Our next guest founded the world's biggest hedge fund from his apartment in New York City.
That's where it all began. In 2008, he sounded the alarm about the impending financial crisis, and now he's warning about something even more important. He's the author of the brand new book, How Countries Go Broke, The Big Cycle, and Bridgewater Associates founder Ray Dalio joins us now. Ray, great to see you. Congratulations on the book.
Thank you. It really relates now how countries go broke because everyone should be concerned about the deficit. That alarms you.
Why? You know, a lot of people have a lot of bonds. One man's debts are another man's assets, and they have to get a good return. And when there's a lot of debt, it has to be sold, and there is not enough buyers for that debt. And when that happens, bad things happen, like interest rates go up and the economy goes down. So you've got to get that down to about 3% of GDP, and now it's six and a half.
So right now we have about $36 trillion in debt, and that is your focus. Is that your biggest worry now? Yes, that's supply and demand. I line up the buyers and I look at the sellers. Yeah, I worry about that.
It's the same for people, you know. The only difference is the government has the Federal Reserve so they can print money, and also then they have the ability to tax. So the program is now to stimulate the earnings and so on, but there's going to be a problem, a supply-demand problem. And when you say people buying debt, people buy debt if it makes financial sense for them.
That's right. Who are the countries, who are the people that would buy that debt, and why are they not doing it? About a third of the debt is foreign, and they buy it because it's a reserve currency. You have to keep in mind that it's a store-hold of wealth.
And why do they buy it? Because it gives a good, real return. After inflation, it gives a good return. And so that's a problem because in this debt cycle that I describe in the book, what happens is as debts rise relative to incomes, then there are more liabilities, debt liabilities that the government has to come up with. That squeezes out spending. You know, the debt service expenses right now are, as mentioned before by a number of people, bigger than defense expenses. So as that debt builds up, it squeezes out, then there's a supply-demand issue. And so what has to happen is, in terms of selling it, has to have a real return. And it's very difficult when so many debt assets, so many debt liabilities, to make the interest rate high enough that it is good for the creditor and not too high for the debtor.
That's a difficult balance. And where are we at right now? We know we have this bill working through Congress. The president wants to get it done by July 4th. As it has, it keeps the tax cuts in place, gives things like no taxes on tips, gives break to people paying Social Security, also funds defense up to a trillion dollars.
But some say it will add $2.5 trillion to the debt, if that's the big picture. The hope is growth. Everybody I speak with on both sides of the aisle agree that it's got to be at 3 percent of GDP. It's like – but politics. We're having politics. So it's like being on a boat that's headed for some rocks, okay, the supply-demand I'm talking about. And everybody's arguing, should I – we need to get to 3 percent, we need to turn, but they argue about how, right? So it's the politics that is standing in the way.
Pandemic really – And it's a mix of things that need to be happened. Three factors. There's tax revenue, which is more important than tax rates. Sometimes if you run the mix right, you can increase the economic activity and earn more tax revenue, but if you get it stimulated – so there has to be tax revenue, there has to be cuts, there have to be cuts in spending, and then there's interest rates. Interest rates are very important.
Interest rates are four times as important as either spending or taxes. So that's why interest rates and how the Federal Reserve runs monetary policy will be very, very important. How are they running monetary policy in your view? Could they be doing more?
Could they be doing something different? I'm talking about the Fed. Given their mandate, and they're on hold, I think that's the right monetary policy now, because they have to balance these two things. Plus we're in a period of great uncertainty having to do with a number of things. But I think that when you take the whole picture of that deficit, what happens is that there's going to be a lot of pressure to have low real rates, to drive real rates down, which makes for all people who are holding debt. You know, it's good for people who are holding debt, but on the other hand it's not so good for the people who are holding the bonds. You talk about, you say we have two things going on at once.
We have a civil war internally, and internationally we're also battling. Do you want to expand on that? Yeah, there are these cycles. The last cycle began in 1945, big cycles, not just the business cycle.
And we call those orders, systems of operating. There's a monetary system, so how we're doing in terms of the debt. So this debt buildup has been over a generation, over 80 years, and that's a problem.
And then add in the pandemic too, which everything went off the charts. And creating a lot of debt. You have to pay back debt. Women's debt's another asset, as I say. Second thing is the country is at war, two sides, the left, the right, the issue of how do you run the country. Very, very big differences. And that is a difficult thing in our democracy, because everybody's arguing and politics is standing in the way of making good decisions. And the idea of compromise, you know, that's out. So we have a change in the domestic order. What is the domestic order?
How is that going to work? Number three is the world order. We used to be in an American world order, 1945. The United States had half the world's economy and so on. Now we're in a situation where there's rising powers challenging, and we're going from a multilateral world order to a unilateral world order, and America first and other countries first.
We're seeing that. And then we're seeing other factors like technology. Technology, remarkable changes in technology.
The confluence of those forces is what is driving it. And it's right now a very disruptive set of conditions. We need a renovation in the country. I don't think anybody doubts that we need a renovation in the country. The question is how they're fighting over what that renovation looks like. But if you look at our greatest competitor economically and militarily, it's China.
