Ray Dalio on What the “One Big Beautiful Bill Act” Means for America’s Deficit

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Hedge fund founder, author, and one of the top influences in the financial world, Ray Dalio has written about how countries (or, in his parlance, “empires”) find themselves in irreversible doom spirals, covered in depth in his new book, How Countries Go Broke: The Big Cycle.

So, I wanted to talk to him about the fiscal hot potato being passed back and forth between the House and the Senate that threatens to explode our deficit past the point of no return. His message is clear: “I don’t care who’s right or wrong, but this is what needs to happen now if we want to avoid disaster.”

We covered:

• ️ Why these “big debt cycles” happen repetitively throughout history

• What makes him think we’re nearing the end of the “world order” that began in 1945

• How some debt boosts productivity (and why ours doesn’t)

• The critical role education plays in building civil and productive societies

• Why wages and productivity diverged over the last 50 years

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is President of Morning Brew content and additional fact checking comes from Scott Wilson.

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Mentioned in the Episode

• Ray Dalio’s newest book: How Countries Go Broke: The Big Cycle

• One Big Beautiful Bill Act (Congress.gov)

• Overall government revenue went down from TCJA (CRFB)

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Ray Dalio:

Investment that raises productivity and simultaneously makes people productive and earning income is the best investment that you can have. Human capital. And so the investing in that, we who don’t create a bottom and accept it, there is a level below. If you look at successful countries, we see that there are these elements: The broad percentage of the population is well-educated and civil.

The bottom line is productivity. Do you produce that productivity where if you’re just giving it away and you’re not converting it to productivity by the people, then they’ll have the waste. So government sometimes does it well and sometimes it doesn’t do it well. So it’s all of these things are how well done it is.

Katie Gatti Tassin:

Welcome back to the Money with Katie Show. I’m Katie Gatti Tassin and today I am talking to someone who is one of the most influential people in finance and policymaking. Ray Dalio’s new book, How Countries Go Broke: The Big Cycle, spends its first part reviewing the material and theories that he laid out into of his previous bestsellers: Principles for Dealing with the Changing World Order and Principles for Navigating Big Debt Crises. He’s the founder of a hedge fund called Bridgewater, and according to Time Magazine is one of the hundred most influential people in the world.

His perspectives on debt cycles and economic systems are informed by, as he says, his 50 years of experience as a macroeconomic investor and his interest in history studying 35 major debt crises over the last hundred years and beyond.

So Bridgewater is one of the most successful hedge funds of all time. Having posted the second highest gains of any other hedge funds since its inception for a period of more than 20 years, they produced an average real return of 11% compared to 7% for the S&P 500. And anyone who knows about active management of assets knows that that is almost impossible to do. So when a person with a track record like that says that he sees serious cracks in the foundation of the global economy, people tend to listen because there is a track record there of making correct bets and demonstrating the ability to understand these macro cause and effect relationships.

In the beginning of his book, he notes that he’s deeply concerned about what he sees unfolding in the management of the US economy. And to me this is a book about the difference between chronic risk and acute risk. So acute economic risk might be something like tariffs. It kind of comes in seemingly out of nowhere. It’s easy to spot because it happens fast, it’s all over the news, everybody’s talking about it. But chronic risk is much harder to clock because it unfurls slowly in what Ray sees as cyclical and ultimately predictable 80 to 100 year timelines. Now he believes that we are reaching a critical point in that timeline and that the way our policymakers respond will have enormous implications for the people who live through what he classifies as a period of forced de-leveraging.

So when I spoke to him in preparation for the conversation that we’re about to have, he told me that he recently met with leaders of both major parties in the US to talk about what’s needed to avoid economic calamity and that he heard remarkably similar consensus and concern that American politics is the politics of promises like a pledge to never raise taxes or never cut spending. And that unwillingness to break from the status quo is a major obstruction to our ability to move forward. And I press him on this a little bit in our conversation because I think as you’ll hear, I personally see one of those pressures, particularly the pressure to not raise taxes as being more powerful and more of an obstruction because of who holds power in our society.

 But I still think it’s really interesting to talk to people that maybe see these things differently or as I think what you’ll hear with him almost doesn’t really care, which is more to blame and is more focused on this is what we need to do and we need to find a way to do it quickly. So we are going to talk about all of those ideas and more today. I’m also going to ask Ray about some of his past comments about the role of wealth inequality in the breakdown of civic life because I think that it is. as you know, very critical. So without further ado, enjoy this conversation with Ray Dalio.

Okay Ray, thank you so much for being here today. So before we dive into my slew of questions, I think it would be helpful if we ground this conversation in the framework that you use to think through how power shifts and changes over time. So can you walk us through your dynamic of the five forces?

