Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Authoughts podcast.
Speaker 2: I'm Tracy Allaway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 4: Joe, have you.
Speaker 2: Ever seen those visuals of a trillion dollars where it's like,
Speaker 2: here's one hundred, here's one hundred dollar bill, here's a
Speaker 2: stack of ten thousand dollars, here's a million dollars, and
Speaker 2: eventually you get to one trillion, and it's just all
Speaker 2: these palettes of notes that are worth a billion each
Speaker 2: and they're like covering the size of a football field
Speaker 2: or something, and they're double stacked.
Speaker 3: I love that. I never really know what they mean.
Speaker 3: It's like, oh, this is as big as the Statue
Speaker 3: of Liberty or something like that, and it's like, okay,
Speaker 3: like I mean that is objectively big.
Speaker 4: I get.
Speaker 3: Is that a good way to visualize mine in terms
Speaker 3: of what it means? I don't know, but yes, money,
Speaker 3: especially your small denomination bills, can really pile up before
Speaker 3: you get to real value.
Speaker 2: Well, okay, speaking of big numbers, the US budget deficit
Speaker 2: was about one point eight trillion in twenty twenty four,
Speaker 2: so if we stick with the visual, almost almost two
Speaker 2: football fields of double stacked palettes of one billion dollars each.
Speaker 2: So okay, quite a lot. But I think this ill
Speaker 2: we saws, I know, but we didn't see a trillion dollars.
Speaker 2: We saw billions. And I think this kind of illustrates
Speaker 2: one of the really difficult things about finance and debt,
Speaker 2: which is all of us, as you mentioned earlier, kind
Speaker 2: of struggle to grasp the scale of these numbers that
Speaker 2: are involved here, and one point eight trillions seems so
Speaker 2: abstract that we have to describe it using football field
Speaker 2: analogies or whatever else. And if we can't really grasp
Speaker 2: the scale of the debt because it's just this number
Speaker 2: that no one really understands or even takes seriously, then
Speaker 2: it feels like it's difficult to tackle to solve.
Speaker 4: Right.
Speaker 3: Well, I'll say two things on that. I mean, I
Speaker 3: think a you have to question, like, at any given point,
Speaker 3: what isn't a called economy solving for right? And so
Speaker 3: people have anxiety about the size of the debt and
Speaker 3: the deficit. And then it's like, but you know a time,
Speaker 3: you know, there's also.
Speaker 2: A high and they also have anxiety about social services, yeah.
Speaker 3: And things like that, And then there is also the
Speaker 3: question of you know, we think of a household or
Speaker 3: any entity as like you have to have money to
Speaker 3: pay your bills. Are there other dynamics besides numbers that
Speaker 3: cause a financial crisis. So, for example, you could have
Speaker 3: a country with very high debt to GDP and it's
Speaker 3: fine because you know, it goes on for longer than
Speaker 3: people expect. And you can have countries with low debts
Speaker 3: and deficits, but because they have an internal political crisis
Speaker 3: because people no longer have confidence in the government of
Speaker 3: this to pay it back. You can have a crisis
Speaker 3: even at low levels. And so even thinking about what
Speaker 3: does it mean to solve a debt, talk about debt
Speaker 3: at the national level is simultaneously a financial discussion and
Speaker 3: one about political confidence.
Speaker 2: A social conversation. All right, Well, on that note, I
Speaker 2: am very happy to say that I think we have
Speaker 2: the perfect guest to talk about all of these things,
Speaker 2: someone who has consistently had some very big thoughts about
Speaker 2: these very big numbers. We're going to be speaking with
Speaker 2: Ray Dallio, the legendary founder of Bridgewater, the author of
Speaker 2: numerous books, including a new one titled How Countries Go Broke,
Speaker 2: principles for navigating the big debt cycle, and most importantly,
Speaker 2: a key player in the invention of the chicken nugget.
Speaker 2: I am very excited. Ray, Welcome to the show.
Speaker 4: Wow, what an introduction. Thank you.
Speaker 3: Tracy's good at introductions. If it had been me, I'd
Speaker 3: just been like Ray Dalio, you all know his name,
Speaker 3: let's break it in. But Tracy does it properly, especially
Speaker 3: for a guest of your stature.
Speaker 4: You do pretty good too, Joe, thank you for having me.
Speaker 2: So I want to start with the really important stuff.
Speaker 2: So first, let me just thank you on behalf of
Speaker 2: millions of Americans for your contribution to the chicken nugget.
Speaker 2: What did you do exactly when it comes to chicken nuggets?
Speaker 4: What was your role? Well, when I was pretty young,
Speaker 4: I started trading commodities because they had the lowest margin requirements.
Speaker 4: So I figured if I was going to be right
Speaker 4: and I wouldn't do it, if I wasn't going to
Speaker 4: be right, that I would be able to get the
Speaker 4: most amount of leverage out of these and so I
Speaker 4: started trading commodities before most people started to trade commodities,
Speaker 4: and then that led me in nineteen seventy three when
Speaker 4: I graduated from business school to become a commodity investor
Speaker 4: sort of. And what I did was I was in
Speaker 4: charge of institutional futures at one of these brokerage houses,
Speaker 4: and that brought me in contact with the mechanics of
Speaker 4: how hedging and how chickens and grain and everything worked.
Speaker 4: So fast forward, I got to meet the biggest chicken
Speaker 4: producers in the world, and McDonald's hired me as a
Speaker 4: consultant of sorts to advise them on how they were
Speaker 4: going to safely price the chicken McNugget. You see. Their
Speaker 4: worry was that if they this was very volatile times
Speaker 4: then and their worry was if they bought the chicken
Speaker 4: and they put it on the menu and the prices changed,
Speaker 4: like went up a lot, they'd have to change the
Speaker 4: menu price. So they needed to know that they could
Speaker 4: have stable prices. And we walked and I knew that
Speaker 4: the mechanics of chicken. He had you produce it. There
Speaker 4: were little chicks and they didn't cost much. And what
Speaker 4: cost most of the money to make a chicken was
Speaker 4: the corn and soyed meal that they produce as feed
Speaker 4: to feed them to get them to be big chickens
Speaker 4: and so on. And so I went to one of
Speaker 4: my chicken producing clients and McDonald's, and I showed how
Speaker 4: this chicken producing client could hedge the price and give
Speaker 4: them a stable price, and because of that, they were
Speaker 4: able to put chicken McNuggets on the menu.
