Context:

The transcript is an introductory segment from a Commonwealth Club program. The program is a virtual event with Ray Dalio as the primary speaker, discussing his latest book and his insights on economic conditions, political movements, and the shifting power and wealth among nations.

Speaker Introduction:

Ken Broad, the host, is a founding member of Jackson Square Partners. His firm is a sponsor of the Commonwealth Club event. He introduces Ray Dalio as the founder, co-chief investment officer, and chairman of Bridgewater Associates. Dalio is an expert in investment philosophy and corporate management.

Latest Book:

Ray Dalio’s new book is titled “Principles for Dealing with the Changing World Order, Why Nations Succeed and Fail.” It expands on the topic Mansur Olson described 40 years ago in “The Rise and Decline of Nations.” The book aims to provide a detailed perspective on five centuries of economic, social, and political transformations across the globe.

Topics of Discussion:

Dalio plans to discuss significant shifts in economic conditions, political movements, and the distribution of wealth and power among nations. He aims to provide insights derived from historical patterns to help people better understand and navigate the future.

Moderator:

Sir Michael Moritz, a partner at Sequoia Capital, will be moderating the conversation with Ray Dalio.

Interaction:

The audience is encouraged to submit questions through the text chat during the program, indicating that the event aims to be interactive.

The segment sets the stage for a conversation with Ray Dalio on understanding the complexities of a rapidly changing world through historical context and insights.

Background & Methodology:

Ray Dalio is a global macro investor with over 50 years of experience in various markets. He discusses the importance of learning from history to understand present-day trends. His insights are derived from studying economic and political history spanning the last 500 years, focusing on the rise and decline of reserve currencies and empires, and even going back to China’s Tang Dynasty (~600 AD).

Surprises & Historical Patterns:

Dalio points out that the most surprising events in his career were those that had never happened in his lifetime but had historical precedents. Studying these patterns, particularly from the Great Depression, enabled him to anticipate the 2008 financial crisis.

Three Current Trends:

Dalio identifies three major global trends that demand attention:

Debt Creation and Monetization: Central banks are running deficits and buying bonds, leading to significant economic repercussions, including inflation.

Internal Conflict: Increasing societal polarization, particularly around wealth and values, is driving internal conflict.

Rise of New Global Powers: Specifically, the rise of China as a power to challenge the existing world order.

Additional Factors:

He also notes the often-underestimated impact of acts of nature like pandemics, droughts, and floods in toppling civilizations. Lastly, he emphasizes that over time, the most impactful factor is the advance of knowledge and technology.

Objective Measurements:

Dalio utilizes various charts and indices to support his points, ranging from debt-to-GDP ratios to measures of political polarization. These metrics provide a grounded way to assess and compare the power and health of nations over time.

Rise and Decline of Empires:

Dalio presents research showing the ebbs and flows of global powers since 1500, demonstrating the cyclical nature of empires. The data indicate that we’re in a period where China is rapidly rising to challenge existing powers, which historically has increased the risk of conflict.

Takeaways:

Dalio suggests that what seems like unprecedented events today often have historical precedents. By studying these cycles and trends, we can better prepare for the future. His views are supported by rigorous measurement and analysis, making them valuable for anyone interested in understanding global economic and political shifts.

Introduction to the Big Cycle:

Ray Dalio discusses an archetypal pattern he terms the “big cycle,” which outlines the rises and declines of empires or countries. The cycle often begins with the creation of a new world order following significant wars like world wars or civil wars.

New World Order and Power Consolidation:

A new world order is established post-war, defining the ruling systems of that period. Afterward, the emerging leadership usually consolidates its power and focuses on rebuilding education and productivity. This leads to a phase of peace and prosperity.

Economic Rise and Reserve Currency:

During the rise phase, the empire becomes more productive and competitive, eventually leading to its currency becoming a global reserve currency. This reserve status enables the country to borrow large sums of money, often leading to increasing indebtedness.

The Financial Centers:

Dalio observes that empires in their prime also become the world’s leading financial centers. For example, Amsterdam was a leading financial center when the Dutch were dominant, London for the British, and New York for the U.S.