Ray Dalio:

I’ve been a global macro investor for about 50 years and sometimes things that surprise me because they didn’t happen in my lifetime, but they happened many times before. So I went back over the last 500 years to study the rises in declines of reserve currencies and empires and so on. And then I saw this big cycle transpiring, which we are now in, but there are five big forces that interact and we have to keep them in mind and their interactions.

The first is the credit, money, debt market. Economic forces create credit, it creates buying power, creates debt and so on. The second force is the internal force of order and disorder, which really has to do with political and social harmony or conflicts and it creates what we call the domestic order. The first one, it creates the monetary order. In other words, the type of system that we have, monetary system we have, then we have an internal political system and it goes through a cycle in terms of harmony and then greater amounts of polarity leading to populism, leading to greater conflict and so on.

And then there’s the third is the world order. In other words, after a war there’s a dominant power and that dominant power sets what the rule world order is like how the system works. And then there’s over a period of time rising powers to challenge the existing world power and that changes the world order. So those are the three big things in mind and keep in mind that these orders change over a period of time. Number four is acts of nature, droughts, floods and pandemics had more impact. They have toppled more orders than any of the first three that I mentioned. And number five is man’s learning and inventiveness particularly of new technologies.

So when we’re looking at this arc, you can’t look at it just in the narrow sense. So for example, when we think about let’s say debt and money and how the order and the cycles working, we have to realize that military expenses or geopolitical rivalries and all of that enters into that question and similarly how rich a country is and what its financial conditions affect, what it can do internationally and so on. So those are the five big forces. They tend to evolve in big cycles that typically are about a lifetime long. This cycle that we’re in began in 1945. Usually when you have a breaking down of those orders, you had a breaking down of the monetary order, breaking down of the world order and a war and then you have the cycle beginning. We’re in that kind of a cycle with these interrelationships.

Katie Gatti Tassin:

Yeah, the themes of interrelatedness and the difference between acute risk and chronic risk really jumped out at me in the book because I think to your point, we’re nearing what feels like the end of that cycle that began in 1945, but most people who are alive today didn’t really see the beginning of it. So this is all we’ve ever known.

And the first part of the book spends a lot of time teasing apart the dynamics of this big debt cycle, which seems to me like it could be summarized in this way, but you keep me honest: that the private sector over borrows has losses and then has problems paying it back. Then the government over borrows to help out, has losses, has problems paying it back. And then to help them, the central bank buys the government’s debt and takes the losses. And when I read that, it struck me that it sounds like the crises begin in the private sector.

I’m curious if that’s typically the case that you see. And I would say that as a reader of the book that has been critical of deregulation in the financial sector. I’m curious how you think about deregulation and regulation, and would more guardrails limit the damage that the private sector is able to inflict or are we talking about something that’s ultimately bigger than that?

Ray Dalio:

Good question. The cycle having gone through 500 years and many countries is the cycle that you’re describing. And what happens is after a breaking down of these orders, which like you say happened in 1945, then you eliminate the debt, you wipe it out in one way or another, you find who is in control within the country and then you have a dominant power. So you have order and you have prosperity. And these are great periods. They go on for a long time, they’re the renaissance periods of creativity and so on.

But what happens over a period of time as there’s more betting on that, and particularly as there’s a reserve currency or what I might say is a dominant empire that has a big role in trading all over, they trade in their currency and people want to save in that currency and it makes it a reserve currency and when others want to save in it, it makes it easy to get into debt in that currency.

And so you see these debts build up and as that builds up over a period of time, then they build up in the private sector. But the public sector eventually has to come to the aid of the private sector and play an important role. Very dramatic and clear example of that was the COVID and the post COVID period, when at first we had COVID and the system would not be able to correct itself. So what you had is the government had to send out a lot of checks. Turns out that the amount of money that they sent out was more than twice the lost income of those. They sent it to individuals, companies and so on. They received a tremendous amount of money. And then when there was the change in the administration, there was then another wave of that largely because of a change in how wealth should be redistributed and so on.

So that creation, how do they do that? The government sends out the checks, but where do they get the money from? They get the money from the central bank who buys the debt. And so that is the dynamic. So we have now a dynamic in place in which the private sector is receiving a lot of money that is being borrowed by the central bank. So what we have is the government borrowing a lot of money so that it could distribute that money. So it’s as you describe and the interrelationship and the dependence of the private sector and also our buying power in the world are very dependent on the debt that the central bank is getting into, which can’t be sustainable in the private sector.

Katie Gatti Tassin:

Do you see a role for more regulation or do you think that because it sounds like this cycle is so observable, we’ve seen it happen so many times that is there an inevitability to some of this that you see?