Speaker 3: I love this story for multiple I love the idea
Speaker 3: of creating a sort of synthetic financial chicken McNugget price
Speaker 3: through the inputs. You know, I want to say, you know,
Speaker 3: for a long time, I probably bought into this view
Speaker 3: that the real creators in an economy are the farmers
Speaker 3: and the growers and the entrepreneurs who you know, come
Speaker 3: up with a distribution mechanism, and it always sort of
Speaker 3: the people in finance are thinking, you know, is seen
Speaker 3: as like, oh, they're just sort of speculating or betting
Speaker 3: on that. And I've changed my mind over the years.
Speaker 3: And you know, there are many good ideas in the
Speaker 3: world that people have on paper and labs and so
Speaker 3: forth that never exist because the financing mechanisms to bring
Speaker 3: them to place don't exist. And so I would say
Speaker 3: that if you like, especially in nineteen seventy five, when
Speaker 3: I imagine we didn't in the mid nineteen seventies, when
Speaker 3: we didn't have the same level of easy running computing
Speaker 3: power in as liquid markets, et cetera. That someone who
Speaker 3: figures out how to create a synthetic McNugget price is
Speaker 3: as much the inventor of the McNugget as the person
Speaker 3: who figured out how to, you know, ball and fry
Speaker 3: the chicken.
Speaker 4: Do you think I can claim being the inventor the
Speaker 4: chicken nugget?
Speaker 3: I don't know.
Speaker 4: I think that I think that'd be overreach.
Speaker 3: Okay, well, anyway, I love that.
Speaker 2: I love that story, all right, So I want to
Speaker 2: get to debt the actual important things. So the thrust
Speaker 2: of the new book, it kind of reminds me of
Speaker 2: one of my all time financial favorites, which is a
Speaker 2: history of interest rates by Homer and Sydney. And you're
Speaker 2: kind of taking a similar approach, although maybe you're not
Speaker 2: going all the way back to ancient Babylon or something
Speaker 2: like that. But why did you decide to focus on
Speaker 2: debt cycles? What's the allure for you? And what do
Speaker 2: you learn from history?
Speaker 4: In nineteen seventy one, before after I graduated college and
Speaker 4: before I went to business school, I clerked on the
Speaker 4: floor of the New York Stock Exchange on and I
Speaker 4: filed the markets. I filed the market since I was
Speaker 4: a kid. I first got involved in markets when I
Speaker 4: was twelve. I used to caddy and then it was
Speaker 4: the time of the stock market, and the stock market
Speaker 4: was very hot, and I took my cadding money and
Speaker 4: I did that. But anyway, that led me to be
Speaker 4: on the floor of the New York Stock Exchange and
Speaker 4: follow markets. And on August fifteenth, nineteen seventy one, Richard
Speaker 4: Nixon Sunday Night, got on the television and told people
Speaker 4: that the monetary system was going to change, that the
Speaker 4: money that they thought they could get gold was thought
Speaker 4: of as money then, and paper money was like checks
Speaker 4: in a checkbook, didn't have any intrinsic value, no value
Speaker 4: that they would not get because there was a fixed
Speaker 4: exchange ring. And he gave some sort of BS story
Speaker 4: about why that was, which it was really because they
Speaker 4: didn't have enough gold to back up their money claims.
Speaker 4: And I walked on the floor of the New York
Speaker 4: Stock Exchange. I thought, this is a big crisis. This
Speaker 4: is going to be terrible, and I thought the stock
Speaker 4: market I was going to go down a lot and
Speaker 4: I went on the floor and it went up the
Speaker 4: most in years. And I didn't understand that. I didn't
Speaker 4: understand why, And so I started to do research, and
Speaker 4: I found that on March fifteenth, nineteen thirty three, President
Speaker 4: Roosevelt got on the radio and made the exact same
Speaker 4: announcement for the exact same reason. And I studied, then,
Speaker 4: why is it that they went up a lot? Okay,
Speaker 4: you devalue money. When you devalue money and you make
Speaker 4: money very easy, things go up. And so I learned
Speaker 4: not just the nature of that mechanic, but I learned
Speaker 4: that things that surprised me in my life often were
Speaker 4: things that never happened in my lifetime, but they happened
Speaker 4: in times in history. So I studied the Great Depression.
Speaker 4: I figured, okay, I should study all big things that happened,
Speaker 4: and I studied that Great Depression. And as a result
Speaker 4: of doing that, in two thousand and eight, I was
Speaker 4: able to anticipate the global financial crisis ahead of it.
Speaker 4: And the reason is is because when you have a
Speaker 4: debt crisis and interest rates go down and hit zero,
Speaker 4: so they can't go down anymore. Cutting interest rates anymore
Speaker 4: is no longer going to work. And what I learned
Speaker 4: from studying this event in nineteen thirty three is that
Speaker 4: when that happens, the government prints money and buys the bonds.
Speaker 4: So what happened in two thousand and eight was exactly that,
Speaker 4: and I wouldn't have understood it if I didn't study
Speaker 4: what happened back then. So that changed my whole approach
Speaker 4: to decision making, which is also why I did this
Speaker 4: study recently, and that came out as the book that
Speaker 4: you're referred to, you know, Principles for dealing with the
Speaker 4: Changing World Order. I needed to study things that hadn't
Speaker 4: happened in my lifetime. So we'll get into it. Yeah,
Speaker 4: there are things that are happening to us in our
Speaker 4: lifetimes that haven't happened before that you have to go
Speaker 4: back to the thirties or other periods of time to understand.
Speaker 4: And related to that is this money debt thing.
Speaker 3: Let's talk about the present tense And obviously Tracy and
Speaker 3: her fantastic intro talked about the size of the deficit
Speaker 3: life year, and you know, you see so much about
Speaker 3: the debt. You know, there's two things in the story.
Speaker 3: You're told there's sort of two things that struck me
Speaker 3: right now, Which is one is, obviously we don't have
Speaker 3: a form of currency that's quote backed by anything. There's
Speaker 3: nothing to quote run out of that we couldn't mate it.
