Introduction and Purpose:

James Harding, the editor and co-founder of Tortoise, introduces Ray Dalio as a guest for a public conversation. Dalio is well-known not just as the founder of Bridgewater Associates, but increasingly for his insights into the larger issues affecting society, such as financial markets, inequality, and geopolitical tensions between the East and the West.

Format and Expectations:

The discussion is structured to be an “open news meeting,” emulating the experience of professionals sitting around a table sharing insights. Audience participation is encouraged through the chat feature. The conversation aims to cover three significant topics: the financial market cycle, issues of inequality and instability, and geopolitics, specifically US-China relations.

Anticipation and Background:

Harding reveals his long-standing wish to have this discussion with Dalio, referencing an essay Dalio wrote in the spring of 2019 about the need for capitalism to be reformed. Harding points out the paradox of a highly successful capitalist questioning the system that enabled his success.

Setting the Tone:

Harding humorously mentions the intimidating blurbs at the beginning of Dalio’s latest book, “Principles for a Changing World Order,” featuring endorsements from figures like Henry Kissinger and Larry Summers. He poses a final question about Dalio’s transition from being a hedge fund manager to publicly discussing broader societal issues.

Technical Details:

Audience participation is managed by Emily Benn, who is tasked with marshaling the chat and ensuring a diversified conversation. The goal is to make the discussion an open conversation rather than just a dialogue between Harding and Dalio.

By setting up the context and outlining the format and expectations for the discussion, this segment serves as an effective introduction to a conversation aimed at delving into complex financial and social issues.

Three Phases of Life:

Ray Dalio, the primary speaker, starts off by talking about the three phases of life. The first phase is dependency and learning, the second phase is about independence and success, and the third phase is about helping others succeed without you. At 72, Dalio identifies himself in the third phase and has been actively passing along his learnings and principles since stepping down as CEO five years ago.

Global Macro Investor Insights:

Dalio, who has been a global macro investor for 50 years, observes three major trends that have not occurred in his lifetime. First, the creation and monetization of unprecedented levels of debt, facilitated by central banks at near-zero interest rates. Second, widening wealth, value, and political gaps that have not been this severe since 1900, leading to various forms of populism. Third, the rise of a new great power challenging the existing global order.

Capitalism and System Goals:

Dalio mentions that capitalism, in its current form, is not effectively serving its intended purpose if the goal is equal opportunity and a system that benefits the majority. He believes the system’s mechanics are faulty, as evidenced by societal gaps and imbalances.

Historical Cycles and World Order:

Dalio has studied the rise and fall of empires, currencies, and social orders over the past 500 years to understand the current situation. He highlights that history is cyclical, involving both internal and external wars that reshape the world order. The last significant change occurred in 1945, post-World War II, and we are now at the cusp of another cycle.

Cycles and Evolution:

Dalio views the world through an ‘evolutionary lens’ marked by incremental progress. While long-term trends reflect improvement in life expectancy and quality, shorter-term cycles are influenced by economics, politics, and international geopolitics. These cycles are driven mainly by wealth and power dynamics, and they interact to create fluctuations around the general upward trend of human progress.

Debt Cycles:

Ray Dalio likens his understanding of the financial system to that of a mechanic, describing it in mechanistic terms. He begins by explaining how debt fuels a cycle. Offering debt to people provides them with buying power, or credit, which stimulates spending and the economy. However, this credit eventually has to be repaid, a process Dalio describes as “depressing,” effectively slowing down the economic cycle.

Political Desires and Consequences:

Dalio observes that it’s politically desirable to offer people more spending power through credit. This results in debts rising relative to incomes, creating a cycle that is initially stimulative but ultimately depressive.

Zero Interest Rates:

Dalio emphasizes that eventually, an economy reaches zero interest rates, which poses challenges for stimulating credit. This phenomenon was notably experienced in 2008 and previously in 1933. When this happens, central banks have to resort to printing money to stimulate the economy and service debt burdens.

Fiat Money System:

Dalio notes that in a fiat money system, money is not inherently limited and can be created. Governments borrow and central banks print money, increasing the supply of money and credit. This, in turn, devalues the currency in relation to goods, services, and financial assets.