Ray Dalio:

There’s an inevitability to this. It’s human nature and it’s connected to the political. For example, right now we have a political system that cannot deny the public what needs to be denied to the public in order to bring about financial stability. I’ll give you a picture of what it’s like, but basically the government spends about $7 trillion now this year that’s what they spend. They bring in about $5 trillion, so they’re overspending by 40% and as a result of that, they have a lot of debt and they’re increasing the debt a lot.

But what happens is politically we’re in a situation where politically it’s demanded of those who are our representatives in government that they draw a line and you’re seeing these lines being driven like “I will make a promise” and “Will you sign up that you will make the promise, you, fellow legislations, that I will not raise taxes, that I will not raise your taxes” or the other side is “I will not cut the benefits.”

And so we have these commitments. I will not raise taxes, I will not cut the benefits. And as a result of that, you’re still spending 40% more than you’re taking in. As a result, social security cannot be paid and a number of these things can’t be paid and the debts are rising and as a result of that, the interest rates and the debt service payments are squeezing out consumption so that there’s that pattern.

So yes, it is human nature. Plato way back when wrote the book The Republic and he talked about democracies and the whole cycle and what he was saying is that the problem is that the people are voting for what they want and when the people vote for what they want, then those who give it to them sometimes it’s not the best thing, the most discipline. So that cycle has existed throughout time repeatedly and it is what we are going through right now today. The only problem is we’re getting to the end of that cycle.

Katie Gatti Tassin:

We’ll get right back to my conversation with Ray right after a quick break.

I think that much of what we’re going to talk about today, given the position that America is currently in, will revolve around what goes wrong when a country accrues too much debt. But I did think it was noteworthy that you also talk about the fact that too little debt and too little credit can also cause economic problems that are as bad or worse than too much of it because it represents these lost opportunities on these improvements that could have been made.

And so I want to talk briefly about productivity because it does feel very crucial that when we have these discussions about government debt that we’re talking about what that debt is being spent on. Is it going to things that are going to increase our country’s productive capacity or not? So can you share some examples of spending that would boost productivity? What would good debt look like in this case?

Ray Dalio:

Yes, credit, which creates debt, creates buying power. So if it produces productivity then it raises living standards and that productivity will pay for the debt and have debt service payments. That’s what you can do for a productive society. Most important things to do is to educate your population. Well-educated kids growing up to be if they’re well educated so that they can earn a living and that they are educated also of being civil to each other so that they can work well together and they come out to a country in which there’s a great opportunity, ideally equal opportunity, and they have a civil society in which there is effective capital markets and rule of law and so on so that they can be productive and work well together. That is what makes a civil society.

And so when you ask what are the best investments, the most important, best investment is in the education of the majority of the people so that they can behave civilly, be productive, be good earners. We have a problem with that. 60% of Americans now have below a sixth grade reading level, and if you look at the condition of the bottom 60% of the population and you say, are they productive and so on, it’s a real problem. That problem creates very big income and wealth debt differences, but it also creates a lot of fighting between the left and the right and about what to do about that.

Katie Gatti Tassin:

An interesting part of this to me is that it does feel like conventional wisdom that productivity is stagnating now, but that is a bit of a recent phenomenon and that it has been rising over the last couple of decades in a way that wages have not. And I feel like typically the chart or the data that people will point to to make this point is a divergence between average productivity and the median wage. And typically when you look at these graphs, it looks like it starts to diverge in 1971. I think there are a lot of explanations for why that is. I think the one that I am most familiar with is getting off the gold standard and technology accelerating productivity in a way that was not translating to higher wages. In your mind when you think about this, when you think about the relationship between productivity and wages, what’s the narrative that you see as most compelling?

Ray Dalio:

There’s the country as a whole and then there are the two parts. So we have to realize that the country as a whole is getting greater and greater in debt and particularly, let’s say now, the government in order to support the private sectors and greater in debt and within the country, there’s been a combination of influences that have to do with technology and globalization.

So if you look at the wealth differences for example, that you’re referring to, which have also carried through to the educational differences and the opportunities, differences that certainly technology and then globalization, which has made it better for the world as a whole. In other words, the poorer countries have risen relative to the richer countries. So internationally between countries, wealth gaps have narrowed as they have risen, but as that’s taken place, those increasingly competitive entities outside have taken the jobs and so on.