Speaker 3: It's the sort of fiat currency in the truest sense
Speaker 3: of the word. There's also the other thing is you
Speaker 3: know you mentioned stock surged because of these moves represented
Speaker 3: this big fiscal loosening. We are in an era in
Speaker 3: which inflation has been high for several years. Inflation is
Speaker 3: still above target, and many people would say this still
Speaker 3: most persistent issue right now is this issue of too
Speaker 3: much money and that there's still things are too expensive,
Speaker 3: et cetera, and so there's still this impulse to titan
Speaker 3: So when you think about these lessons that you're talking about,
Speaker 3: then when you look at our fiscal position in twenty
Speaker 3: twenty five, what do you think about what? When you
Speaker 3: look at our fiscal position, what do you see?
Speaker 4: Again? I think you can tell from the way that
Speaker 4: I talk. I think about the mechanics and how does
Speaker 4: it work. And in answer to your prior question, the
Speaker 4: reason I'm writing this book is because I think that
Speaker 4: we're at an inflection point and I think that people
Speaker 4: do not economists and people and everybody. Policy makers don't
Speaker 4: adequately understand the big debt cycle. They understand the shorter
Speaker 4: term debt cycles. You know things economies, we inflation goes down,
Speaker 4: they make credit available, things go up, stocks and everything
Speaker 4: goes up until you get too much and you get inflation.
Speaker 4: Then they tighten credit and so on. But the big
Speaker 4: debt cycle isn't understood. And yet we're there, We're at
Speaker 4: the brink of one of these. And so what I
Speaker 4: think about this is that there are really three factors
Speaker 4: that drive the big debt cycle, and I want to
Speaker 4: convey those. I'm a part of my life that I'm
Speaker 4: trying to convey those. And so, okay, most people think
Speaker 4: interest rates go up because of inflation tightness or ease
Speaker 4: of monetary policy, but they don't realize that there are
Speaker 4: limits to dick growth. And here's how it happens. One
Speaker 4: man's debts or another man's financial assets. So when you're
Speaker 4: holding a lot of bonds, that's a large percentage of
Speaker 4: the portfolio, that's also a large debt. And think of
Speaker 4: the credit system like a circulatory system that brings nutrients
Speaker 4: to all of the parts of the body. So you
Speaker 4: give mind power. And if that buying power is used
Speaker 4: to create productivity, then what it does is it produces
Speaker 4: incomes that are large enough to pay the debts back
Speaker 4: and give you productivity and everybody's app But if the
Speaker 4: debts are too large and don't produce the productivity, you
Speaker 4: don't have the income that's necessary to service those debts.
Speaker 4: And so in this circulatory system, if it's healthy, you're
Speaker 4: seeing incomes rise with the debts, and you're seeing the
Speaker 4: system work well. When debts rise relative to incomes that
Speaker 4: are needed to service the debt, it's like plaque in
Speaker 4: the system, building up in the circulatory system because it
Speaker 4: means that first of all, you have a debt service
Speaker 4: problem that you have to pay the debt service, and
Speaker 4: that's like plaque in that it leaves less room for spending. So,
Speaker 4: for example, the US government has an interest bill that's
Speaker 4: about a trillion dollars a year, and if they didn't
Speaker 4: have a trillion that didn't have that interest bill, they'd
Speaker 4: have a trillion dollars more spending, and that process gets
Speaker 4: worse and worse over time. In addition, one has to
Speaker 4: roll over the debt that was last accumulating, so we
Speaker 4: have to roll over this year about nine trillion, a
Speaker 4: little over nine trillion dollars of debt. That means the
Speaker 4: new you know, they get it runs out, then you
Speaker 4: have to sell it again. And when they have a
Speaker 4: lot of that debt, that's a problem. And when you're
Speaker 4: doing putting a lot more debt on top of that
Speaker 4: pile of debt, so it's not just the existing debt
Speaker 4: that's a problem, but you have to add more debt sales,
Speaker 4: which equals essentially the budget deficit, which now is going
Speaker 4: to be about seven and a half percent of GDP.
Speaker 4: You've got to sell those. You have to sell those
Speaker 4: to people or institutions or central banks or sovereign funds
Speaker 4: that hold these bonds while they're already holding too many
Speaker 4: bonds and now they have to roll them over, and
Speaker 4: you have to sell these new bonds that are coming on,
Speaker 4: and that can be a problem, and it can be
Speaker 4: worse than that, because if they don't have if they say, hey,
Speaker 4: there are too many of these bonds and i've got
Speaker 4: enough and I don't want to buy it, or worse,
Speaker 4: there could be some reasons that they don't want to
Speaker 4: buy it, like for example, sanctions. Okay, we're living in
Speaker 4: a world similar to the nineteen thirties, and if I
Speaker 4: was the Chinese, I would worry that what would happen
Speaker 4: to me might happen what happened to the Japanese in
Speaker 4: the nineteen thirties, which is that we froze their bonds,
Speaker 4: a meaning they didn't get their money. And so nowadays,
Speaker 4: with sanctions and too many bonds and so on, when
Speaker 4: I calculate who are the buyers and how much do
Speaker 4: we have to sell, I find a big imbalance, and
Speaker 4: I know how that works. You know what happens is
Speaker 4: central banks buy these bonds, They print money and buy
Speaker 4: the bonds, and then they lose money on the bonds,
Speaker 4: and you get a negative network at the central bank,
Speaker 4: and you get this spiral when you reach the part
Speaker 4: of the cycle that you have to borrow money to
Speaker 4: pay debt service, and then the holders of those bonds say, okay,
Speaker 4: it's a risky situation. In the private credit market, we
Speaker 4: call that the debt spiral, the debt debt spiral, because
Speaker 4: when you have to to roll over the debts but
Speaker 4: it's risky, the credit spreads go up. And when the
Speaker 4: credit spreads go up, then it adds to the debt
Speaker 4: service and it becomes a spiral. That's a problem. So
Speaker 4: the way I calculate it is that we're quite near
Speaker 4: that point.
