Ray Dalio's introspective look at financial world order, inequality and capitalism: Full interview

Ray Dalio is one of the most influential investors in the

world

today. He founded his firm Bridgewater in his two-bedroom apartment in New York City in 1975 and has grown it into the

world

's largest hedge fund. Dalio is a New York Times bestselling author. number one bestselling principles life and work in which he shares a plan for personal and professional success

dalio

is an active philanthropist and conservationist with a special interest in ocean exploration and conservation. I'm pleased to bring on our next guest, ray

dalio

, the founder of bridgewater. Associates, the world's largest and most profitable hedge fund firm.

Ray is also a well-known philanthropist and author of several books. Ray. It's great to have you with us. It is a pleasure to be here. I mentioned at the top that you are the author of several. books and I know you're writing one now called the changing world

order

and you've been talking about three forces at play that we're here before the pandemic. I would love for you to share your view of the world with our viewers and listeners, um. Yes, I do research, so this is a study that I've been doing and then I decided to share it with people because I think it's very important.

Yes, several years ago, first in 2008, we entered into a monetary situation, of course, where we are printing money, creating a lot of debt and monetizing it and then populism emerged around the world and President Trump emerged, who was more populist. , and it affected fiscal policy, it affected the markets in many different ways. And that led me to realize that there are three big things that are happening in the world, that are dominant and then Kovid came along. Those three forces are, first, long-term debt and the monetary cycle, that is, the creation of a lot of debt by monetizing it and the implications of that that reverberate through the system in terms of all the markets and everything second um is uh this conflict this polarization this wealth gap and how we confront each other and I

look

ed at the wealth gap and I

look

ed at a lot of measures of conflict going back in time and I found that if you were in the period 1930-45, the printing of money as I described it in debt monetization was also in the period 1930-45 and the third major influence is the rise of China, so the rise of a great power that challenges an existing great power, the United States, and that has huge implications as an investor.

I think what the relative attractions of the markets are, but it has many implications, it is not just a trade war, so the markets and everything we are reverberating the trade war, the technological war, the geopolitical war in Taiwan and the southern seas of China and then also the capital war that we're seeing emerge, so those three factors required me to go back in history and I wanted to study the rises and falls of the reserve currency empires, so I needed to go back far enough to have some , so I had to go back 500 years to see the rise and decline of the Dutch empire. and its reserve currency the rise and decline of the british empire and its reserve currency the rise and beginning of the decline of the united states and its reserve currency and china and that's it, those are the forces and that's what I did to what you're referring to and that, by the way, is available for anyone to read on LinkedIn, so to recap, the high levels of debt, the extremely low interest rates, the large wealth gaps across political divides and the growing world power that was China, versus this type of overextension. the power is the United States and I just heard you say ray um in that thesis you said that this was the period most analogous to the period 1930-1945, of course, if we go back in history, understand what happened, then that sounds really worrying.

It's really worrying and it's even more worrying when I went back to find the 500 years and the times repeating themselves over and over again and what I found was um, there's a cycle, there's a big cycle, you know, you start a new world.

order

in 1945 we started a world order after the war they decided how the world would be divided they created the dollar as a world reserve currency and so on and then um because there is so much fighting and then you have established a power that is a dominant power you have a period of peace and prosperity and then that extrapolates and leads to more debt.

The fear of bad times decreases the opportunities to get into debt and debt, especially if you have a reserve currency because the world wants to save on that. reserve currency and that puts the country more and more in debt and then you have these debt increases and you have bubbles but you have prosperity and the bubbles are really fun, they are really nice, they are great, but then you get to the point where there is there is a limitation to that and those limitations begin to become evident when the central bank cannot easily produce money and credit that begins when zero interest rates are reached because then the same cannot be done, then it moves on to what is monetary policy. one is the monetary policy of interest rates, when that no longer works, you move to the next type of monetary policy which is printing money and buying

financial

assets, but the

financial

purchases of financial assets and other things widen the wealth gap because those who have financial assets do better than those who do not have financial assets and have a widening wealth gap and when you have that widening wealth gap and then you have another crisis in an economy, that is a formula for a lot of conflicts and That's what Mira, so what does a central bank do?

