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Podcast

Ray Dalio- Our System Is in Jeopardy - Debt, AI & the Cycle That Destroyed Rome

All-In with Chamath, Jason, Sacks & Friedberg

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  • Five Forces Driving National Decline
    • Five intertwined forces determine national trajectories: debt/money, domestic wealth and values gaps, international power shifts, technology, and acts of nature.
    • Ray Dalio traces monetary and political orders breaking down repeatedly across history, framing today’s risks. Transcript: Ray Dalio Studied these big cycles in history going back 500 years. And there are five big forces that are intertwined to determine the answer to your question, which is there’s the debt money one. And I’ll take you into that in a minute. There is the domestic gaps, the wealth and values gaps that are causing irreconcilable differences between the left and the right that is affecting how taxes, democracy, and everything Works. There’s the international great power conflict, the classic rising of a great power, challenging existing great power, and changing the international world order. Then there’s technology all through these cycles. There have been technology. And then there’s acts of nature, droughts, floods, and pandemics. So, and when we think of orders, we’re talking about there’s always a monetary order, and all monetary orders have broken down for the same reasons. All political orders, domestic political orders, they all always change. In the United States, less so. We have 250 years here, but they always change. There was one civil war in there. And then they, but internationally, they always change, all orders change. And the international geopolitical order going from a multilateral to a unilateral world order is changing, and certainly technology is changing. (Time 0:01:45)
  • US Fiscal Imbalance And Debt Rollover Risk
    • The US runs a structural fiscal imbalance: projected spending ~$7 trillion vs revenue ~$5 trillion, creating large deficits and a debt pile that strains rollover capacity.
    • Dalio warns rolling $9 trillion of maturing debt plus ~$2 trillion annual deficit magnifies systemic risk. Transcript: Ray Dalio The economics of a country are basically the same as the economics of a company or an individual, except the government has a ability to print money. Look at it like a company or like your own. Basically, it’s projected to spend about $7 trillion, take in about $5 trillion. So it’s running a 40% deficit, 40% of its spending. It’s been running deficits for a long time. So it has a debt that is 600%, six times the amount of money that it takes in. And we can project that number. The problem with debt cycles, and you can see them transpire, they’re almost like the circulatory system of the body. The capital markets bring credit to different parts of the economy. And if that credit is used to be productive and produces an income that pays for the debt service, it’s a healthy process. But what happens is that if the debt service grows relative to the income because it’s not paying for it, it’s like a plaque in the system growing up and it squeezes out spending. And so we now have that $2 trillion deficit. Half of that is interest payments. Plus we have to roll over $9 trillion of debt that has been accumulated and is maturing. Okay. So now if you were to look at a company like that or an individual like that, you have that problem. So as a handy number, 3% of GDP would sort of stabilize the situation. (Time 0:03:30)
  • Target A 3 Percent Deficit To Stabilize Finances
    • Aim to stabilize the deficit-to-GDP around 3% to avoid severe financial strain and dangerous rollover pressure.
    • Dalio and others back a three-part plan using modest spending, tax, and rate adjustments to reach that target. Transcript: Ray Dalio So as a handy number, 3% of GDP would sort of stabilize the situation. Very unhealthy condition. It’s not just unhealthy because it’s squeezing out those spendings, but also because there’s a supply and a demand. In other words, you have to roll over the $9 trillion of debt that’s coming due, and you have to sell $2 trillion more, something like that. (Time 0:05:19)
  • Gold Is Reserve Money Not Just A Speculative Asset
    • Gold functions as the longest-established money and a core central-bank reserve, not merely a speculative commodity.