Speaker 2: Can I just press you on the inflection idea, because
Speaker 2: I think this is one of the things that people
Speaker 2: really struggle with, because it is true the US has
Speaker 2: a lot of debt, and it's true that it's issuing
Speaker 2: more debt in order to pay down interest. But at
Speaker 2: the same time, nothing really bad has happened quite yet,
Speaker 2: and I think there's a sense of call it maybe
Speaker 2: debt doom fatigue. We've had warnings over the deficit for decades. Now,
Speaker 2: how do you actually go about figuring out when the
Speaker 2: cycle will turn or what specific things do you look
Speaker 2: for as the proximate catalyst for that inflection point?
Speaker 4: Well, that's why I wrote my book How Countries Will
Speaker 4: Go Broke that by the way, when I say it's
Speaker 4: a book, it'll come out as a book, but I
Speaker 4: made it free online for anybody who wants to read it,
Speaker 4: and what I wanted to show was the actual mechanics
Speaker 4: of how that happens. So I hope your listeners will
Speaker 4: get it and you know it's free, it's there for
Speaker 4: you to start to consider, and what it is is
Speaker 4: look at that mechanics and the signs that you can
Speaker 4: see that happening. In other words, first start to do
Speaker 4: the supplied demand analysis. Simple when that dynamic I describe
Speaker 4: starts happening, you can see it because the amount that
Speaker 4: is sold is not bought by the private sector anymore
Speaker 4: of those other buyers, and then the central bank has
Speaker 4: to come in and then print money and make up
Speaker 4: that difference, and then that the value is money. So
Speaker 4: we saw let's call it a palpitation. I give this example.
Speaker 4: It's like a heart attack. We saw that when in
Speaker 4: twenty twenty, in twenty twenty one, when the government needed
Speaker 4: in twenty twenty to send out a lot of money,
Speaker 4: it actually sent out about twice the amount of money
Speaker 4: that people in their incomes lost or businesses lost. They
Speaker 4: sent out twice as much amount of money then and
Speaker 4: then in twenty twenty one they did it again without
Speaker 4: the need. But there was a move from a right
Speaker 4: of center policy to a left of center policy in
Speaker 4: which universal basic income and the desire to do that
Speaker 4: put out that money. And so where did the government
Speaker 4: get the money from. They got it from the central
Speaker 4: bank that produced the money and sent it out, and
Speaker 4: so everybody's getting all this money and they're surprised that
Speaker 4: prices went up so okay, So you have that wave
Speaker 4: of inflation that was like a warning heart attack. So
Speaker 4: what I'm trying to do in that book is show
Speaker 4: the dynamics and the mechanics that show how you can
Speaker 4: calculate what the supplied demand is and what will happen
Speaker 4: at what's likely to happen, and what has happened through time.
Speaker 4: So I go back through time and I show these many,
Speaker 4: many cases of it so that you can distinguish it,
Speaker 4: because I'm with you the alternative, which has been a problem.
Speaker 4: You know, it's like somebody who's built up their cholesterol
Speaker 4: and lived this way and they say, I haven't had
Speaker 4: a heart attack, and they get that as positive reinforcement, and.
Speaker 2: I guess the nuggets, and there we are.
Speaker 4: So the question I have for everybody, for those in
Speaker 4: the administration and for others, is that dynamic which you
Speaker 4: can see we're played out in there. You could see
Speaker 4: the moment by moment, literally month by month changes that
Speaker 4: are the symptoms and the indicators that you're having a
Speaker 4: heart attack, an economic heart attack at that crisis. It's
Speaker 4: shown in that book. And the only thing I want
Speaker 4: to do is, first of all, say is that logical?
Speaker 4: Do you see it? And so in our conversation, I
Speaker 4: can't show you the charts and numbers and so on,
Speaker 4: but I can tell you. And so we should be
Speaker 4: asking ourselves is that logical? Has it happened before? And
Speaker 4: then what do we do about it? Rather than say
Speaker 4: we don't have to worry about it?
Speaker 3: What does it look like? Specifically? Okay, you walk through
Speaker 3: the math and you talk about you know, at some
Speaker 3: point you could talk about supply and demand and is
Speaker 3: the demand actually there? And there have been warnings, as
Speaker 3: both you and Tracy acknowledged for years, and you know
Speaker 3: you have these little tremors or maybe heart attacks and
Speaker 3: so forth. Let's say it happens, and I don't know
Speaker 3: what it is, but what is the equivalent in twenty
Speaker 3: twenty five or twenty twenty six or twenty twenty seven
Speaker 3: of Nixon suddenly taking us off the gold standard?
Speaker 4: Is it?
Speaker 3: And you sort of hinted at it, do you see
Speaker 3: plausibly mixing up with geopolitics from the trade wars? An
Speaker 3: equivalent of saying we don't acknowledge China's debt, that that's
Speaker 3: not real debt. We're freezing it, we're paying it off.
Speaker 3: They have no claims to it. Is that something that
Speaker 3: you could see happen? What does that day look like?
Speaker 3: In your view?
Speaker 4: That day looks like what happened on August fifteenth, nineteen
Speaker 4: seventy one, but just much bigger. You'll see you'll see
Speaker 4: the supply demand problem. You will see a spike in
Speaker 4: interest rates, a tightening very much by the way these
Speaker 4: always happen, that happened in twenty twenty. There'll be a
Speaker 4: spike in interest rates. It will show up as interest
Speaker 4: rates rising and the value of money going down, particularly
Speaker 4: in relation to gold or other currencies. Perhaps, although this
Speaker 4: is something that will affect all currencies because they'll all
Speaker 4: be in the same they'll all depreciate it get together,
Speaker 4: and you'll see the rates rising, even though the Federal
Speaker 4: reserve is easy. Then you will see the Federal Reserve
Speaker 4: come in and buy and do another QE, and then
Speaker 4: you're going to see the kind of reaction that you
Speaker 4: saw back in twenty twenty and twenty one on where
Speaker 4: not only the inflation component but gold and other asset
Speaker 4: prices in the scent going up, it'll look like that.
Speaker 3: But just to be clear, I want to press on
Speaker 3: this point. When that what is the equivalent announcement of
Speaker 3: a Nixon going off the gold standard in nineteen in
Speaker 3: August nineteen seventy one, what is that thing today? Is it?
Speaker 3: Do you?
