In this episode of Influencers, Andy sits
down with investor and entrepreneur Ray Dalio to discuss his new book on "Why Nations Succeed
and Fail". ANDY SERWER: Over nearly five decades, hedge
fund billionaire and investing legend Ray Dalio has built an iconic set of principles
for how to thrive in the market and in life. He made his first stock pick at age 12, and
at 26 launched Bridgewater Associates. Now it's the world's biggest hedge fund with
about $223 billion in assets under. Management his new book is called "Principles
for Dealing with the Changing World Order-- Why Nations succeed and Fail." On this episode of "Influencers," Dalio joins
me to talk about what's behind all this inflation. How the US-China standoff will unfold, and
what it all means for the global economy and your portfolio. [MUSIC PLAYING] Hello, everyone, and welcome to "Influencers." I'm Andy Serwer. And welcome to our guest, Ray Dalio, founder
of Bridgewater Associates and author of a new book, "Principles for Dealing with the
Changing World Order-- Why Nations Succeed and Fail." Ray, nice to see you. RAY DALIO: Nice to see you. ANDY SERWER: So you've identified three trends
in your book that lead to the decline of powerful countries, maybe like the United States, financial
markets that lead to a lot of debt, internal conflict like political polarization, and
pressures from the outside like rival countries. Let's start with the first one, financial
markets. You've expressed concern about low interest
rates that often lead to higher debt burdens and inflation. Would you say that characterizes what's happening
in the United States right now? RAY DALIO: Well, let me clarify. The three things that you mentioned are financial
conditions, the production of debt and money, to monetize those, the internal conflict over
wealth and other things, politics, the greater extremism, and then the rise of a great power
to challenge any existing great power in the form of China. Those three things never happened in my lifetime
before. But they happened throughout history. And when I learned that to be surprised, I
knew that I needed to study prior periods. The reason we anticipated the 2008 financial
crisis was because we studied the Great Depression. And so to answer your first question about
the first of those, i view it just very much mechanically. Buying power, which comes in the form of money
and credit, when that's produced in a quantity which is much greater than the incremental
production of goods, services, and financial assets, drives those financial asset prices
to go up. And the printing of money, the monetization
of debt is a last phase in a long-term debt cycle, because it indicates that when there's
a lot of debt, and there's a zero interest rate and you print that money, that debt monetization
has its effects. So what we're seeing now in the market is
very, very, very classic, it's happened repeatedly, in that that enormous amount of buying power
created by the creation of money, which doesn't raise living standards, that is passing through
the system. And so you're seeing it happen in the inflation
of goods, services, and financial assets. ANDY SERWER: Right. So many credit a similar strategy with softening
the COVID-19 downturn and helping speed up the recovery. Has the Federal Reserve been too dovish, and
should they raise rates more quickly than they're indicating they will? RAY DALIO: There's a trade off that I think
everybody has to understand, and that-- that's related to the second. With the large wealth gaps and large-- not
enough money in lots of places, the Federal Reserve and the Treasury were put into a position
of needing to get checks out. And there is also this left-right conflict,
issue having to do with the wealth gap. And that means that you have fiscal policies
that are now requiring lots of spending. And so the question is really, are the consequences
of not doing that better or worse than the consequences of doing that? Now when we look from an investor's point
of view or an individual's point of view, we have to remember that you can't raise living
standards by just creating money and credit, particularly if you don't raise productivity
more than that. And that means that those asset prices are
going up. So we're in the phase of the cycle, very classic,
that the financial asset prices have gone up because you've given them more money. That demand is going up, and now we're having
inflation, inflation of those assets. So if a lot of that buying power is going
to be pulled back particularly as we go into the next year, but there's still going to
be a lot and there's still going to be a high level of inflation of-- of those types of
assets. So the trade off is always the question. ANDY SERWER: Right. OK, so quickly, where do you come out on that
trade off? Is it a binary yes or no? RAY DALIO: It's a reflection of the state
of where we are in the cycle. That we have borrowed-- it's all the problems
that we've gotten ourselves into by acquiring too much debt and spending more than we're
earning rather than being more productive. And also not distributing the opportunities
and the incomes in a way that it's a broad based prosperity. So on the one hand, you have a prosperity
that the bottom 60% of the population isn't participating in very much. And at the same time, you have-- so it's creating
that polarity, and at the same time, you have the financial markets. So those are trade offs that different people--