Seeds of Decline:

The rise and accumulation of wealth and power also lay the groundwork for future difficulties. Prosperity often leads to increased borrowing and financial bubbles, as well as reduced competitiveness as the nation becomes more expensive.

Wealth Inequality and Economic Strain:

Wealth gaps increase, and nations struggle with debt that they cannot finance, leading to deficits. This often results in money printing or other tactics that devalue the currency, triggering inflation and other economic issues.

Financial Resources and Military Power:

Dalio highlights that having enough financial resources allows nations to buy almost anything, including military power. Without money, countries are at significant risk.

Long-Term Trends and Adaptation:

Despite these cycles, Dalio points out that technological advancement and adaptation have led to an overall upward trend in per capita GDP and life expectancy over the long term.

The big cycle serves as a lens through which one can understand the complex dynamics of the rise and fall of nations, linking political, economic, and social factors.

Early Lessons:

Ray Dalio begins by recounting his experience in 1971 when President Nixon announced the United States would no longer back its currency with gold. This experience made Dalio realize the importance of understanding financial history, as similar events had occurred in the past and significantly impacted financial markets. Dalio leveraged these historical insights to anticipate the 2008 financial crisis.

Historical Study as Necessity:

Dalio emphasizes that his historical study was driven by necessity. Understanding past events allowed him to make sense of the financial mechanisms at play during his lifetime. This approach ultimately benefited not just him but others who have learned from his analysis.

China’s Financial Evolution:

Dalio shifts to discuss China, mentioning that he started visiting the country in 1984. Since Deng Xiaoping’s open-door policy, China has seen significant improvements in per capita income, life expectancy, and poverty reduction. This contrasted sharply with the U.S. experience during and after the 2008 crisis.

2008 Financial Crisis and its Aftermath:

Dalio argues that 2008 marked a pivotal moment for the U.S. because it led to zero interest rates and a surge in debt. This situation forced the Federal Reserve to print money, which in turn inflated asset prices without benefiting the broader economy. This led to an increase in wealth inequality within the United States.

U.S.-China Relations:

According to Dalio, China and the U.S. had a symbiotic financial relationship post-2008. The U.S. would buy Chinese goods, and China would buy U.S. bonds. However, this dynamic, coupled with growing wealth gaps and job issues, eventually contributed to the rise of populism in the U.S., most notably marked by Donald Trump’s election.

Comparing Two Global Powers:

The key themes—debt, reserve currencies, and internal order—Dalio explores in his book also serve as a lens through which he examines the differing trajectories of China and the U.S. since the 2008 financial crisis.

Chinese Perception of the U.S.:

Ray Dalio observes that the Chinese government’s perception of the United States did not significantly change after the 2008 financial crisis. Although concerned about potential defaults on U.S. bonds they owned, their primary focus remained on internal development and economic growth.

Evolution of U.S.-China Relations:

Dalio notes that attitudes between the U.S. and China have soured over the years, with a marked increase in anti-China sentiment in the U.S., particularly after the rise of populism. The tensions are not merely economic but have expanded into ideological differences.

China’s Internal Focus:

China’s focus has been largely internal, especially under Xi Jinping’s administration, which has been in power for almost ten years. Reforms have centered on opening up financial markets, combating corruption, and economic globalization.

American Misunderstanding of China:

Dalio emphasizes the need for Americans to understand China better. He points out that China is practical and focused on what works, explaining their ability to harmonize seemingly disparate elements like communism and capital markets.

Different Governance Philosophies:

Dalio notes that China has a top-down, autocratic governance style as compared to the U.S.’s bottom-up approach. This difference manifests in various societal controls, like restrictions on internet content and video game usage for children.

Long-term Planning in China vs. Short-term in U.S.:

Dalio highlights that China values long-term planning, contrasting it with the U.S., where political administrations might change every 4 or 8 years. This offers China a strategic advantage in terms of sustained policy execution.