Inflation Dynamics:

The result of this increasing money supply is inflation. Dalio asserts that if the supply of money and credit exceeds the quantity of goods sold, inflation occurs. He concludes by saying that this is a dynamic we can’t escape, especially when spending exceeds earnings.

Debt Cycle and Inflation:

Ray Dalio discusses the cyclical nature of debt and how it can lead to poor returns for investors. When debt becomes less attractive due to negative real returns, investors shift their thinking. They begin questioning whether their return is greater or less than the inflation rate. This change in investor sentiment leads to the selling of bonds, creating an imbalance in the market.

Central Bank’s Dilemma:

The central bank faces a challenging decision during this period of debt unattractiveness. If they don’t print more money, interest rates rise and the credit market tightens, causing economic downturns. If they do print more money, it can fuel an inflationary spiral, deteriorating the value of money.

Inflationary Brink:

Dalio states that we are on the brink of an inflationary cycle. A historical look at 750 currencies since 1700 shows that only 20% have maintained their value. The rest have either been destroyed or devalued, highlighting the cyclical nature of currency and inflation.

Political Pressures:

Adding complexity to the economic situation is the political cycle, where there’s increasing demand for more money and credit. This makes managing inflation and economic growth increasingly difficult.

Asset Diversification:

For investors looking to protect their wealth, Dalio suggests a well-diversified portfolio that isn’t heavily weighted in cash or debt. Diversification should also span different asset classes and countries. He emphasizes real assets like real estate and gold as possible avenues for investment.

Global Perspective on U.S. Dollar Debt:

Many countries hold significant amounts of dollar-denominated debt, as it has been the reserve currency. Dalio indicates that this could create more pressure on central banks to print money, impacting portfolio strategies worldwide.

Country Evaluation:

When considering global diversification, Dalio recommends evaluating countries based on three criteria: financial stability, internal order, and potential for external conflict. These factors help in assessing where investments could be “good, prosperous, and safe.”

Dalio’s talk serves as a comprehensive guide for understanding the intricate balance between inflation, debt, and diversification in financial markets.

Bitcoin as an Alternative to Gold:

Ray Dalio discusses Bitcoin’s role as an alternative form of money, emphasizing that while it has been impressive for its 11-year existence and global acceptance, it will never reach the importance of gold. Bitcoin, like gold, serves as a “storehold of wealth,” but Dalio believes its potential is significantly smaller than other forms of assets.

Money’s Definition and Future:

Dalio contends that the definition of money is rapidly changing. With the emergence of NFTs (Non-Fungible Tokens) and other digital currencies, like China’s digital renminbi, Dalio suggests that the financial world will soon need to redefine what constitutes “money.” Money is no longer just a physical entity; it’s becoming increasingly digital and global, capable of being moved easily between countries.

Multiple Forms of Currencies:

According to Dalio, we are entering an era of multiple currencies. He elaborates that what qualifies as money will depend on its ability to store wealth and be easily exchangeable across countries, differentiating it from assets like real estate. This implies a broader spectrum of investment vehicles that may be considered as a “store of wealth” in the future.

The Instability Factor:

Dalio also hints at broader issues like cyber risk and instability but doesn’t delve into them deeply. However, he suggests that these factors could have a significant impact on the world’s financial systems.

Investment Strategy:

Dalio recommends having a diversified portfolio, noting that in the rapidly changing world of finance, sticking to traditional forms of investment like cash or bonds may not yield meaningful returns. He suggests that people should consider having a “very little bit” in Bitcoin, reiterating the importance of diversification in this volatile financial climate.

These points encapsulate Dalio’s views on the shifting landscapes of money and investment, emphasizing the need for adaptability and a reevaluation of traditional financial wisdom.

Alternative Money:

Ray Dalio discusses the evolving landscape of what constitutes “money,” citing Bitcoin and other digital currencies as forms of alternative money. He distinguishes these from traditional assets like real estate, which cannot easily serve as a medium of exchange. Alternative currencies are becoming part of a broader financial ecosystem, alongside traditional money, creating a complex tapestry of monetary options.