    • Dalio recommends 5–15% allocation to gold as insurance because it is transferable, scarce, and diversifies when fiat systems fail. Transcript: Ray Dalio It’s the big cycle. And what you have to understand is that gold is not a precious metal that’s speculated on, like most people have come to think of it as. It is the most established money that it’s the second largest reserve currency that central banks hold. And so what we’ve seen is for various reasons that I pretty much covered, the economic, the supply demand, the political, the geopolitical, for those reasons, central banks themselves Have acquired gold to build that up. And individuals and others are looking for an alternative money. The question is, what is money? So when we’re thinking about this, money, mechanistically, money is debt. What I mean by that is that if you’re holding money, you’re holding it in the form of a debt instrument. And if you are holding a debt instrument, what you’re getting is a promise from somebody to deliver you money. Okay. And as I mentioned in the beginning, the power of the central banks when they have too much debt is to print money. Okay. So if you’ve got that down, okay, then you can understand what’s happening. Okay. Because the question is, Dave, what money do you think is safe? Right. Given what I’ve just said. Okay. David Friedberg Yeah. Yeah. Asset back. Right. I want an asset. I want to have something that’s got some physical known limitation to it. Ray Dalio And particularly what you want is that can be transferred from one place to another because money is both a medium of exchange and a storehold of wealth. So in other words, if you, country’s central bank or government wants to pay another government, it can’t just be in fixed assets like buildings. Okay. If you want to transact, you have to transact in something that you can transfer to them and so on. And gold is the only asset, it’s a long-term historic asset for reasons that means that it can be transferred, they can’t print a lot of it, and it is not dependent on somebody giving you Something. In other words, most money, if you hold debt or you hold stocks or you hold something, you’re holding a promise from somebody to give you buying power. Okay? So you can, like wealth is important to think to distinguish wealth from money. Okay? Wealth is in stuff. It’s, you know, it’s in buildings, it’s in companies and so on, but you can’t spend wealth. You have to, when you want to spend it, and that’s the purpose of money, you have to sell it and then you get money to spend. And right now we have an awful lot of wealth relative to money. And the question is, what is that money? (Time 0:12:01)
  • Hold 5 To 15 Percent Of Portfolio In Gold
    • Prepare portfolios for systemic risk by holding 5–15% in gold as insurance against fiat money debasement.
    • Dalio frames gold as a diversifier that typically outperforms when other assets fail and central banks buy reserves. Transcript: Ray Dalio Wealth taxes and wealth being a risk. One question that might be asked, are we in a bubble? In other words, are AI stocks and other such stocks in a bubble? If you want to get into that, we’ll get into that. But one of the things that we know from that is that one of the characteristics of bubbles is that there becomes a need for money that requires people to sell their assets to get money to Meet that need. Now, quite often that need comes from borrowing money to buy those assets. Okay. And then the assets go up in price and so on. But what happens is it can’t be sustained because you have to make the debt service payments and they’re not throwing off the cash to make that. And so they have to start to sell that. And when you have to sell it because you need money, you need cash to pay your debt service or to pay nowadays wealth taxes. Okay. So now we have a dynamic. The bubble will burst as that dynamic takes place. There are a number of things we could talk about about the bubble if you’re interested. But just imagine if you put in wealth taxes, everybody could talk about whether they like or don’t like wealth taxes or something. But anything that if you put in wealth taxes, and there’s a lot of fear of wealth taxes in and of itself, that can drive money, the wealth to cash. And there’s only one way you’re going to get the cash with the wealth, and that’s either sell it or to borrow against it, which causes its own cash flow issues. And we have a dynamic having to do with the social part of this, the wealth gap that makes that politically an issue. Anyway, all I’m saying is people should worry and companies should worry or countries should worry, do they have enough gold? If you didn’t know what gold was likely to do and you had no view on gold, one should have between 5% and 15% of their portfolio in gold because of the fact of how it works with the other components. In other words, it’s a diversifier when the shit hits the fan, okay, gold does well and the other things don’t, generally speaking. And because of that correlation, depending on what else is in the portfolio, if you put it through an optimizer, you’d have something like that. (Time 0:17:32)
  • Why Bitcoin Hasn’t Matched Gold’s Safe Haven Role
    • Bitcoin lacks key institutional attributes of reserve money: limited central-bank demand, traceable transactions, and smaller market size versus gold.
    • Dalio notes its ownership concentration and correlation with tech stocks reduce its safe-haven utility. Transcript: Ray Dalio There’s an important differentiating characteristics of Bitcoin. And then there’s also, you know, like who owns it and why they buy it, why they bought and sell. Okay. So Bitcoin does not have privacy. Any transactions can be monitored and then indirectly perhaps controlled. Central banks are not going to want to buy Bitcoin and being able to hold it. So it’s not just individuals, it’s institutions and so on, but most, you know, and central banks so that there are attributes of that. There has been some question or thoughts of the development of new technologies like quantum computing and so on. Can there be issues regarding that? And then there’s who owns it and what are the other exposures that they have in their portfolio? It tends to have a pretty high correlation with the tech stocks from an ownership. You know, just the supply demand is affected by if somebody gets squeezed in one thing, they sell something, whatever else they have. So there are those dynamics. It’s a long way, and it’s a relatively small market that’s a relatively controllable market. I think a lot of attention has been given to Bitcoin, but as a money, it’s small in relationship to gold. And so those are the dynamics. (Time 0:20:53)
  • The Tightrope Of Interest Rate Policy
    • Interest-rate policy must balance creditors’ returns and debtors’ solvency; with huge aggregated debt, this balancing act becomes extraordinarily delicate.