If you impose taxes, you take money out of the economy. That's not good, that's a problem, and if you cut expenses, that's worth it, that's a problem. So the central bank always throughout history this goes back literally. For thousands of years, the central bank, or the entity that controls money, then prints more money because, think about it, we received all those checks in the mail and we needed to receive all those checks in the mail, but we can't take them away. anyone, so where does it come from and what are the implications? That happens for a lot of logical reasons and it often happens at the same time that there is an external rising power as a competitor, which is a challenge in that environment, so yes, it is one of those times and I think people are not aware of This is because I learned from my experiences that many things that happened in my life that surprised me never happened in my life before, but they happened many times before and in history. and that if you went back in history you could see that the first time that happened was in 1971, i was working at the new york stock exchange and richard nixon got in front of the camera and said, we're not going. to give you the gold and the value is the dollar and I walked across the floor of the stock market I thought there was a big crisis and I walked across the floor of the stock exchange and the stock market was up four percent, which was the most in a couple of decades and I said wow that's amazing and then I found out that Roosevelt did the exact same thing on March 5, 1933 and what was done at those two times is the same thing that was done on April 9, this year when the federal government and the federal reserve decided to produce a lot more money and credit, so yes, you need these insights and I want to convey them, which is why I convey that research in the LinkedIn article, yes, and it's always interesting, especially when you mentioned a mistake in 1971 on the floor of the stock market, what you thought was happening or was going to happen and it didn't, so you looked back in history and did this deep study.

A couple of things I would like to comment on. double click here ray um monetary policy you were talking about monetary policy one, monetary policy two and you know when you think about what happened first, you had low and low interest rates, you couldn't you couldn't go any lower so then I had that buying the financial assets that you mentioned, that benefits the richest, that is, the richest because they own the stocks, so I guess we are exacerbating wealth

inequality

here and we need to rethink monetary policy that is more targeted and that can really help stimulate those who really need it.

Well, that's what monetary policy three is, so monetary policy one is based on interest rates, monetary policy two is classic quantitative easing, purchases by the federal reserve or central banks using financial assets, monetary policy three, which is what we're looking at now and what's needed is um. the production of that debt through government borrowing and the government directing those checks to those who need them most, that's what we just saw and then the central banks monetize it, so we're in a new era, well of monetary policy three as I call it monetary policy three will mean that the free market will play a much smaller role in determining capital market flows and that the government, as we go into the future, will be thinking about how to get that money to those who need it most.

It will be a highly political decision, much more political than in the past and the central bank will then monetize those political decisions, so monetary policy three means that there is that type of cooperation, so those are the two dimensions of the big change . In the environment, you will see a lot more government influences and the direction where the money goes, which will have a big impact not only on the economy but also on the markets. You have to watch what they are going to spend their money on and they have to see where they are going to get their money, what taxes, etc.

It means the government will play a bigger role and it also means there will be a lot more monetized debt and that has implications for the value of financial assets. has implications for the value of currencies etc., let's look at what debt monetization entails and what the implications could be. I mean, you're talking about what you know, of course, when we think about the United States, we have the world reserve. The coin that sounds like that state is very much, uh, I guess under threat here is that what you're basically saying is that yes, if you look at those arcs, there are a lot of characteristics of them, but, when you get to the end of the bow. um if money is hard when it was connected to gold or was gold, they always broke that link, um, and they should and if it was soft, they would always print more money and you can't increase the standard of living by printing more money. certainly you can redistribute the money that those receive in the form of checks and they go out and spend it, it helps their standard of living, but what it does is decrease the value of that cash and it decreases the value of the bonds because the bonds are a promise of receiving a large amount of currency and they transfer wealth to financial assets, they always make stocks go up, like in my 1971 lesson, they always make gold go up and also always change the impact of the currency, so when we look at this Also Let's see, I think the rise in importance of China's remb as a currency has a long way to go before it becomes a reserve currency, but I think one of the important things we need to see is that you will see flows of favorable capital markets for China and if you do a comparison of their markets, where their interest rates are, where their capital markets are, who is doing IPOs, you know almost half of the IPOs depend on, we will find out. but around 45 of the IPOs will be done in the markets of China, Shanghai and Hong Kong, this year, new offerings that will boost capitalization and increasingly will see the internationalization of the Remnb, will see capital flows. move in those directions and those kind of analogous movements have been repeated throughout history and then I guess, relating it to you, you know the investors who are looking at a lot of retail investors and a lot of people who are also of my generation, do they? how should they think?