the only thing I care about is whether we're productive, whether we increase the size of
the pie through productivity, and then divide it well so that you create the-- something
closer to equal opportunity that produces greater political stability and also draws
on the population going, why. And the reason I say that is because I've
studied these empires, these dynasties going back since the last 500 years, and you see
the same thing happening over and over again. When there's a financial problem, when the
grain reserves are empty, and the coffers are empty, they print money. And when they print money and the coffers
are empty, it devalues money. And with that, when you have a large gap of
people at each other's throats, then you create a risk of an internal conflict, the risk of
some kind of civil war. And that is what I think is-- is where at
risk of. ANDY SERWER: Yeah, I want to get to that polarization
in one sec, but just quickly on inflation rate, how concerned are you about it? RAY DALIO: I'm significantly concerned about
it, because the amount of money and credit that has to be produced and is budgeted is
a large increase. And yet if it's not spent, it produces its
own problems. The markets have a sensitivity to that. So what it means-- and then there's a supply-demand
picture for bonds. And the way it looks is if you should get
the selling of bonds, it worsens that supply-demand picture. Because the way it works is the Treasury borrows
and runs a deficit, but it can't produce money. So it has to sell bonds. And when it sells bonds, if there are not
enough buyers of those bonds then the Federal Reserve has got to come in and print money
and buy those bonds. And the world right now is over invested in
US dollar denominated bonds, pension funds on the 60-40 mix, or-- and they have negative
real returns. And cash has a lot of negative real returns. So if there was a selling of that and a moving
to other assets-- stocks, other assets, commodities, other assets or other places, other currencies,
other real estate and the like, that's selling worsens the supply-demand picture. And then if there's not enough demand, that
means that the central bank is going to come in and print more money. So yes, it's not only the portent-- the inflation
that's in the pipeline or projected in that supply-demand balance, but it's also what
it could be if there's a selling of debt instruments. ANDY SERWER: So we're printing too much money? RAY DALIO: To-- it's going to produce inflation,
if that's what you're saying. ANDY SERWER: Right, OK. Let's go to the second trend you identify
in declining empires, internal unrest. You write that wealth inequality often leads
to the rise of populism and division. How bad have the divisions got in the US and
what's most to blame for that? RAY DALIO: Well, I think people around us,
we all see it. January 6 was just a simple-- but history
has shown when the causes that people are behind are more important to them than the
system, the system is in jeopardy. And what we're seeing is not a classic wealth
gap caused by-- accompanied by political gaps. So you're seeing that the left is more left
and the right is more right, and you're seeing the conflicts within the parties. In the primary elections, you're going to
see in each party a competition between the moderates and the more extremes. And so you're seeing that dynamic play out. You're seeing questioning of election results
and questioning of-- of rules. So you're getting to the point something like
15% of-- I forgot whether it was Democrats or Republicans-- wish the other member of
the party would die. And 10% of the other party wish they would
die. They don't want their children to marry other
members of the party. So there's a question of even how rules will
be followed. And so there's going to be a conflict. And I think it's not an exaggeration to say
that you could see in the 2024 elections that no side will lose and accept loss. And you're seeing the movement to different
states related to different values. These types of things have never happened
before, but in my book, in my study that I did to understand them over time, they happen
repeatedly through history. So I'm not just looking at what's happening
today, but I'm finding that that pattern follows a very classic pattern that's repeated throughout
history, which is the tendency of the middle to disappear. And that you have to pick a side, and you
have to fight for that side. And that's the dynamic that is what I think
is going on and following the classic dynamic that's shown in the book to have happened
repeatedly. ANDY SERWER: In the book, you cite the emergence
of figures like Elizabeth Warren on the left and Donald Trump on the right, but Ray, do
you think there's a risk here of drawing a false equivalency by framing it that way? Because Trump made concerted efforts to overturn
the 2020 elections, whereas Elizabeth Warren wants higher taxes and more regulation. RAY DALIO: I-- I don't understand why that's
a question. If-- I'm very much a mechanic, I'm not a ideologue,
not ideologically. I just take measurements. And what I'm saying is that if you look at
the voting records of Republicans, that it's the most conservative that it has been. If you look at the voting records and policies
of Democrats, it's the most left that it has been. And that if you look at-- this is since 1900--
if you look at the voting across party lines, it is the lowest that it has ever been. So that you have-- those are just simply facts. You have a party in which basically, 30-something--