    • Low rates fuel borrowing and bubbles; high rates can crush the debtor side and the economy. Transcript: Ray Dalio Because we have so much debt, federal debt, interest rates are one of the three main considerations. There’s the taxes, there’s spending, and then there’s interest rates on the debt. But you can’t make interest rates severely artificially low because one man’s debts are another man’s assets. And if you make those interest rates too low for the creditor, you will produce the dynamic that we understand. In other words, you’ll produce a lot more borrowing, you’ll put it into things, and you can fuel a bubble. And so at the same time, you can’t have them so high that the debtor gets squeezed unaffectively. So there’s a balancing act, you know, keep them high enough that they’re adequate for the creditor, but not so high that the debtor. And so when you have a lot of debt assets and liabilities, because for every debt asset, there’s a debt liability. And when you have a lot of those, that balancing act is very difficult. (Time 0:23:35)
  • Fed Balance Sheet Expansion Is Likely Later
    • The Fed may re-expand its balance sheet eventually as foreign demand for Treasuries falls, using shorter maturities now to blunt pressure but increasing rollover risk.
    • Dalio highlights persuasion and attracting other capital as interim tactics. Transcript: Ray Dalio I think that it’s likely down the road. Right now, there’s the shortening of maturities as a means of trying to deal with that. Of course, that increases the debt rollover risk. But sell less long debt, try to hold the short rate down so that the longer rates attachment to it helps to hold the long rate down, and then try to use the government’s power of persuasion On other countries to either buy the debt or to hold the debt or to have other forms of capital enter the United States. (Time 0:27:07)
  • Tariffs Are Revenue Tools Tied To Geopolitics
    • Tariffs are primarily revenue tools and should be evaluated as such; economists often overlook taxes as a component of inflation.
    • Dalio argues tariffs can help rebuild industrial independence but must be part of a broader industrial and geopolitical strategy. Transcript: Ray Dalio I think so. First of all, there’s the tax revenue part of them. I mean, thinking of it just as revenue. And I think that people don’t, all economists, make the mistake of not including taxes in inflation. And what I mean by that is if your taxes go up, that’s inflation. I mean, why should it be any different than if your cost of housing goes up? Why shouldn’t it be part of the inflation calculation number? It’s taking money out of your pocket. I mean, it’s probably, you know, for a lot of people, the biggest expense. And so when they say inflation is something separate, you know, I think it’s changing the form of inflation in a sense. So what I mean is, you know, through history, tariffs used to be the biggest source of revenue for government throughout most history and in most countries. OK, so it is a I think it’s viewed it’s a totally valid way of raising money and it should be kept in consideration for that. And you get the foreigners paying a portion of it. But there’s also, as part of the big cycle question, is the problem that we have that we are not independent. Okay, we’ve had a hollowing out. This is the big question, you know, that we’ve had a hollowing out of manufacturing the middle class and so on. Now, are we going to try to build that? And what is the plan to build that? Or are we going to continue on with large trade deficits? And so you have unsustainable trade deficits that the United States has, and which are capital surpluses. In other words, the dependence on foreign capital is the other side of those trade balances, and that’s unsustainable. So because that’s unsustainable, you need some way of rectifying that. Okay, so what is the plan to rectify that? Partially, that plan can have trade tariffs. I think they’re totally valid, but it all has to be part of another greater plan, which is to develop the industries that we need to have developed, which we’re seeing happen in a much More proactive way. In other words, you’re seeing more government activity to create infrastructure, to bring in industries and so on. You need that not only economically, but you need it geopolitically because you can’t have dependencies. In other words, we’re entering a world of greater conflict. We’ve moved from a multilateral world order to a power-based confrontational world economy. And in that environment, everybody’s threatening to cut off everything from, you know, the goods and capital wars that we can have are threatening. And so you have to build independence. And so that’s part of a plan to try to build that independence. So I think when I look at that, I don’t think that’s the problem. I’d say, and it’s misunderstood. So yes, I think people are misunderstanding that. And the important thing is we get the other things right. You know, like, let’s get down to 3%. (Time 0:29:10)
  • Three Pillars For National Success
    • Three pillars of national success: educate children well (skills and civility), maintain orderly civil environment enabling competition, and avoid wars.