Bitcoin vs. Gold:

Dalio doesn’t see Bitcoin as a direct competitor to gold but acknowledges its place in modern finance. He suggests that Bitcoin could serve as an alternative to gold for some people, but it will not attain the same level of importance as gold has in the global financial system.

Civil Strife in the US:

Dalio voices concern about the rising political extremism in the U.S., citing that when individuals prioritize their causes over the system they operate within, the system itself is in jeopardy. He points out that such dynamics have historically led to revolutions and shifts from democratic to autocratic regimes.

Party Polarization:

Dalio refers to data showing that voting across party lines is at its lowest point, indicating that the U.S. political system is becoming more polarized. He notes that extremism within each party is becoming more prominent, which is contributing to this polarization.

Migratory Shifts:

Dalio observes that people in the U.S. are increasingly relocating based on their political and philosophical beliefs, in addition to economic factors like tax rates. This is affecting local economies and could escalate state versus federal tensions.

Rule of Law and Power:

He warns that if neither party accepts the result of future elections, like that of 2024, the dispute will shift from legal to power dynamics. He stresses that the nation is currently on a path where conflicts are resolved more by power struggles than by adherence to the rule of law.

Dalio’s discussion ranges from the complexities of modern financial systems to the concerning trend of increasing political extremism and polarization in the United States, all pointing toward a future where traditional norms may be upended.

Topic Overview:

In this segment, Ray Dalio is engaged in a discussion where participants raise several questions. Topics range from the role of financial systems in social cohesion, to conflict inevitability, to GDP’s relevance in modern times. Education and technology, particularly Web3 for African nations, are also discussed.

Role of Finance in Social Cohesion:

The first question by Michael (using Fadlan Effendi’s laptop) points out the influence finance has on social structures. Michael emphasizes the importance of Dalio’s insights on China, where robust education has led to innovation and then to financial centrality.

Conflict Inevitability and Capital Markets:

John Alexander echoes Ray Dalio’s sentiment that conflict is inevitable, especially as the middle ground in society is “hollowed out”. John asks how capital markets and investments can be restructured to mitigate this issue and bring people together, rather than drive them apart.

Education in Web3 and African Nations:

Michael also discusses the role of education in Web3 format, specifically for African nations. He asks how this could lead to hyper-innovation and consequently to hyper-deflation.

Agency and Linear Policy-making in Exponential Times:

Major Ty Volker from the British Army’s think tank delves into the issue of agency, questioning how policymakers can adapt to an era of exponential change when most are still operating under linear frameworks.

GDP’s Relevance:

Tyrell Volker raises concerns about the use of GDP as a key metric. According to him, GDP was designed for the industrial age and may not be a reliable gauge for the service-driven, technologically advanced society we live in today.

These questions provide a comprehensive view of various facets of modern society and economics, showcasing the critical thinking of the participants and posing significant questions for Dalio to address.

Concept of Cycles:

Ray Dalio emphasized the cyclical nature of societal and geopolitical orders, suggesting that they often emerge out of conflicts or wars. The victors of such conflicts set the new rules and institutions, establishing a period of relative peace and prosperity. During this phase, there is a focus on reducing wealth gaps, eliminating debts, and creating a fairer system.

Importance of Education:

Dalio stressed that education is a cornerstone in this cycle, serving as a “long leading indicator” of future societal success or failure. A strong educational system does more than impart academic skills; it also teaches civility and the ability to collaborate. Education, according to Dalio, has a rippling effect on various facets of society and should not be limited to just literacy and numeracy.

Lack of Specific Insight into Africa:

When asked specifically about the role of education and its potential impact on African nations, Dalio admitted his lack of detailed knowledge. He stated that while his insights mainly cover G20 countries, the principles of the importance of education and cycles can apply universally.

Geopolitical Tensions and Shifts:

Dalio touched on the third theme of his discussion—the rise of a new great power challenging an existing one, something he sees as being closely interconnected with societal cycles and education. While he did not elaborate much, he indicated that this factor is crucial to understanding current global dynamics.

The discussion suggests that understanding these cyclical patterns and the role of education can offer valuable insights into both societal stability and geopolitical shifts.