This summary encapsulates Ray Dalio’s insights into the nuanced relationship between the U.S. and China, their contrasting ideologies, and the implications of these differences.

The Arc of Empires:

Ray Dalio discusses the concept of an “arc” that empires and dynasties go through. He states that new leaders usually begin by consolidating power, then building basic structures, and elaborating from there. This arc shapes how countries plan for the long term. Specifically, some countries consider timeframes beyond 25 years, utilizing historical data and studies on past dynasties to shape their strategies.

Competitive Advantages:

Dalio identifies long-term planning as a significant competitive advantage for countries. He contrasts this with other nations, which may only be looking five years ahead. Besides long-term planning, he acknowledges that different countries have other distinct competitive advantages. For instance, the United States has the advantage of being a country of immigrants, which allows it to draw talent globally.

Chinese Innovation and Planning:

China has integrated corporate-style management into its governance. It has a controversial 2025 plan, with metrics that are reviewed every 2.5 years. Those who do not deliver on the plan are held accountable. China has also been fostering creativity through venture capital and capital markets. Dalio talks about a program in China called the “Little Giants” program, aimed at finding and nurturing new ideas.

Education and Talent:

Dalio states that China produces eight times as many STEM graduates as the United States but mentions that the U.S. still has elite education centers for creativity. He emphasizes that the U.S. has unique competitive advantages in its educational systems but that the average level of American education has declined in global standings.

Immigration and Talent Retention:

Dalio discusses how the United States could better retain talent, particularly from China. He acknowledges the issue of intellectual property theft but stresses that the U.S. has a unique opportunity to attract the best and brightest from around the world.

Demographics and Meritocracy:

Finally, Dalio talks about the importance of drawing on a broad population for talent, referring to it as meritocracy. He states that historically, systems which are fair and can draw the best talent forward have been most effective. He notes that the United States has done exceptionally well in this aspect due to its immigrant population.

The discussion covers multiple facets of how nations compete on the world stage, from long-term planning to the nurturing and retention of talent. It emphasizes the different strengths and strategies that countries like the U.S. and China bring to the table.

Demographic Dimensions:

Ray Dalio discusses the importance of understanding demographics when analyzing an economy. One of the key aspects he identifies is the ratio of the working-age population to the retired population. A disproportionate number of retired people can strain the economy as the working-age population needs to support them, especially when health issues come into play.

Economic Activity and Productivity:

Dalio points out that Gross Domestic Product (GDP) or economic activity is determined by two factors: the number of people and the output per person. The interplay between these two can have a significant impact on an economy’s health.

Role of Technology:

Dalio shifts the focus towards technology’s role in replacing human labor. He suggests that technological advancements can alleviate some of the demographic challenges by increasing productivity. The critical question, he states, is how technology contributes to productivity and potentially replaces human labor.

Dealing with Inequality:

Dalio believes that the increasing role of technology raises questions about inequality, specifically how to “divide the pie.” However, he notes that this is more of an issue of economic distribution rather than a fundamental demographic problem.

Importance of Debt and Reserve Currency:

Although not elaborated on, Dalio acknowledges the significance of federal debt and the issue of reserve currency in economic discussions. He implies that understanding these abstract concepts is essential for anyone involved in investing.

The transcript indicates that Dalio considers demographics, technology, and economic activity to be deeply interconnected and vital for understanding the nuances of economic health and investment strategy.

Debt Mechanics:

Ray Dalio begins by explaining the intrinsic relationship between debt and financial assets. One person’s debt essentially becomes another’s financial asset. The accumulation of debt needs to be paid back eventually, which has economic implications. When people borrow, they can spend beyond their earnings, but when it comes time to repay the debt, spending must be reduced.

Inflation and Buying Power:

Dalio highlights the perception problem people have when it comes to inflation. Most people think of their wealth in terms of the amount of money they hold, not realizing that inflation erodes the buying power of that money. He mentions that even with low interest rates, if there’s high inflation, keeping money in “safe” forms like cash is actually a losing proposition.