    • Dalio says failure on these pillars explains current productivity and social breakdown. Transcript: Ray Dalio There are three things basically that you need to do to be successful. You have to first educate your children well and so that they are capable of being productive and also educate them in civility so that they are civil with each other. The second is then they have to come out to an environment that is an orderly civil environment that people can compete and work with each other to be productive. That works for the most people. And the third thing is you have to stay out of wars. You have to stay, you don’t have to have no civil war and no international war. If you do those three things right, you will have a successful country. That’s all throughout history. (Time 0:37:13)
  • Values Gaps Threaten Democratic Order
    • The US system is in jeopardy because irreconcilable values gaps lead people to reject the system, risking mob disorder and political paralysis.
    • Dalio suggests a strong bipartisan leader is needed to enforce reforms and restore order. Transcript: Ray Dalio Equation that’s it that’s that what we need is is is to stop fighting okay we’re now at a stage where we have irreconcilable differences in other words when when the causes people are Behind are more important to them than the system. The system is in jeopardy. Our system is in jeopardy because people will not accept the system or the alternatives. And so they’re going to fight. You know, I think when we have, we’re going to have the midterm elections, you’re going to go past the midterm elections with probably that Democrats will take the House and maybe, I Don’t know, it’s going to be difficult. And you know what? Nobody can succeed because everybody’s going to be fighting. They’re going to all be fighting. Okay. So how does that affect productivity? Okay. And then when you deal with things like, how do you get a good education system? So you have now almost the mob disorder, mob disorder and inefficiency. Nobody’s allowed to take charge of this. If you go back in history, Plato, you know, I think it was like 350 BC, wrote about the cycle, you know, of democracies and the threat to democracies. Now is similar to Julius Caesar and Rome and being stabbed in the Senate. And what you need is you need a bipartisan, you need the country to have a strong, almost a strong leader. We do need a strong leader to get the reforms done to make the country work well. But I mean, so how do you force this mob of people who are behaving this way, including in the elections and so fragment to create order? (Time 0:38:50)
  • Bubbles Buy Companies Not Technologies
    • In bubbles investors buy companies, not technologies; technologies survive even if most companies fail.
    • Dalio contrasts US profit-driven AI deployment with China’s usage-first model that may prioritize adoption over profits. Transcript: Ray Dalio Okay. There’s a giant difference between the behavior of the companies and the behavior of the technologies. And that the norm is in these is that a lot of companies won’t survive in the start. Very small percentage and they’ll all fight and so on. But the technologies will go on and it’ll be great. The technologies will. So I want to emphasize to people that dynamic. And I can go on and describe, you know, what it’s like. Of course, we’ve seen it to some extent with the 2000 bubble in the technologies and what went on. But even if I describe what it was like in the late 20s, you know, it’s just, it was unbelievable, but the technologies will go on, but the companies won’t necessarily go on. And so when I’m looking at that, that has big implications. Right now, it looks to me like AI basically is eating everything and it might eat itself. And what I mean by that is not produce adequate profits. We can’t take just a domestic view of that. We have to look also at what’s happening in China and make interesting distinctions there. You know, there’s a difference in philosophy that’s carried through in the economy of how the economies of the United States and China work in that we have basically primarily a profit-based System. They have a system in which they might believe that profits are a second consideration. They’re not necessarily needed in order to achieve the best results. For example, in China, they would say usage of AI is fantastic. So it should be like electricity or something, and let’s make it free for everyone. And let’s make it open source for everyone. Okay. And they might get much higher usage and they’ll get their productivity gains through the usage. And we have a profit system to pay back. Okay. Well, now we’re in one world. How do you compete in that world? What do you do with that? In other words, just imagine that their technologies are almost as good as ours because they are. They’re not far behind. But that you could get them for free, open source. Okay, now you got to pay it back. Okay, so I just want to emphasize that these are also systematic risks that enter into the picture of AI. (Time 0:42:44)