like 30% of the population is in support of the let's call it the more right, let's say
the Donald Trump-- more right. And something like 30% of the population is
concerned with the more-- at the more left. And that within each party that there is then
a conflict between those two things. And that-- because that constitutes perhaps
the majority of those party members, then those that are in the middle, although they
would constitute a higher percentage of the population-- so let's say that swing 40% or
50% of the population-- they within their parties are not dominant. And as a result, we're seeing that move to
the more extremes of the two and the greater conflict. ANDY SERWER: Fair enough. I guess I was just making the point that there
is left wing, right wing, extreme left, extreme right, and then there is just not believing
in facts. But-- but I get it. You write that the US has a-- RAY DALIO: That also is-- through the history,
it's very interesting, you read these things. The combination in history of politics and
the media operating with the emotions has been a classic dynamic that's repeated over
time, the dynamic that we're seeing now. So that the media tends to become more polarized
and more appealing to those who want to fight with each other. And then distortions in the media, because
fighting and winning is more important than seeing both sides. And that's why the distortions that take place
and that greater polar-- polarization in the media is very, very classic, you see. And then you lose that media medium. ANDY SERWER: Right. I don't want to go down this rabbit hole,
but explaining that the big lie is just that maybe isn't polarization. Maybe it's just trying to get people to see
facts. But-- RAY DALIO: Well, I think that by many measures,
the-- a sense of we're getting facts through the political system and the media, the public's
readings on that are the lowest on record. So I don't think it's the getting of facts. I think there's a great concern about the
inability to get the facts. And that I'm saying, you see that in all the
histories of-- it's recounted in the book many times-- that you see that dynamic working,
because everybody becomes polarized. But yeah-- no, I don't think we would cheer
on the efforts to get the real facts. ANDY SERWER: Good. You write that the US has a 30% chance of
devolving into a civil war within the next 10 years. What would cause that to happen, and who would
be responsible for that? RAY DALIO: Well, let me clarify what I mean. What I mean is that fighting over the rules,
it doesn't mean necessarily shooting each other, although you could see much more violence. It means that the rules of the system, that
democracy, by rule of law, and the deferring to what the rules are, for example, to settle
elections or settle issues, I think that that could be largely lost. I think, for example like they had sanctuary
cities, you could see situations in which the federal government would give mandates
that would not be followed by the state governments. And-- and then there's a question of who,
how-- you just have power, and who has what power. And I think that you're going to see a lot
more testing through the legal system and then maybe even beyond, that they won't accept
those rules. And then that's a threat to our democracy. Because the-- the great thing of our democracy
is that they're following the rules, believing in it. And we've seen repeatedly where a presidential
candidate might have the majority, but they said there's electoral votes, and it comes
down to that. And then they would say, well, for the greater
good, we will agree on how that works. That's a remarkable following of the rules
that our system is dependant on. And I think that almost anybody looking at
the situation would say that there is some significant probability that might not work
as well. ANDY SERWER: You talk about wealth inequality
as an attribute of declining empires, but you contrast the US with a rising China, which
also has a very large disparity between rich and poor. Why is wealth inequality concerning in the
case of the US, but less so when it comes to China? RAY DALIO: Well, it has nothing to do with
China or the US. It has to do with the nature of the phenomenon
that you see across countries. It's not-- if you have a large wealth gap
or opportunity gap, and you have rising living standards, you don't have the same kind of
conflict risks. It's the three-- when the three worked together. When you have a financial problem and so you
can't resolve that easily. And then you have the conflicts. And they can be over wealth-- that's the left-right
conflict-- but there are other conflicts that end up it can be-- we see it about groups,
that people tend to gather in groups. It could be ethnic, it could be whatever. And so you see that when you have that, and
you have challenges, other challenges like the rising power challenging another, there
is more tension. And if you start to have lower living standards
from that and a sense of inequity, it produces more conflict. That's happened repeatedly-- that mix has
happened repeatedly. ANDY SERWER: Let's go to the third trend that
you write about in your book, which is the external threats, which in the case of the
United States, you see mostly as a rising China. You say China is on its way to overtake the
US as the world's most powerful country. I guess the question is why and is that inevitable? RAY DALIO: Well, the population of China has--
