History, in the eyes of legendary investor Ray Dalio, is a perpetual motion machine. Nations rise and fall according to an inevitable cycle where peace and prosperity are always followed by depression and war. And in his new book, Principles for Dealing with the Changing World Order, Ray says the United States is now in the downward part of that cycle.
In this week’s episode of the Next Big Idea podcast, Ray joins host Rufus Griscom to discuss China, inequality, and the possibility of civil war. Listen to the full episode below, or read a few key highlights. And follow Rufus on LinkedIn for behind-the-scenes looks into the show.
How Ray concluded that we could be headed toward civil war.
Rufus Griscom: This is a massive project that you and your team have undertaken. You’ve studied 500 years of human history. You quantify 18 different gauges of the state of the top 20 countries in the world, everything from education and debt burden to softer factors like character, civility, and determination. As I understand it, you spent years building a model of the forces of history, and you conclude that the United States is in stage five out of six stages of the cycle of an empire. Stage six is effectively collapse, and we’re in stage five. This is a blaring, DEF CON warning. In fact, you’ve projected a 30 percent probability of a civil war in the next decade. Do you see this as a potentially catastrophic situation?
Ray Dalio: Before we get to my conclusions, I’d like to explain why I did this. I didn’t do it to study history. I did it to understand what’s happening now and how to deal with it in the future, because I’m a very practical decision-maker. I run the world’s largest hedge fund. For 50 years, I’ve been making global bets on these things. And I learned in the past that the things that surprised me were things that didn’t happen in my lifetime, but happened before that.
I learned that first in 1971. There was the devaluation of the dollar, and the stock market went up. I found out the same thing happened in March of 1933. And that made me study the Great Depression, which is why I was able to anticipate the global financial crisis in 2008 and profit from it.
Three things that never happened in my lifetime but are very big are an enormous amount of debt creation that is being monetized, which means printing money and buying that debt by central banks. That’s first. The second is the size of the wealth gaps and the political gaps, and the amount of internal conflict. You have to go back to 1900 to find the wealth gaps and the political gaps that exist today. And the third is the rise of a large, strong power to challenge the existing great power. In other words, China is rising to challenge the United States.
“I didn’t intend to write it as a book; I did it as a study because I needed to know what Bridgewater, my company, needed to understand in order to deal with today.”
The existing world order began in 1945 when there was the last war. So in order to understand those things and how to deal with them today and tomorrow, I needed to go back and follow this story. I needed to start it 500 years ago, because these rises and declines of empires and these challenges take 250 years. So that’s what I needed to study. And that’s what I think people needed to know. I didn’t intend to write it as a book; I did it as a study because I needed to know what Bridgewater, my company, needed to understand in order to deal with today. And then I converted it into a book that I felt everybody needed to know.
How wealth inequality contributes to our societal ills.
Rufus: How much of the resentment and internal strife do you think is a result of increasing concentration of wealth or wealth inequality?
Ray: It’s certainly one of the big drivers, particularly if there’s a sense that the system is unfair. It’s got to work for the majority. And historically, the societies that have been drawing upon the broadest population do best because you can’t ever tell where the talent is going to come from. It can come from anywhere. Once the workforce was opened to women, for example, you could get a lot more talented people, and the same is true for different groups. So when there’s a financial problem and a sense of “it’s not working for me,” you have a conflict. That’s been true throughout history. You can go back and see the patterns: the French Revolution, the Russian Revolution, the Chinese Revolution, the Cuban Revolution. In all of those, you see the same things.
Rufus: Clearly something we have to do better is distributing wealth in a way that’s more equitable to get our country back to being more cohesive.
Ray: Let me clarify. Yes, but you also have to distribute opportunity to be productive, because you have to simultaneously increase the size of the pie and divide it. You can’t just redistribute wealth without having productivity rise. Collectively our living standards are going to be a function of our productivity, so you need to really divide the opportunity pie, not just the wealth pie.
“You have to simultaneously increase the size of the pie and divide it.”
On the wealth tax.
Rufus: I’m guessing you would support some degree of taxing the rich, but you’ve opposed a wealth tax as a step too far. This gets personal, of course. We’re in this moment in history when, I think, Elon Musk recently hit $270 billion of net worth. It’s probably lower now. Forbes reported yours at $15 to $20 billion.