Yeah. And I'm looking at reports the last 24 hours that they're telling their government to tighten their belts, and cigarettes, and going out to dinner is not going to happen. We hear about factories shutting down, people not getting paid, a younger generation not working at all. They seem to be a country in strife. You know, there's a saying there, eat bitterness, okay?
When you have bad times, difficult times, the question is how can you endure it? Since I started to go to China, I started going in 1984. And I would argue no one knows them financially or economically better than you.
What I would say is since then, per capita incomes increased by 28 times. The leader, Xi Jinping, says there was a 100-year storm on the horizon. So, yes, batten down the hatches. I think a lot of us, whether it's our country or others, is can you take a difficult time? Can you have the strength to take that difficult time? Do you agree they're going through a difficult time? Oh, yes, and as are we going through a difficult time, too, in terms of the total picture. Let's say their growth rate, they're changing and improving at a very fast rate going through a difficult time. And their growth rate, if you adjust it for probably what it really is, is probably in the vicinity of 4 percent, something like that, 3 or 4 percent. And they're improving, but they have big gaps and problems, too. They have a debt problem, but on the other hand, they're also making technology and improving at a fast rate. So you cannot take China and think that they are not going to be a force for the foreseeable future.
They're not folding, okay? We both have our challenges, and there's going to be a big conflict. That's the nature of the beast.
No, I hear you. I just think that a lot of people think China's running the perfect game, and America's struggling, and it just might not be the case because we know so little about what goes on there. What's so interesting is it's certainly a test of the systems. In other words, what we have here is capitalism, okay? What they have there is communism.
So the issue of how do you make a profit, it's difficult to make a profit in China, but on the other hand, then they have this top-down directed. So there's a conflict of the systems, but you have to recognize, we have to recognize, wow, the most important thing is that we're strong. Do you see merit in the president trying to restructure trade relationships with the major powers, from the EU to China to the smaller ones like Vietnam? Do you see merit in it? Oh, it's got to happen.
It's got to happen for a couple of reasons. First of all, it's one of the reasons we're also getting into a lot of debt, but partially it could also contribute to tax revenues, but also these imbalances are not sustainable. They're not sustainable not only because of the debt issue and the trade issue to make it more competitive, but you also have a situation of security. I mean, how can you be dependent on imports from China in the world where there is going to be conflict?
What form of conflict that means, but you can't have a dependency. We're now in a world that is going to a self-sufficiency, and that is a lower level of efficiency. And we got that wake-up call with the pandemic. Where's our pharmaceuticals? Where's our rare earth? Why don't we make anything?
It's like we got a collective wake-up call. Any responsible leader will realize we need to be refining our rare earth here or refining other people because we now have China threatening South Korea not to sell us some of the metals we need for our military and for our technology. So we've come to a world now in which there must be much more self-sufficiency. And we can't depend on money coming in. We can't depend on goods coming in. There must be more self-sufficiency, unfortunately. So you like what this administration has recognized. Some people overseas are disconcerted by the America First policy.
You think it's necessary. I think there are big problems here with the debt, with the competitiveness, with the imbalances, and we're in a new world. Now the question is, can we calm down and smartly analyze how we do this together?
Yes, we're going to be in this conflict, but yes, the world as it's fragmenting is a concern to me. This is Jimmy Fallon inviting you to join me for Fox Across America where we'll discuss every single one of the Democrats' dumb ideas. Just kidding. It's only a three-hour show.
Listen live at noon Eastern or get the podcast at FoxAcrossAmerica.com. You also noticed the president went overseas and reset relations or maybe reinvigorated relations with the UAE, with Qatar, and Saudi Arabia. Was that a wise move? And you as an investor, have you also looked at investments with countries like that? I was at the Saudi Arabian gathering and I thought that that was terrific.
Lots of deals. Really? Yeah. Can you give us an idea of what it was like in there? Was it beyond small talk? It was real talk? It was a lot of deals. Real talk.
Big deals, okay? And also there was an understanding. It was very business-like, but also a sense of relationships.
So there was the gathering and there was this friendliness and then sitting down and doing deals. So we have a very business-like approach to what's happening in the Middle East. And of course the economic interdependencies together with the geopolitical, military interdependencies is part of the changing world order.
But it is now splitting into this opposing sides in this tough game. Ray, would you also say that for a national security perspective, beating China to the punch with these deals is necessary? I think that economic... Economically.
I'm not talking about military. I think 80 percent of this is about economics. Okay? It's about smart finance. That's why I'm concerned about the debt. Yes.
Okay? So it's 80 percent of this is the well-being of the people of the countries. And that's about economics. So the ability to do these deals is very important in a world that is also very fragmented and people are seeking self-sufficiency. So the question is still who are the allies economically?
Who can you rely on? That's part of the... Yeah. So it was good in a difficult world. But let's keep in mind the monetary order is at risk. The domestic political order is at risk.