is four times that of the United States. So if it has an average income of half the
United States, it will be twice as large as in the United States. When I first started to go to China in 1984,
since then, its income has-- real income has increased by 26 times. So if you just extrapolate lines and you look
at productivity and the like, it's a very likelihood that China will be-- it's today
a comparable power in many ways, and that it would become a greater power. That's just how things are transpiring. And if you look at history, China has a history
of being, prior to 1800, always you know, like number one or two because it has a large
population, and it's been very productive historically. ANDY SERWER: Bridgewater invests in China,
as do many other funds and companies that do business with that country. But you and others have drawn criticism for,
I guess, profiting off the rise of a country challenging the United States, and at the
same time acknowledging human rights violations committed by China. How do you respond to that, Ray? RAY DALIO: Well, every-- every company, every
investor has to balance the interests of various parties. So for example, I have a responsibility to
the investors. And-- and then if there's not connections
in its ways, companies-- if they were separated-- all these companies dealing together, If there
was a separation, that means that it would not be efficient for the whole system. And so what we're looking at is guidance really,
by governments who understand all the issues, geopolitical issues and the like, to try to
balance those issues and their constituencies and so on. So that's really-- our expertise is in investing
and is in economics. And we think that as we'll assess what percentage
of the portfolio should be there. And we do that in 40 countries. When we think-- we invest in Brazil and many,
many countries. And we have to rely really, on the guidance
of not only our country, but the countries that are there, because it's not just a matter
of what we individually think. It's a matter of making the right decisions
based on the people who are in the responsibility of assessing them make those decisions. ANDY SERWER: You know, things have changed
so much over just say, the past 10, five years. I mean, it used to be yourself, people like
you and John Mack, Hank Paulson could be described as friendly to China. And now, you know, that description gets more
difficult. You've got Mitt Romney calling you out. You know, Fox hosts calling you a collaborator. Does it-- does it trouble you that this has
changed so much, our relationship and how people view the relationship and how you are
a part of that relationship, Ray? RAY DALIO: What-- me, I could deal with me. What does trouble me is that both sides really
don't know each other well. And it strikes me as a very inclination to
be emotional and to fight. And that raises the odds of a fight on both
sides. And it's almost a needless fight. I mean, there are things that you have to
say, what will you fight for, and what are the consequences of that fight? So I-- I believe in peace. I mean, that doesn't mean you-- when your
essential values, yourself, are threatened by an outsider, I think you have to fight
for that. But the inclination to immediately stereotype
and fight rather than to try to seek what are the other side's perspectives and that
demonization is a dangerous thing that could bring about a war and a needless war. ANDY SERWER: How should we though, Ray, respond--
we being the United States-- respond to the rise of China? Either positively, negatively, carrots, sticks? What should we do? RAY DALIO: I think that there's the-- there
are five types of wars. The first four are competitions, really. There's a trade war, a technology war, a geopolitical
influence war, and-- and a capital war. Those can be viewed as competitions. And then there's a military war. In all of those cases, the most important
thing that you can do is be strong. Us internally. If we do the right things to be strong so
that we are stronger than any opposition in the world, we won't have a problem. So I think the biggest war that we're having
is a war with ourselves to be able to be productive. To earn more money than we spend. To improve our income statement and our balance
sheet. And to be good with each other so that we're
productive together rather than at each other's throats and threatening our effectiveness. ANDY SERWER: You say a military confrontation
between the US and China is unlikely for now, but becomes increasingly possible as China
catches up. What are some signs that we should see perhaps
that would concern us? RAY DALIO: Well, I think if there's going
to be a military war issue, it is likely to be around Taiwan. I think others-- other issues are not military
triggering. And just the view of that is Chinese perspective
and American perspective both, and the world has said there's one China and Taiwan is part
of China, and they should have peaceful unification. That issue is a diplomatically worded issue,
but it's-- it's an important issue that might be, could be fought over. I think that you watch it. You watch-- you watch the news. You keep on top of that, and you see the actions. So beyond that, I think it's mostly the competitions
in those other areas. And again, I think it's just be strong. But watch what's going on closely with Taiwan. You'll see the straws in the wind. ANDY SERWER: Taking a step back, Ray, and