Ray: I don’t think I’m well understood—I’m in favor of a redistribution of wealth. And just to be clear, I’m in favor of anything that works, but there are practical applications. On LinkedIn, I did an examination of wealth taxes, and the practicality of wealth taxes is the issue, not the idea of redistributing the wealth.
So let me give an example of that. In order to tax wealth, that means that for illiquid assets such as your house or property and so on, you have to come up with a value for those. And that’s very, very difficult. That’s different from other types of taxes that can achieve something similar, such as inheritance taxes or something along those lines.
Rufus: It’s conceivable that the way things are going, 10 years from now we could see the first trillionaire. There must be some inflection point where money just simply doesn’t have utility.
Ray: That’s exactly right—and we’re already way past that point.
Ray’s views on China.
Ray: When I started going to China in 1984, there was nothing private. Restaurants were all government-owned. Everything was government-owned. People would take naps in the middle of the day. [Today,] there’s a vibrancy and an education of their children. There are capital markets—the second-largest capital markets in the world. There’s entrepreneurship. They’re creating billionaires, and they’re creating ideas.
“The biggest risk of democracy is disorder. The biggest problem of autocracy is it can stifle creativity.”
The United States has the best rarefied environments that are terrific in terms of, you know, a limited number of universities and the environments around those universities and so on. And yet if you take a look at China, how many computer engineers are they turning out? About eight times as many.
When I first went to China, I would give $10 calculators to people who were government officials, and they thought they were miracle devices. Nowadays, they’re competing with quantum computing.
There’s certainly a conflict of ideologies, and each side has risks. The biggest risk of democracy is disorder. The biggest problem of autocracy is it can stifle creativity.
I don’t know how this is going to turn out. My general view is that I’m big on diversification, and I’m impressed by both.
Why inflation may be here to stay.
Rufus: I think Goldman Sachs is predicting that inflation will decline to 3.7 percent by the end of the year. Do you agree with that, or is this the beginning of a new set of problems?
Ray: It’s the beginning of a new set of problems. If you took that optimistic forecast, it doesn’t include how people’s behaviors are going to change. Wages are going to have to go up. People are going to argue, “I need more money in order to live.” It’s going to produce political problems. Everybody’s going to demand more money. So in my opinion, that 3.7 percent is an optimistic number.
Rufus: You estimate that the next downturn is coming about four years from the publication of this book, so late 2025 or 2026. Has your view on that evolved in the last few months?
“Recessions, stimulations, recoveries, inflations, tightening, downturns, recessions—and we do it again.”
Ray: I can’t be precise, but I can say the following: There’s a cycle. Recessions, stimulations, recoveries, inflations, tightening, downturns, recessions—and we do it again. Those cycles, on average, have been about seven years, but they depend on how far you’re into the cycle before the inflation.
We are in the increasingly risky “putting on the brakes” part of the cycle. There’s a long way to go from zero interest rates to something to compensate us for inflation. So when we take that cycle, we can say, “This is a typical third year in a cycle.”
Let’s say this all began—the stimulation of giving everybody a lot of money and credit—in April of 2020. And so if we look at 2022, we’re in the beginning of the tightening phase. You carry into 2023, and it’s going to get more difficult—the easy money has been made. And when you carry that forward, it becomes increasingly risky. That’s what also makes the 2024 election period very risky, because you can have a situation where the financial markets go first, the stock market goes first, credit spreads start to expand, and credit becomes more difficult. And then you see the economy follow. That’s the pattern.
And then you come to a period like the 2024 elections, which is a whole different set of circumstances, because we’re at each other’s throats. There’s such an internal political conflict because of populism. That conflict can be bad. So when I look at the confluence, 2022 looks more like a transition period, and 2023 is of greater risk.
Episode Links
- Order a copy of Ray’s new book, Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail
- Read his latest LinkedIn post on Russia’s war in Ukraine
- Follow the Next Big Idea wherever you listen
- Get 20% off an Express Membership to the Next Big Idea Club when you use code PODCAST20 at nextbigideaclub.com.