Impact of Monetary Policy:

Dalio describes the current economic cycle where there is an influx of money due to governmental actions. While this initially makes people feel wealthier, the increased spending ultimately drives up prices, leading to inflation. This phenomenon then changes the willingness of institutions to lend money.

Global Reserve Currency:

Dalio addresses the risk associated with the U.S. dollar being the world’s reserve currency. He points out that if the world begins to shift away from holding dollar-denominated debt, the U.S. will be forced to sell even more debt to cover its deficits. The central bank would then have to print more money to cover this, leading to risks both for inflation and for the status of the dollar as the reserve currency.

Risky Situations Ahead:

In summary, Dalio suggests that the intersection of debt mechanics, inflationary pressures, and global reliance on the U.S. dollar as a reserve currency creates a volatile and risky economic landscape, particularly with regard to inflation and the stability of the reserve currency.

The transcript shows that Dalio’s view integrates complex elements of debt, inflation, and global economics to offer a comprehensive understanding of current and future financial risks.

Functions of Currency:

Ray Dalio begins by stating that a currency serves two primary functions: it is a medium of exchange and a storehold of wealth. These functions are crucial in understanding why alternatives to traditional currencies are becoming more attractive.

Storeholds of Wealth:

Dalio observes that people are diversifying their storeholds of wealth due to the eroding value of cash, especially in an environment of negative real interest rates. People are turning to assets like real estate as a reliable store of value.

Portability of Currency:

He points out that while real estate is a store of wealth, it lacks portability. Currency, in contrast, can be easily carried around and used globally, thus fulfilling both its roles effectively.

Emerging Alternatives:

Dalio notes that the era of alternative currencies, including cryptocurrencies, has begun. He mentions that while he owns some crypto, he finds gold to be a better alternative. He also brings up the issue of countries like Russia being cut off from the SWIFT system, suggesting that this could give rise to alternative currencies like China’s digital currency.

Competing Currencies:

The future, according to Dalio, will see a competition between various types of currencies, from digital currencies to traditional ones, and even non-traditional storeholds like NFTs and precious gems. He specifically mentions the growing role of the Chinese RMB as an alternative to the U.S. dollar.

Dalio’s insights offer a nuanced perspective on the evolving role of currencies, both traditional and alternative, in a rapidly changing economic landscape.

Three Big Pillars for National Success:

Ray Dalio emphasizes the importance of three core aspects for any nation’s long-term success: financial soundness, social harmony, and avoidance of detrimental international conflict. A country should aim to earn more than it spends, work cohesively to avoid internal conflict, and steer clear of unaffordable wars. Dalio suggests that these factors contribute to a country’s overall strength.

The Importance of Productivity and Education:

Dalio talks about how productivity is key for a country’s financial stability. Investment in sectors like public education is essential for fostering long-term productivity. He stresses that when education is neglected, the nation loses out on potential gains in productivity and overall well-being.

Concerns Over Unfunded Liabilities:

Dalio discusses the pressing issue of unfunded public pension and healthcare liabilities. These obligations are larger than existing debts and can be dealt with in one of two ways: either by raising taxes and redistributions or by printing more money. The latter option risks leading to a reduction in real interest rates and potential economic imbalances.

Worry As a Catalyst for Change:

Dalio believes that concern for the country’s direction can be a catalyst for positive change. If people worry about the issues, it could prompt actions that mitigate those worries. Conversely, if there is complacency, the issues could escalate and cause long-term damage.

State of U.S. Optimism:

Dalio expresses that he is much less optimistic about the United States now than he was a decade ago. He sees signs of growing internal discord and deteriorating measures of national well-being, which are reflected in the metrics he tracks.

Investment Strategy:

Dalio would opt for a diversified investment strategy, particularly in the U.S. and China, as both are leaders in technology and innovation. He also recommends exposure to Southeast Asia, specifically mentioning Singapore, while assessing countries based on his three core criteria.

Final Note:

Dalio suggests that if nations focus on the basic principles of financial health, social harmony, and strategic international relations, they can maintain or improve their state of affairs. His observations point to a deteriorating situation in the U.S., calling for immediate action in multiple sectors.