On this, it sounds like you know the kind of performance that we've seen in the US stock market for so long that they need to think beyond the US is that what I'm also hearing well, I think first The most It is important to first realize that cash is a risky asset. I think a lot of people think if I go to cash I'll be safe because it's a lot less volatile, but keep in mind that a lot more cash is produced in this environment. real returns go down, it's a seductive, um, risky asset, because let's say, relative to inflation, you can be taxed at 2 percent a year, and since you're taxed at two percent a year, it's a huge amount of money over time, but it is a subtle tax. first look at that, think about the question of currency or the value of money, then in terms of that, yes, you want to diversify into stores of wealth and what's number one, the second big thing is diversify well, diversify well um, in five diverse asset classes, but diversify the countries diversify the currencies, so think about diversification, if you diversify well, you will reduce your risk without reducing your expected returns, if you know how to do it well, but I would say you know which ones They are the three main things that I don't know, diversify, diversify. diversify, I would say um, so I would say thatthose would be the main headlines that I would like to go through and of course you know we're heading into an election and it's just a few days away and you have to wonder something. of the topics we've talked about here, whether it's wealth gaps, political gaps, populists left and right, how you think about elections and I guess the scenarios, the probabilities and how that might influence some.

Of these most important issues that we've talked about before, well, first of all, I think what is the most important thing for the United States um and I think the most important thing for the United States uh is to do the fundamental things well, we'll talk about that in a second and also coming together, what worries me most is one side trying to beat the other side and doing harm because history has shown that when you have those gaps, those wealth gaps and the values ​​gaps and the anger, you get demonstrations, you get violence and you can get to the point where respect for the system, uh, is not good.

I have a principle that is when the causes that people are behind are more important to them than the system. The system is in danger so you have to pull it together and make sure that I can do that I think that's the importance of deterioration so what are the fundamentals the fundamentals there are so many important fundamentals but let me go over the important ones um are you going to earn more than What do you spend so you can build like us? country, are we going to earn more than we spend to build our balance sheets?

That is important for every individual, for every company, for every organization and for every government. You can judge health by financial health by those things, so you have to go to the fundamentals that produce those things and start with good broad-based education of your children, I think good public education and broad-based civility, when I say education I'm not just talking about, can you read and write? All those things are very important, of course, but also behaving civilly with each other because societies that row in the same direction with a common mission like an American dream work better and I think it all starts with education and you know.

The basics are basically not what I was seeing. I went to a public school. I had parents who took care of me and loved me. They taught me some values ​​and those things are the most important fundamentals. Save more than you know those things if we can. Doing that will be the most important thing because wherever we are in relation to China or anywhere will depend on how we are with ourselves to do those fundamental things correctly. You wrote the beginnings of the book and it is a fascinating read. We're talking about radical transparency, thoughtful disagreement, all these different principles and we're just having this conversation about you know how we are with each other and civility to bring civility back.

Are you optimistic that we can get there? I'm not optimistic that we can get there. We can get there, but I know we can get there if people are afraid of the consequences of not getting there. I think if you study history and see what civil wars can be like and realize that you could have a civil war. Don't assume that you don't and you will see that when people put winning and getting your way above all else, they will distort the truth, cheat the rules and be violent towards each other because because winning is of the utmost importance, the whole suffers greatly. and it affects everyone negatively, so, but I think we have a mentality where everyone, not everyone, but I think the biggest problem of our time is people.

They are passionately attached to their opinions and are also unable to deal with thoughtful disagreement about how to overcome those disagreements in agreement and get things right together. I also want to talk about

capitalism

and I know you've done a deep dive into this, you did a study on this not long ago and it also relates to education which I know you and your wife are intimately involved in in the state of Connecticut, which if you look at that state it also has a wealth gap. How would you diagnose the current state of

capitalism

? It's broken?