Speaker 4: They won't. They won't because because we have a Fiat monetary.
Speaker 3: Yeah, so we can't do it can't be the same.
Speaker 4: It doesn't require an announcement, But do.
Speaker 3: You expect there to be a policy announcement of we
Speaker 3: are no longer paying the debt, say owned by China.
Speaker 4: I'll tell you what you will certainly see, and then
Speaker 4: I'll tell you what you will possibly see. What you
Speaker 4: will certainly see is the Federal Reserve coming in and
Speaker 4: buying a lot like it did. And it doesn't have
Speaker 4: to say an announcement, but it'll come in like that
Speaker 4: like they did in two thousand and eight, or like
Speaker 4: they did in twenty twenty, except in a bigger way.
Speaker 4: But what you might have in preparation for that, like
Speaker 4: in nineteen seventy one, is certain actions taken to deal
Speaker 4: with that issue, such as extending the maturity of the debt.
Speaker 4: These are possibilities.
Speaker 3: Can you say you're not like a default on some
Speaker 3: people's debt.
Speaker 4: Yeah, but I think the government would do it such
Speaker 4: as that country is going to be sanctioned, and therefore
Speaker 4: to sanction them, we are not going to pay the debt.
Speaker 4: That would be a very classic and certainly fireworks should
Speaker 4: go off in your mind about that signal. I'm not
Speaker 4: saying it's going to happen, but that is one of
Speaker 4: those things. And you could see then the government saying
Speaker 4: that they're going to restructure the debt. They won't say
Speaker 4: it's a default. They will say under this policy, we're
Speaker 4: going to be better off if we don't vault the fault.
Speaker 4: We won't change what you're going to get paid, but
Speaker 4: we're going to spread it out over more years. That'll
Speaker 4: be a restructuring of the debt combined with some monetization
Speaker 4: of the debt, in other words, a central bank policy
Speaker 4: where they're buying some of that debt. That'll look like that.
Speaker 4: If it gets bad, then you could have more extreme
Speaker 4: things happened.
Speaker 2: Since we're on the topic of major events in the
Speaker 2: financial system, wonder if you've been following any of the
Speaker 2: papers or thought pieces coming out of parts of the
Speaker 2: Trump administration, and specifically this hypothetical situation of a Mara
Speaker 2: a Lago accord where the US basically gets a weaker
Speaker 2: dollar and also gets to maintain its special status in
Speaker 2: the global financial system. What do you think about the
Speaker 2: possibility of the US restructuring the entire system so as
Speaker 2: to further benefit itself.
Speaker 4: I think that that's a real possibility, and it's done
Speaker 4: semi secretively. But I want to be clear what that's like.
Speaker 4: I don't think it's a depreciation of the dollar in
Speaker 4: relationship to all other currencies. I think all other currencies
Speaker 4: will depreciate with the dollar. In other words, it's up
Speaker 4: to each central bank, and pretty much in terms of
Speaker 4: other currencies, it's an ugly content. You know, there's the
Speaker 4: Euro and the European situation, which is terrible. There's the
Speaker 4: Japanese yen. They have a huge amount of debt which
Speaker 4: they're monetizing and so on. There's China's REMMB and that's
Speaker 4: not going to be a safe soorehold of wealth. And
Speaker 4: none of those currencies are going to sort of be
Speaker 4: what you'd call strong. So I think it would be
Speaker 4: very much like the nineteen seventies, which is very much
Speaker 4: like the nineteen thirties in which they all go down
Speaker 4: in relation to gold or other hard assets like that.
Speaker 4: And you know, what is the alternative money? Will be
Speaker 4: the question, what's the alternative money that is stable and
Speaker 4: supply But bitcoin might be a bit part of that,
Speaker 4: could be a big part of that. But what is
Speaker 4: the alternative money? Because debt is money and money is debt.
Speaker 4: When I say debt is money, debt is money. Cop
Speaker 4: you're holding this and you're people are going to give
Speaker 4: you money, and money is stored in a debt instrument.
Speaker 4: When you're holding your money, you're putting it in a
Speaker 4: debt instrument, So they're one and the same. When you
Speaker 4: have too much debt, it goes down. So I would
Speaker 4: think it's more like gold bitcoin. What is the alternative money?
Speaker 4: Money has two purposes, right, a medium of exchange and
Speaker 4: a storehold of wealth. As far as a medium of exchange,
Speaker 4: it can keep working as a medium of exchange. In
Speaker 4: Germany's Ymar Republic or Argentina recently, you can you know,
Speaker 4: you can carry back barrels of wheelbarrows of money and
Speaker 4: it's you can still exchange it. They had so much
Speaker 4: that they couldn't count it, so they waited. This is
Speaker 4: literally the case. So the money will can be used
Speaker 4: for medium exchange, but as a storehold of wealth, it's
Speaker 4: not going to be used, and people will look for
Speaker 4: other storeholds of wealth that are movable and tradeable. So
Speaker 4: like in the thirties and then the forties, what did
Speaker 4: countries do with each other. They're not going to trust
Speaker 4: that the other country is not going to print the
Speaker 4: money or do that, So they exchanged gold. Because gold
Speaker 4: has the attributes, it's limited in supply, it's not easy
Speaker 4: to manufacture, and throughout history it's been held by central banks.
Speaker 4: It's used today. Gold is the third largest reserve currency.
Speaker 4: It's the dollar, then the euro, then gold, and then
Speaker 4: the Japanese in and so that's why I'm saying I
Speaker 4: think that in that particular dynamic, you say, well, what
Speaker 4: is it that's the storehold of wealth, and you see
Speaker 4: and I emphasize gold, but bitcoin two has elements of that.
Speaker 4: It's not real estate because real estate is down. You
Speaker 4: have a problem with real estate. Real estate is nailed down.
Speaker 4: You can't move it around, you can't. It doesn't work
Speaker 4: that way. It's very interest rate sensitive, so when interest
Speaker 4: rates go up, it hurts it. It's also very easily
Speaker 4: taxed because it's not moved, you can easily tax it,
Speaker 4: so it's not like it could be exchanged. So there's
Speaker 4: a very limited number of alternative moneies.