looking at the big picture here, it sort of suggests, at least my take on-- on the book
is that while you're writing about-- you're saying empires in decline-- you're writing
about the US in decline. Is this-- is that the case and is it inevitable? How bad could it get? How can we turn it around and have it not
happen? RAY DALIO: I-- I've expressed very little
opinions in the book. I do express opinions, but what I thought
was very important was to have objective measurements. So you see 18 different gauges that include
a variety of measures of relative strength. Measures such as education, productivity,
building of infrastructure, how many inventions come out of the country. Many different measures of-- of performance. So those objective performance measures are
the most important thing I could get across. So anybody can watch those. They're like a health index. You can see if the levels are going improving
or deteriorating, whether the income and balance sheet thing is improving, any of those. So it was most important to me not to be ideological
or opinionated. I don't think my opinions matter as much as
the reasoning behind that. And that's why I looked to put those in and
also created a model that has a cause-effect relationship. I looked at 10-year leading indicators of
output. In other words, everything that happens has
causes that make it happen. And by being able to measure that was cause-effect
relationships, and putting them into graphic and numerical form, and then using those to
then give an indicator, I could show what happened, and that's what my objective was. So the reader of the book will be able to
make their own judgments. What you see in the book are really those
measures over time repeatedly through the rises and declines of empires. ANDY SERWER: We are almost out of time, Ray,
but I got to ask you before we let you go about crypto. You told CoinDesk you own some, even though
you said you thought it was going to get killed by regulation. How much Bitcoin do you own? Do you have any other cryptocurrencies? And what do you think the outlook is for them
now? RAY DALIO: Well, I'm not going to give the
precise amount of Bitcoin or-- but I do own some Ethereum as well. But the answer to your question is that I
don't own a lot of it. I view it as an alternative money in an environment
where the value of cash money is depreciating in real terms. And I think it's very impressive that for
last 10, 11 years, that programming has still held up, it hasn't been hacked and so on,
and it has an adoption rate. So I'm very big on diversification, and it's
a relatively small part of the portfolio. I would like to say that cash-- I've been
quoted, "cash is trash"-- that cash which most investors think is the safest investment
is I think, the worst investment. And that it's important, because it loses
buying power. The one thing I would say to investors is
don't judge anything in your returns or your assets in nominal terms, in terms of how many
dollars you have. View it in terms of inflation-adjusted dollars. And so cash like this year, you'll lose 4%
or 5% to inflation. And so pay attention to those, because I believe
that that'll be the worst investment. And then beyond that the important thing is
to diversify one's portfolio well. Because we know from the surprises in the
balance-- we also know that those asset classes on average significantly outperform and will
significantly outperform cash. And that they move between each other in a
way that-- that has to do with correlations because of when things go down, when the economy
goes down, then bonds will do better than stocks, and so on and so forth. So diversification of assets-- I view crypto
as a small piece of that. And the message is cash is going to be a problematic
asset. And hold that other diversified portfolio
of assets-- keep it, looking at it in real terms, not nominal terms. And that diversification should be also international
diversification from countries, not just asset classes, in order to have a truly well-diversified
portfolio. ANDY SERWER: All right, Ray Dalio, founder
of Bridgewater Associates and author of the new book, "Principles for Dealing with the
Changing World Order-- Why Nations Succeed and Fail." Thanks so much for joining us. RAY DALIO: My pleasure. ANDY SERWER: You've been watching "Influencers." I'm Andy Serwer. We'll see you next time.
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Posted this under text, but it didn't work. It is a video of Ray Dalio being intervied about his new book, which documents the decline of empires. As everyone has said, there is the possiblity of a civil war and political polarization. Ray gives a few descriptions of what he believes could happen. Don't pay attention to his description that the democrats have voted more left then they ever have, it's just more useful to watch the video and get an impression of what he thinks. He is a major hedge fund manager, but has some interesting insights. One of the most interesting ones was "you don't raise living standards by printing money", which is what we have been doing for the past 12 years since the financial collapse of 2008.
Yes, I always pay attention to billionaires' YouTube bloviations. Wonder how much of his billions are directly related to profiteering off of price increases, the decline of real peoples' standards of living - inflation HE helped create.
"Behind every great fortune lays a great crime." Balzac