Yes, the piece you are referring to is available on LinkedIn if everyone wants, it is why and how capitalism needs to be reformed. You know, it's something simple. That? What are your objectives and is the system achieving the objectives? um and um, I don't know if we could agree on our goals, but I would say the American dream as I grew up and really believed in it and benefited from it was the idea. of equal opportunity and doing so would take advantage of the largest percentage of the population to find out where the talents are everywhere and also people would believe that the system is fair and so I think that when I look at that I don't think that the system is broken .

I believe in capitalism, but the nature of capitalism in various ways can produce these disparities that need to be addressed, so education is a good example, as you point out, my wife and I'm particularly my wife. See, children can't have the most basic education, the needs are widespread, okay, let me give you a picture in Connecticut, Connecticut is the richest state in the country and it has the largest wealth gap and the wealth is concentrated in a small percentage of the population. Relative to the total, 22 percent of high school students in Connecticut are disengaged or disengaged disengaged means they have an absenteeism rate greater than 25 percent and are failing their classes or disengaged means they do not come to school. school are out of school they don't know where 22 percent of high school students are those where those high school students are going to be what kind of citizens are they going to be are they going to be net contributors or Are they not going to have that deficit?

It's fair? Well, education, we were in a situation where Kovid makes it clear that they did not have computers, so we had to do it and the state did not have the money to buy them. computers, so we had to buy 60,000 computers for kids who didn't have computers and didn't have connectivity, okay, but there are so many that there is poverty and food is a problem in that type of environment, so it is not a Equal opportunity now, why does it exist again and there are no bad people producing it, but the profit system is not good enough to be able to allocate resources that way?

In other words, not everything can be achieved with profit, for example. The pursuit of profits logically and for the efficiency of the entire system is going to replace people and jobs and therefore contributes to the wealth gap. It is smart for a company to have technology that replaces people in jobs, but it comes at an increasingly smaller level. percentage of the population that makes that technology and benefits it and produces that wider wealth gap, so that wider wealth gap is not an unfair system either. What I found is that the top 40 percent because I broke it down into the top 20 of Quinn's tiles.

Each 20 to 40 percent of the population spends on average five times more money on their children's education than those in the bottom 60 percent; In other words, most people have this, elites spend five times as much money on their children's education. the elites and the children at the bottom want to take good care of their children, they are not doing anything wrong, but that perpetuates an opportunity gap, so those structural reasons are not bad, but those structural reasons are leading to a result. I don't think that's fair or what we want because we're not taking advantage of that talent and it could lead to a civil war or, you know, some kind of revolution, so you have to deal with that.

I also have to wonder how the states are doing during the pandemic and you're just thinking about the public education system and funding those things. How do you think that exacerbates the problem and what should be done? Do we need more government to get in here do we need the private sector to step up do we need more philanthropists to embrace local public schools what do you think needs to change before we get to what I think needs to change I want to build on your point of what is and what it is is in a lot of places and it's ironic in the richest states, they have the most debt and they have the biggest wealth gaps, so this is true not just in Connecticut, New York, New Jersey, Illinois, you know, and in various places. and that produces a dynamic that has been that everyone sees that it is true over time you cannot increase taxes because people will leave and will have too great a burden and you cannot reduce spending because it is inhumane for those other people um and when you have a big debt and you have a big wealth gap and you have a recession you have a conflict you have a real problem the United States as a whole has that problem but the federal reserve buys closes the gap by buying the money but printing the money and buy that gap, buy that debt, I think at the end of the day the question will have to arise: will they have to do it?

How will that question be addressed? Because, you know, at the state or local level because it exemplifies what happens when debt can't be bought or then I think we're in an era of a lot of monetization, unfortunately all of this reaches a point where it's an intolerable crisis and then Extraordinary measures are coming and I think the path will look like this, so what does that mean for my generation? I'm a millennial. You know, my generation. I guess we are becoming today's parents and the younger generations will be the ones who really have to do it. deal with the consequences here, what do you think the world we'll finally inherit looks good again?