Speaker 3: So you know when people say something like a mar
Speaker 3: Lago chord and they harken back to the Plaza coord
Speaker 3: that was clearly about we want a weaker dollar because
Speaker 3: we want it weaker against other FIAT currencies for the
Speaker 3: virtue of strengthening American manufacturing. What you're saying then is
Speaker 3: that it couldn't work that way this time. We can't
Speaker 3: think it's such a tight analog because it's not going
Speaker 3: to weaken just against other currencies, it'll weaken against heart assets.
Speaker 3: Just real quickly, if we were if we had you
Speaker 3: on the if we had had you on the podcast
Speaker 3: in twenty fifteen, we were talking about something else. Are
Speaker 3: you more exposed in some way more bullish on gold
Speaker 3: today in twenty twenty five due to this, then you
Speaker 3: were say, if we had been talking to you ten
Speaker 3: years ago.
Speaker 4: Oh yes, I think the gold and I'm not trying
Speaker 4: to harp on gold, and I don't want to be
Speaker 4: run out and go buy it.
Speaker 3: They will, but you can going okay, so.
Speaker 4: Let me let me restrain them. Okay, I want to
Speaker 4: restrain them. I want to say, what you don't know
Speaker 4: about the future is far greater than anything that anyone
Speaker 4: knows about the future. So we always have to be humble. Well,
Speaker 4: what you need is a proper diversification to create a portfolio.
Speaker 4: And what that means is if you look at gold,
Speaker 4: gold does well when those other assets that you're typically
Speaker 4: holding in your portfolio don't do well in such a crisis. Okay,
Speaker 4: So if you're holding a lot, let's say, a lot
Speaker 4: of odds or those types of things, the optimal mount
Speaker 4: in a typical portfolio is in the vicinity of a
Speaker 4: little bit bet less than fifteen percent, like if you
Speaker 4: didn't know you would hold but let's say it's ten percent, Okay.
Speaker 4: A prudent amount of that kind of little bit of
Speaker 4: gold serves as a protection and diversifies the portfolio. And
Speaker 4: what I think the most important thing is that you
Speaker 4: don't have much of an exposure. I'm not on this
Speaker 4: show to tut gold, and I want to restrain people,
Speaker 4: but it's also keep in mind and investing what happens
Speaker 4: is the biggest problem with most investors is that they
Speaker 4: believe that whatever has been the best investment over the
Speaker 4: recent past is the best investment, not that it's become
Speaker 4: expensive and become too expensive and go down. And so
Speaker 4: there's a tendency of portfolios to investors to hunt to
Speaker 4: invest when things become terrific. So, by way of example,
Speaker 4: let's say AI companies and you know companies like that. Well,
Speaker 4: the thing I want to convey to investors is that
Speaker 4: the idea that what's been going on is a good
Speaker 4: what's gone up a lot and really done well is
Speaker 4: a good investment, rather than it's become expensive is something
Speaker 4: they have to watch out for, and that the best
Speaker 4: company is no more the best investment. Right then, the
Speaker 4: best horse in a horse race is the best thing
Speaker 4: to bet on because there are odds and hurdles that
Speaker 4: are bay into the price. So if you're going to
Speaker 4: bet on a horse and a horse race, you have
Speaker 4: an equal likelihood of betting on the worst horse to
Speaker 4: do the best to win on because the odds are
Speaker 4: shifted the discounting. You know that might be the fifty
Speaker 4: to one shot, and so the markets are like that.
Speaker 4: It's like a football game, you have to beat the spread.
Speaker 4: So that dynamic means that you should balance most. The
Speaker 4: thing I will really convey to your listeners is that
Speaker 4: knowing how to balance your portfolio well is a very
Speaker 4: important thing. This is the most important thing because what
Speaker 4: you know is you know you can't be certain about
Speaker 4: and you can reduce your risks without reducing your expected
Speaker 4: returns if you do that well. And that gold is
Speaker 4: a part of a portfolio. So if I'm giving some
Speaker 4: thoughts about a portfolio, I would say diversify well. Gold
Speaker 4: is an effective diversifier. And at a time when there's
Speaker 4: an X, you know, let's say too much debt. You
Speaker 4: can also rephrase that and say too many bonds and
Speaker 4: they're going to be a lot more coming. Might be considerations,
Speaker 4: but I don't want to start giving portfolio advice. What
Speaker 4: I want to do is let people know, and let
Speaker 4: really the policy makers know that there's a solution here.
Speaker 4: I mean, there's a right thing to do. We're talking
Speaker 4: about all the difficult things, and I want to emphasize
Speaker 4: that this can be doable. Okay, you can lower that
Speaker 4: deficit to go to three percent of GDP frump tax
Speaker 4: cuts come in, the projected deficit will be about seven
Speaker 4: and a half percent of GDP, and you have to
Speaker 4: cut that to about three percent of GDP because that'll
Speaker 4: mean that that's won't rise relative to incomes and it
Speaker 4: will greatly improve the supply demand. So what I want
Speaker 4: to do is contribute by showing what can be done.
Speaker 4: And in fact, that was done from nineteen ninety two
Speaker 4: to nineteen ninety eight. There was a five percent in
Speaker 4: GDP cut in the budget deficit. So that's what I'm
Speaker 4: talking about. Going from a four percent you know, let's
Speaker 4: say seven seven and a half down to three is
Speaker 4: a four or five percent cut of this percentage of
Speaker 4: GDP that happened from nineteen ninety two to nineteen ninety
Speaker 4: eight and can be done, And so I want to
Speaker 4: talk about those things that can make a big difference.
Speaker 2: So on this note, how do you actually go about
Speaker 2: building consensus for all these moves, because it does feel
Speaker 2: like part of the problem here is there is a
Speaker 2: lot of disagreement about what debt should be used for.
Speaker 2: You know, should it fund more defense, should it fund
Speaker 2: tax cuts, Should it be used for more social programs
Speaker 2: or infrastructure or something like that, and then there's an
Speaker 2: added layer of disagreement about how debt dynamics actually work
Speaker 2: and when they matter. And I appreciate that part of
Speaker 2: your book is this effort to show how debt actually operates,
Speaker 2: but there's still so much disagreement. How do you actually
Speaker 2: go about, you know, getting people to agree on what
Speaker 2: debt is, how it works, and then do something about it.