Okay? There are two sides and they're at war. And then internationally there's this great conflict with... So this is a very risky set of circumstances that everybody must, I think, calm down, be analytical, and do those, you know, the smart, well-thought-out balance dealing with the budget, dealing with each of these issues. Are you worried about the dollar no longer being the world's currency?
Yes. I'm worried about... When we say the world's currency, let me be clear. I think all the countries have debt problems now. I'm worried about debt being, debt assets being a good storehold of wealth.
That means all the countries' currencies. And so as a result you're seeing gold and you're seeing other markets being able to attract capital. So I am worried about the storehold of wealth.
Right. And that's the backbone of all markets. So when we look at the Treasury market, the U.S. Treasury market, I'm worried about all of that. And if it ceases or diminishes as a storehold of wealth, and that's my big worry. If we print too much, that would be one way to... We are then going to have a very severe problem.
So it's not just the dollar. All countries now, Europe is getting more in debt. They have to get more in debt. China has a debt problem. So it's almost an ugly contest between these countries. So interesting.
I know you personally... So debt, I'm worried about the whole level of debt. And of course, there's too much holding of dollar bonds for... So if you get the selling of those dollar bonds and so on, we will have a very serious problem.
That's what I'm worried about. Does the world need the U.S. and China to do a trade deal? Some form of... Of course, it needs clarity. In the 90 days, it needs clarity. You personally, you're buying gold and you're not afraid of the cryptocurrency. You're also invested in there. Is that necessary?
Would you recommend that for everybody? I think as a store hold of wealth, what is money? Money has to be a medium of exchange and a store hold of wealth. And I think because we have a debt problem, and then you have to look at the alternative monies. Right. And now I can go on at length of why gold, why crypto, what it's going to mean. But yes, you have to look at the alternative store holds of wealth. And you say we have to win the AI race. Oh, you have to...
Yes, that's existential. You wrote the book How Countries Go Broke. You explained in 2008, you were able to foresee that ahead of time. How did you survive 2008? We made a lot of money in 2008. Because you knew something bad was happening? The supply and the demand for credit.
If you understand how much is being sold and who the buyers are, and then that supply-demand picture, you can see the supply-demand imbalances and the consequences. We live on credit. Right. Quick thing about you personally. So you start off, you weren't a scholar in high school. I hated high school. We went to the same college, Long Island University.
Yes. I'm thrilled to be able to say that. And you went there, and you said you found yourself there. Did they see the potential in you there, or did you begin to find how much you love business?
Well, I started... I loved markets when I was 12, so I played that. And in high school, that was much more my interest.
I didn't like when they would tell you, remember this, remember this. When I got to college, and I could pick the courses I liked, and I had the freedom and all of that, I loved college. And so the school was so great for me. It was a transformative experience.
So I loved it. Right. And now you get your first job, $25,000. You got paid salary in the 1970s, which shows... And you went to Harvard Business School. Yeah. 1973, Harvard Business School, I graduate. And I think it was the highest salary, which was then $25,000.
Nice. Do you think back to everything in success that you've had now, and do you remember the days clearly when it was you in a two-bedroom apartment in New York City... Oh, yeah. ...where starting your company with just two employees? Yeah, a guy... Did you have this vision, that Ray Dalio would be what Ray Dalio is?
No, of course not. I played the game, I just liked the game. And it's still now, I just liked the game. You know, I played... You didn't do it to be rich? ...with a guy I played rugby with, and then we had some institutional clients.
I got some institute, gave them advice, and then made them some money, and then got going. And Bridgewater will be 50 years, 50 years this year, it'll be 50 years old. So it was great, you know, bring in people, build a company, 1,500 people, and succeed and make clients happy.
So 50 years, yeah, what a dream. I asked Phil Knight, I said, I read your book, I saw the stressful days when it looked like it was all falling apart, and you found a way to make the money, and I go, it must feel so good now. He says, I missed those days. Yes.
What does he mean? Do you understand that? It's the nature of striving, you know, to get the setbacks, you know.
Markets are like that, you know. You learn from the setbacks. Failure. Yeah, that's right, that's how you learn.
Right. If something goes well, you've got it down, and then you don't learn. I have a principle, pain plus reflection equals progress. You know, I've come to actually value the setbacks, because I reflect and I say, okay, what does that tell me about reality, and what does that also tell me about how I should deal with reality?
And I think if you have that, life is a journey of these, you know, learning experiences, and ups and downs, you get stronger and you feel better, yeah. And last question, that's why you said the last lap of your career, you want to give this all back. The knowledge that you had to build your company, you now want to spread it out. I'm at that stage in my life that I have, you know, I want to give away whatever I've got, some of the principles that I've learned, but also philanthropically. And now pick up his book to learn more and stay ahead of the curve and find out where this country's going, how countries go broke.
Let's find, let's make sure we don't do that as a country. Ray, thanks so much for everything. Great to see you. Thank you, Brian. All right, and I hope this is the first of many interviews. See you at L.I.O. Absolutely. Okay, at the reunion. I'm Emily Campagno, host of the Fox True Crime podcast.