I think you have to be aware of what that whole cycle is like. That's one of the reasons I wrote that LinkedIn article so that the changing world order and LinkedIn if you look at it because otherwise it will surprise you, I think, but I would say that when you look at that, it's the same fundamentals, Educate your children well, teach them self-discipline, character, citizenship, those things. to be strong, teach them to have an open mind to go read history or listen to other people, teach them to be strong, those are the things you can give and yes, don't be naive, don't be blind. uh I think just the experiences you've had are all you need, the future will be very different than your past because of the way these things go in cycles.

The funny thing is that I think almost everyone expects the future to be a modified version of the present and/or what they have recently experienced and most of the time it is more the opposite than similar if, in fact, if you take each decade , the 1920s, the 1930s were the opposite, the 1930s, the 1940s were the opposite, more opposite, that's similar and you take each decade and there are more opposites and similar, so open your mind to that strong, well-educated character, those are the things at the end of the day that will be very useful to you.

You know, I just want to read something you wrote because it really stuck. with me you said quote, we are like ants preoccupied with our work of transporting crumbs in our tiny lives instead of having broader perspectives of overall patterns and cycles, the important and interrelated things that drive them and where we are within the cycles. and what is likely to happen and of course I think later in the article you even said that you are just beginning to put together the crumbs of the picture here and that you don't have all the answers of course and no one really does, except me.

I guess to round it out here, what do you say? I guess you were describing what our world might look like, but if you could boil it down to one thing, what would be the most important problem we need to address first? Of course the biggest issue goes back to one's approach to life, it depends on the level at which you want the question answered, but the biggest issue is having a radically open mind, you have to make your own decisions and you have to take them. well, assimilate, well, not be closed-minded and um and have the character to do it and then go back and understand the stories and how the patterns of the stories and then assimilate from the people around you, the smartest people that you know. information and triangulate well with them to make that decision, I mean, I would say it's global at any time, the most important things that anyone could do, for now, I would say realize that these changes take a global view, take um , make comparisons, um of Countries put things in perspective and then if I stick to reverse investing, I'll be more specific and answer your question.

First I would realize that cash is not a safe investment, it is a very risky investment and I would know how to diversify well. and what I mean is diversify well, I mean diversify globally in countries, markets and currencies, how about you have an idea about digital currencies? This is something that many young people talk about. Any opinion that digital currencies exist. I divide them into two types: there is the type where it is like a bitcoin type currency that will be an alternative currency in terms of its supply, demand and an alternative store of wealth and then there are digital currencies, which means that there will be other types of currencies, say the dollar, the euroor the Chinese remn, which are digitized.

Well, I think we'll see a lot more of that second type, but I think there are three main problems with the first type. Bitcoin kind of that um uh theoretically it's good but the three basic things are um uh a currency has to be an effective medium of exchange to store wealth and governments want to control it so today I can't take my bitcoin yet and buy things easily with it and as a store of wealth, um, it is so volatile, um, that its volatility based on speculation is much higher than it is not an effective store of wealth and that is also one of the reasons why it is a problem. be a transaction vehicle because if a seller says that they are going to receive payments in bitcoins and they don't know what that means in terms of their other obligations, that's a problem and then thirdly, you know that governments won't do it and when, if it becomes material, the governments will not allow it, I mean, them.

They will ban it and they will use every tooth they have to enforce what they would say, okay, you can't have, you can't transact with bitcoin, you can't have a bitcoin, so you have to be almost like um it is. It's a serious crime and I'm going to have to be a criminal to be able to transact, they banned gold, you know, what about gold? But gold was a store of wealth so if I had to say what would I prefer bitcoin to gold uh no I wouldn't prefer bitcoin to gold gold is uh um it will be the vehicle that central banks and Jewish countries exist as an alternative to regular cash um because every central bank can print cash but through transactions over time when countries They dealt with each other and used gold because they didn't have to worry about being devalued by some country that was going to print gold so they're still our third largest reserves if you take the central bank reserves, the largest is the dollar, the second largest. are euros and the third largest is gold, so, but, if I'm dealing with classical currencies, I'm really entering the domain of storekeepers' wealth which also includes stocks that store all the wealth, but I don't think the digital currencies will succeed and in the way that people expect them to, for those reasons, really interesting ideas and of course, you know, I recommend people read your Ray's changing world order and if you have any recommendations book, don't hesitate to stop by. those too thank you very much for your time thank you julie