have a problem with real estate. Real estate is nailed down. You can't move it around, you can't. It doesn't work that way. It's very interest rate sensitive, so when interest

rates go up, it hurts it. It's also very easily taxed because it's not moved, you can easily tax it, so it's not like it could be exchanged. So there's a very limited number of alternative moneies.

Just real quickly, if we were if we had you on the if we had had you on the podcast in twenty fifteen, we were talking about something else. Are you more exposed in some way more bullish on gold today in twenty twenty five due to this, then you were say, if we had been talking to you ten years ago.

holding in your portfolio don't do well in such a crisis. Okay, So if you're holding a lot, let's say, a lot of odds or those types of things, the optimal mount in a typical portfolio is in the vicinity of a little bit bet less than fifteen percent, like if you didn't know you would hold but let's say it's ten percent, Okay. A prudent amount of that kind of little bit of gold serves as a protection and diversifies the portfolio. And what I think the most important thing is that you

don't have much of an exposure. I'm not on this show to tut gold, and I want to restrain people, but it's also keep in mind and investing what happens is the biggest problem with most investors is that they believe that whatever has been the best investment over the recent past is the best investment, not that it's become expensive and become too expensive and go down. And so there's a tendency of portfolios to investors to hunt to invest when things become terrific. So, by way of example,

let's say AI companies and you know companies like that. Well, the thing I want to convey to investors is that the idea that what's been going on is a good what's gone up a lot and really done well is a good investment, rather than it's become expensive is something they have to watch out for, and that the best company is no more the best investment. Right then, the best horse in a horse race is the best thing to bet on because there are odds and hurdles that

are bay into the price. So if you're going to bet on a horse and a horse race, you have an equal likelihood of betting on the worst horse to do the best to win on because the odds are shifted the discounting. You know that might be the fifty to one shot, and so the markets are like that. It's like a football game, you have to beat the spread.

So that dynamic means that you should balance most. The thing I will really convey to your listeners is that knowing how to balance your portfolio well is a very important thing. This is the most important thing because what you know is you know you can't be certain about and you can reduce your risks without reducing your expected returns if you do that well. And that gold is a part of a portfolio. So if I'm giving some thoughts about a portfolio, I would say diversify well. Gold

is an effective diversifier. And at a time when there's an X, you know, let's say too much debt. You can also rephrase that and say too many bonds and they're going to be a lot more coming. Might be considerations, but I don't want to start giving portfolio advice. What I want to do is let people know, and let really the policy makers know that there's a solution here. I mean, there's a right thing to do. We're talking about all the difficult things, and I want to emphasize

that this can be doable. Okay, you can lower that deficit to go to three percent of GDP frump tax cuts come in, the projected deficit will be about seven and a half percent of GDP, and you have to cut that to about three percent of GDP because that'll mean that that's won't rise relative to incomes and it will greatly improve the supply demand. So what I want to do is contribute by showing what can be done. And in fact, that was done from nineteen ninety two

to nineteen ninety eight. There was a five percent in GDP cut in the budget deficit. So that's what I'm talking about. Going from a four percent you know, let's say seven seven and a half down to three is a four or five percent cut of this percentage of GDP that happened from nineteen ninety two to nineteen ninety eight and can be done, And so I want to talk about those things that can make a big difference.

and when they matter. And I appreciate that part of your book is this effort to show how debt actually operates, but there's still so much disagreement. How do you actually go about, you know, getting people to agree on what debt is, how it works, and then do something about it.

and you can do it. And in fact, if you do it, if you get the deficit down, you will get also lower interest rates, and because your interest expenses are so high, those lower interest rates will also contribute to your better health. And in fact, those lower interest rates will help to cause asset prices to go up and the economy to be better, which will also give you tax revenue. So that you can do this, but you're arguing about which way to do it will probably

prevent you from doing it. So you should start off and take the three percent pledge first happen in your mind? What is the goal? Three percent of GDP the budget deficit? Okay, we all agree? Can we all agree that we need to do that? Okay? Or if we can't agree, look at the numbers, look at the story. And I'm telling you, but please, you know, agree that at least if you can say I agree on the number, will take the three percent of GDP pledge. And then what you have

is don't let the particular arguments. I don't care if you do it portionately across things. If you took every item that you can change that contributes to that increase in taxes, cut spending. If you just did everything proportionately and you use that as your backup if we can't reach agreement, we will do it all proportionally across the everything. Great. That's I mean, there are better ways to do it, but at least you did it. But if you don't

do it, so you're going to be in trouble. So that's the reality because it will be public conflict and it probably won't happen. So that's that's a choice. And if you don't do it, then take the responsibility. Say to yourself, if you don't do it, and there's the crisis that I'm saying is will come, and I can't tell you exactly when it'll come. It's like the heart attack. Can't you exactly? I get it, you're getting closer. My guess would be three years, give or take a year,

something like that. Okay, if you don't do that, and then you own it, Okay, that you have to take responsibility for the consequences. And if you say, okay, I got three percent solution, I'll find it, and yes, own it because you will own it. I mean when the economy and this heart attack of sorts comes along, then you're going to find yourself that the voters are not going to be very happy. So you own it.

in which there's a mix of things that happened. You can see the ripe mix. The ripe mix is going to include those things that will naturally, in a healthy way lower interest rates and help the economy and so on. It's not a perfect solution, but it's go to that nineteen ninety two to ninety eight period as an example. In my book gives I give many examples. The best mix is to properly mix depressing moves with stimulative moves.

What I call a beautiful deleveraging. And what I mean by that is that if you raise taxes or lower spending, that's depressing on the economy. However, if you do that with an easing of monetary policy, which is stimulative on the economy, those two things can balance, and they either of them lowers the debt to income ratio, but they can balance each other, and that's a well engineered move.

ask it in a slightly different way. But when it comes to taking action on this specific risk, you said earlier that you have made a lot of money by being able to understand debt cycles specifically in two thousand and eight, can you give us some examples of trades that you have undertaken in your, you know, very long financial career that have been successful and get really specific into it, because I think this is one of the

things that people struggle with. We can talk about diversification and managing your risk, but it's very hard to come up with the specifics of the trade.

that they could not buy. Once they were leveraged up, they could not continue to buy at that same pace, and therefore their purchases were going to go down. Their holdings would be the same, but their purchases were going to go down. At the same time. As I saw that budget deficits would be large and therefore bond sales would be large, I saw the mismatch. So okay, it's

a mismatch. So now what is the mechanics of that mismatch That means, you know, get out of credit risk, get out of credit risk, equity risk, and so on. And that's an.

chicken nugget future in nineteen seventy five. And I do think that we should remember that financial engineering is a form of engineering to bring physical things into the real world.

And then just this idea, like it seems very clear that Ray is you know, he didn't give us an exact number, but the gold and also he mentioned bitcoin multiple times.

foreign governments and obviously the Federal Reserve itself all step back from that market at the same time. So it seems like an issue. On the other hand, you know, the US can in theory force banks to buy more US debt. They can change the regulations and do it that way, that sort of financial repression way.

as such. But if you expect to be paid back over five years and it's ten years, if you're functionally defaulting, you know, I will say, look, if you have a huge tax cut, that's a bunch of rich people who have more cash in the bank, and one place that cash in the bank goes to is investments in One form of investment is bond, so you increase the amount of money that's in the household sector, et cetera. I

don't like I like these types of conversations. And you know, he said one to three years if there's no meaningful reduction in the deficit for this timing of the heart attack. So maybe we'll have ray on again in twenty thirty one and say what happened?

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