Speaker 4: How I'm trying to do that is, first of all,
Speaker 4: show people the three percent solution and make them aware,
Speaker 4: make those in Congress and President awar that they need
Speaker 4: to get the down to that three percent, and that
Speaker 4: arguing about how they do it leading to them not
Speaker 4: doing it. Is very much like taking somebody who has
Speaker 4: a serious heart problem and so on, and you could say, Okay,
Speaker 4: you can exercise, you can eat this different way, you
Speaker 4: can do this, and so on, and this is the way,
Speaker 4: and you can do it. And in fact, if you
Speaker 4: do it, if you get the deficit down, you will
Speaker 4: get also lower interest rates, and because your interest expenses
Speaker 4: are so high, those lower interest rates will also contribute
Speaker 4: to your better health. And in fact, those lower interest
Speaker 4: rates will help to cause asset prices to go up
Speaker 4: and the economy to be better, which will also give
Speaker 4: you tax revenue. So that you can do this, but
Speaker 4: you're arguing about which way to do it will probably
Speaker 4: prevent you from doing it. So you should start off
Speaker 4: and take the three percent pledge first happen in your mind?
Speaker 4: What is the goal? Three percent of GDP the budget deficit? Okay,
Speaker 4: we all agree? Can we all agree that we need
Speaker 4: to do that? Okay? Or if we can't agree, look
Speaker 4: at the numbers, look at the story. And I'm telling you,
Speaker 4: but please, you know, agree that at least if you
Speaker 4: can say I agree on the number, will take the
Speaker 4: three percent of GDP pledge. And then what you have
Speaker 4: is don't let the particular arguments. I don't care if
Speaker 4: you do it portionately across things. If you took every
Speaker 4: item that you can change that contributes to that increase
Speaker 4: in taxes, cut spending. If you just did everything proportionately
Speaker 4: and you use that as your backup if we can't
Speaker 4: reach agreement, we will do it all proportionally across the everything. Great.
Speaker 4: That's I mean, there are better ways to do it,
Speaker 4: but at least you did it. But if you don't
Speaker 4: do it, so you're going to be in trouble. So
Speaker 4: that's the reality because it will be public conflict and
Speaker 4: it probably won't happen. So that's that's a choice. And
Speaker 4: if you don't do it, then take the responsibility. Say
Speaker 4: to yourself, if you don't do it, and there's the
Speaker 4: crisis that I'm saying is will come, and I can't
Speaker 4: tell you exactly when it'll come. It's like the heart attack.
Speaker 4: Can't you exactly? I get it, you're getting closer. My
Speaker 4: guess would be three years, give or take a year,
Speaker 4: something like that. Okay, if you don't do that, and
Speaker 4: then you own it, Okay, that you have to take
Speaker 4: responsibility for the consequences. And if you say, okay, I
Speaker 4: got three percent solution, I'll find it, and yes, own
Speaker 4: it because you will own it. I mean when the
Speaker 4: economy and this heart attack of sorts comes along, then
Speaker 4: you're going to find yourself that the voters are not
Speaker 4: going to be very happy. So you own it.
Speaker 3: Treasury Secretary Scott Vessant is verbally on board with what
Speaker 3: you call the three percent pledge. He also talked about
Speaker 3: three percent GDP growth. I think a three percent increase
Speaker 3: or maybe more oil. Extending the tax cuts permanently, is
Speaker 3: that consistent at all with a three percent pledge, or
Speaker 3: do the extending the tax cuts permanently increase the chance
Speaker 3: of this economic heart attach.
Speaker 4: It depends on the whole dynamic of whatever is done.
Speaker 4: And I mean this in the following way. You can
Speaker 4: get tax revenue. That's what matters. It's not necessarily that
Speaker 4: tax rates. Raising tax rates is going to get you
Speaker 4: the same tax revenues because if the economy is healthy,
Speaker 4: and then it depends, there's an all mechanical thing how
Speaker 4: interest rates operate and so on, the whole mechanics, you
Speaker 4: can bring in more tax revenue. A good model to
Speaker 4: look at was nineteen ninety two to nineteen ninety eight,
Speaker 4: in which there's a mix of things that happened. You
Speaker 4: can see the ripe mix. The ripe mix is going
Speaker 4: to include those things that will naturally, in a healthy
Speaker 4: way lower interest rates and help the economy and so on.
Speaker 4: It's not a perfect solution, but it's go to that
Speaker 4: nineteen ninety two to ninety eight period as an example.
Speaker 4: In my book gives I give many examples. The best
Speaker 4: mix is to properly mix depressing moves with stimulative moves.
Speaker 4: What I call a beautiful deleveraging. And what I mean
Speaker 4: by that is that if you raise taxes or lower spending,
Speaker 4: that's depressing on the economy. However, if you do that
Speaker 4: with an easing of monetary policy, which is stimulative on
Speaker 4: the economy, those two things can balance, and they either
Speaker 4: of them lowers the debt to income ratio, but they
Speaker 4: can balance each other, and that's a well engineered move.
Speaker 2: So I want to go go back to the question
Speaker 2: that Joe was asking a little bit earlier, and perhaps
Speaker 2: ask it in a slightly different way. But when it
Speaker 2: comes to taking action on this specific risk, you said
Speaker 2: earlier that you have made a lot of money by
Speaker 2: being able to understand debt cycles specifically in two thousand
Speaker 2: and eight, can you give us some examples of trades
Speaker 2: that you have undertaken in your, you know, very long
Speaker 2: financial career that have been successful and get really specific
Speaker 2: into it, because I think this is one of the
Speaker 2: things that people struggle with. We can talk about diversification
Speaker 2: and managing your risk, but it's very hard to come
Speaker 2: up with the specifics of the trade.
Speaker 4: Before twenty eleven, what I saw was it was a
Speaker 4: leveraging up. So a big sign is debt is increasing
Speaker 4: much faster than incomes and that's not sustainable and what
Speaker 4: limits it? And back then I calculated that who was
Speaker 4: buying the debt that was increasing in a fast trade,
Speaker 4: and that was the number of entities, but most importantly
Speaker 4: European banks that were leveraging up to buy the debt.