Capitalism’s Limitations:

Ray Dalio starts by discussing how the profit system, i.e., capitalism, is not all-encompassing. It tends to self-reinforce wealth among the rich, creating fewer broad opportunities for the larger population. He points out that a society’s strength depends on leveraging talents from a wide range of its population, something capitalism is not structured to optimize.

Education and Social Costs:

Dalio cites the situation in Connecticut as an example of systemic failure. Despite being a wealthy state, 22% of high school students are either disengaged or disconnected, contributing to greater societal costs in the long term. He argues that a proper investment in education can raise a country’s living standards and quality of life.

Environmental Concerns:

The capitalist system also fails to incorporate environmental costs into product pricing, leading to environmental degradation. Dalio notes that ideological polarities hinder effective decision-making in this domain.

Measure of Economic Success:

Dalio criticizes GDP as an inadequate measure of a nation’s well-being. It fails to account for income disparities and conditions for the majority of the population. He suggests using income levels by quintile as a more informative measure.

Bipartisan Solutions:

Dalio advocates for a bipartisan approach to tackle these systemic issues. He stresses the need for collaborative decision-making to raise productivity and living standards.

Redistribution for Opportunity:

When questioned about inequality and the growing number of billionaires, Dalio states that it’s essential to redistribute wealth in a manner that enhances equal opportunity and productivity. Investments that offer high returns, like quality education, should be prioritized.

Final Takeaway:

Dalio emphasizes that the present system of capitalism needs modification to incorporate social and environmental costs. Equal opportunity is not just morally right but also necessary for societal stability and tapping into a broader talent pool.

Types of Wars:

Ray Dalio identifies five types of wars that have historically occurred: trade wars, technology wars, geopolitical influence wars, capital wars, and military wars. According to him, the United States and China are already in the midst of the first four types, each growing increasingly vicious. The possibility of escalating into a military war exists but is not guaranteed.

Historical Perspective:

Dalio also provides a historical context, mentioning that over the last 500 years, when a rising power challenges an existing one, conflict has often resulted. Out of 16 such instances, 12 led to military wars. However, Dalio contends that China’s case is unique because, unlike Russia, it is comparable to the U.S. in terms of economics and resources.

China’s Economic Potential:

In response to skepticism about China’s growth prospects, Dalio highlights China’s significant achievements since 1984, including a 26-fold increase in per capita income and a reduction in poverty from 88% to less than 1%. He argues that China’s slower growth rate is still about twice that of the United States and other developed countries.

Comparison of Systems:

Dalio underscores that China and the U.S. have fundamentally different approaches to governance and economics. Rather than assuming one system is inherently better, he emphasizes the importance of each country focusing on its strengths. Dalio expresses more concern about internal divisions within the U.S. affecting its strength than about external competition with China.

Final Thoughts:

Dalio concludes by suggesting that, given the scale of uncertainties, both financial and geopolitical, individuals should focus on making themselves and their countries strong. He avoids prescribing a specific course of action but stresses the importance of internal cohesion and strength in the face of external challenges.

Thoughtful Disagreement:

Ray Dalio stresses the importance of resolving disagreements through thoughtful discussion, both on individual and societal levels. According to him, failing to do so can lead to internal and external conflicts, perpetuating a cycle of discord and potential strife.

The Importance of Worry:

Dalio introduces the paradoxical principle that “if you worry, you don’t have to worry; if you don’t worry, you need to worry.” In essence, concern prompts individuals to take precautionary measures, thereby reducing risk. In contrast, complacency can make situations more perilous because it prevents action.

Preparedness and Perspective:

Dalio advocates for a deep understanding of the mechanical workings of the world to navigate challenges better. He emphasizes the need for a protective mechanism, not just in investments but also in choosing where to be and how to act. Being naïve and unprepared, he warns, can be dangerous in the rapidly changing world.

Optimistic Conclusion:

In closing, Dalio underscores that society has never been better positioned in terms of resources, money, and technology. He believes that if people can collaborate effectively, the potential for a bright future is phenomenal. The ultimate takeaway is that societal and individual well-being is achievable through cooperation and informed action.