Speaker 4: And as they leveraged up, I saw that they were
Speaker 4: going their capital requirements and their capital limitations would mean
Speaker 4: that they could not buy. Once they were leveraged up,
Speaker 4: they could not continue to buy at that same pace,
Speaker 4: and therefore their purchases were going to go down. Their
Speaker 4: holdings would be the same, but their purchases were going
Speaker 4: to go down. At the same time. As I saw
Speaker 4: that budget deficits would be large and therefore bond sales
Speaker 4: would be large, I saw the mismatch. So okay, it's
Speaker 4: a mismatch. So now what is the mechanics of that
Speaker 4: mismatch That means, you know, get out of credit risk,
Speaker 4: get out of credit risk, equity risk, and so on.
Speaker 4: And that's an.
Speaker 3: Example, Ray Dahalio, such a pleasure to uh have your time.
Speaker 3: Maybe you're not the creator of the chicken nugget. Maybe
Speaker 3: the father or the uncle of the chicken nugget, but
Speaker 3: also Bridgewater and numerous books. Thank you so much for
Speaker 3: coming on the outline.
Speaker 2: Thank you for having Thank you Ray. That was an
Speaker 2: absolute pleasure.
Speaker 4: You guys know what you're doing. You It was a
Speaker 4: pleasure for me.
Speaker 2: Producers. Keep that in, Yeah, keep that in, Joe. That
Speaker 2: was that was so much fun. I'm glad we finally
Speaker 2: got to interview Ray Dalio.
Speaker 3: I swear I could have we could have done an hour.
Speaker 2: On the Oh, we could have done like five hours.
Speaker 3: No, I mean we could have done anug Yeah. Usually
Speaker 3: because I just think about that. You know, it's not
Speaker 3: a time when everyone had like tons of access to
Speaker 3: computing power, and so even the idea of how you
Speaker 3: I mean, it's so silly, right. We just talked about
Speaker 3: the US might have this economic heart attack in the
Speaker 3: next three years by golden by bitcoin. But I still
Speaker 3: am thinking about the chicken nugget and how it would
Speaker 3: not have been trivial to come up with a synthetic
Speaker 3: chicken nugget future in nineteen seventy five. And I do
Speaker 3: think that we should remember that financial engineering is a
Speaker 3: form of engineering to bring physical things into the real world.
Speaker 2: Absolutely, and also insurance is a big thing here as well.
Speaker 2: And I would argue more.
Speaker 3: Thought for me on the chicken nugget real quick, no, keep.
Speaker 2: Going, And I would argue that insurers are becoming a
Speaker 2: more important, I guess, a shaper of worldwide norms, right,
Speaker 2: like they are the ones that are making decisions about
Speaker 2: what is acceptable. But anyway, these are all big picture
Speaker 2: thoughts on other things we should talk about det yes.
Speaker 3: And you know, look, I think, I mean, there's a
Speaker 3: few quick thoughts that I have, you know, getting a
Speaker 3: bunch of people to say, we believe that a healthy
Speaker 3: level of deficit to GDP is three percent, that you
Speaker 3: know loan doesn't sound hard, you know, but then it's like,
Speaker 3: you know, but we're very reluctant to cut anything of substance,
Speaker 3: and we're also want to make the tax cuts permanently.
Speaker 3: Seems kind of hard to square, but you know, we'll see.
Speaker 3: And then just this idea, like it seems very clear
Speaker 3: that Ray is you know, he didn't give us an
Speaker 3: exact number, but the gold and also he mentioned bitcoin
Speaker 3: multiple times.
Speaker 2: The other thing I'd say on his point about this
Speaker 2: question of who will buy all the US debt, there
Speaker 2: are plenty of people who have pointed out this problem before,
Speaker 2: and I'm thinking back specifically to JP Morgan, and they
Speaker 2: did a research note back in twenty twenty two basically
Speaker 2: all about this, and they pointed out that in twenty
Speaker 2: twenty two something really unusual happened, which is we had
Speaker 2: all three major buyers for US debt, so commercial banks,
Speaker 2: foreign governments and obviously the Federal Reserve itself all step
Speaker 2: back from that market at the same time. So it
Speaker 2: seems like an issue. On the other hand, you know,
Speaker 2: the US can in theory force banks to buy more
Speaker 2: US debt. They can change the regulations and do it
Speaker 2: that way, that sort of financial repression way.
Speaker 3: So I don't know, re mentioned restructuring. So it's like
Speaker 3: you have a five year note and then it's like, oh,
Speaker 3: suddenly it's a ten year note. But we're not going
Speaker 3: to call it a dew fall. But of course, you know,
Speaker 3: these sort of these artifaults, we might not call them
Speaker 3: as such. But if you expect to be paid back
Speaker 3: over five years and it's ten years, if you're functionally defaulting,
Speaker 3: you know, I will say, look, if you have a
Speaker 3: huge tax cut, that's a bunch of rich people who
Speaker 3: have more cash in the bank, and one place that
Speaker 3: cash in the bank goes to is investments in One
Speaker 3: form of investment is bond, so you increase the amount
Speaker 3: of money that's in the household sector, et cetera. I
Speaker 3: don't like I like these types of conversations. And you know,
Speaker 3: he said one to three years if there's no meaningful
Speaker 3: reduction in the deficit for this timing of the heart attack.
Speaker 3: So maybe we'll have ray on again in twenty thirty
Speaker 3: one and say what happened?
Speaker 2: We'll do it all right? Shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our guest Ray Dalio. He's at Ray Dalio. And
Speaker 3: of course check out his new book, which you can
Speaker 3: find for free if you want to buy it, How
Speaker 3: Countries Go Broke. Follow our producers Carmen Rodriguez at Carmen
Speaker 3: armand dash Ol Bennett at Dashbot and Kilbrooks at Kalebrooks.
Speaker 3: From our Odd Lots content, go to bloomberg dot com
Speaker 3: slash odd Lot, where we have a daily newsletter that
Speaker 3: you can sign up to, and check out our discord
Speaker 3: where you could chat about all of these topics, including macro,
Speaker 3: including gold, including bitcoin, discord, dot gg, slash, od loots.
Speaker 2: And if you enjoy all lots. If you like it
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Speaker 4: In eight