So there was a dynamic, let’s say, and it’s of course well recognized between the United States and China, that when you have Chinese become very effective producers and we have less manufacturing and the middle class is very much tied to manufacturing, that means that there was a dynamic that was created that they would sell more competitive goods at prices and we enjoyed being able to buy those less expensively, but we borrowed money in order to do that. So we borrowed this money and ironically we borrow it from the Chinese who then take that money in the form of IOUs. We owe the Chinese money. So we have an imbalance for example, in which we’re dependent on their imports and they’re holding these bonds believing that they’re going to get paid back and everybody’s worried about this.

So you have both technology and globalization creating a hollowing out of the middle class and so on. The technology creates the unicorns which are operating in that same way. It’s fantastic if you’re involved with them, but that comes back to a small percentage of the population. It’s really the top 10% of the population that’s doing wonderfully because they’re better educated technology and so on, and then you have that big gap.

Katie Gatti Tassin:

Something that I noticed and I want to get into a little bit as it relates to productivity and deficit spending to boost productivity is we’ve talked about education. I think personally that there is an argument to be made that some elements of social safety net spending, public investment in things like healthcare, care infrastructure, childcare in particular, we know that women’s workforce participation is lower in the United States than in other countries because of the childcare situation here, other universal programs that other nations provide. I look at those things and I go, I think those would boost productivity. I don’t think that the way that we structure our social safety net, which as we know is a huge portion of spending and primarily goes to the very poor or the old, that those are not boosting productivity. But I’m curious, do you see it the same way? Do you think that sort of deficit spending could end up increasing productivity too?

Ray Dalio:

I see it the same way. Investment that raises productivity and simultaneously makes people productive and earning income is the best investment that you can have human capital. And so the investing in that, we don’t create a bottom and accept there is a level below. If you look at successful countries, we see that there are these elements, the broad percentage of the population is well-educated and civil. The bottom line is productivity. Do you produce that productivity where if you’re just giving it away and you’re not converting it to productivity by the people, then they’ll have the waste. So government sometimes does it well and sometimes it doesn’t do it well. So all of these things are how well done.

Katie Gatti Tassin:

So you call austerity politics or basically a government pulling back on spending, and I thought this was interesting when I was reading it, it was not what I was expecting you to say. You said that this is a big mistake and then you tuck this little wild fact into a footnote that between 35% and 55% of all spending in high income countries is government spending.

And I think that that is pretty amazing and kind of puts this into context of just how important this is in the ecosystem of our economic health. But you also say that raising taxes during a downswing isn’t good either because the idea is that both austerity politics and raising taxes lowers people’s incomes in times when you need the economy to grow. So what do you do instead?

Ray Dalio:

First of all, as you are in the bad part of the cycle, you have to provide credit and liquidity and so on to create the spending and in turn the jobs to bring it up. And then when you’re in the other part of the cycle, which is you’re running well, you have to then collect the taxes and run a monetary policy that rewards those who are the lenders with a higher level of interest rates and so on to pay it back. And if that was a good process, it would work that way. And so when I say you can’t raise taxes there at that time, that’s the part of the cycle because one man’s spending is another man’s income, and so when you have the spending going down and you raise taxes and take money away from somebody, then they will spend less and then somebody else will have less income and then you have the spiral. It should be balancing. That’s what I’m saying, it’s far from balancing, as we’ll see it.

Katie Gatti Tassin:

A popular metric for discussing our national debt is debt to GDP. You look at debt to revenue instead. In other words, you’re comparing our debt to our government’s income and our debt to income ratio is 580%. Can you tell us a little bit about our government’s finances right now?

Ray Dalio:

Yeah, GDP is the total value of production in the country as a whole. The government can print money and take your money by taxes. So let me give you a picture. First I want to say how they get in trouble. The system is like a circulatory system, like your body’s blood system in that it brings nutrients to the different parts of the system and that is in the form of buying power credit. And if that credit which turns into debt produces an income that’s adequate to service the debt and more, you have productivity and you have a healthy system.

What happens in this cycle is that when the debt rises faster than the income, the debt service payments add up and they become a larger amount. It’s almost like plaque in the arteries builds up and it squeezes out other spending. So you can see this in the government that it’s squeezing out other spending and then what happens?

You get into a problem when it squeezes it out as it is. Now to be specific, the government takes in about $5 trillion a year and it spends now $7 trillion a year. So just imagine it’s a company or it’s you, it’s spending 40% more than it’s taking in and it has a debt that is six times the amount of money that it is taking in and it can’t cut costs because the costs are largely items that can’t be cut, Medicaid, Medicare, social security and interest payments on the debt. And so this debt then builds up and as a result, debt service payments build up so that interest on the debt becomes greater and greater. It’s a trillion dollars a year, which is half the budget deficit, 20% of all stake.

And as debt builds up, it’s going to increase more. There’s principal payments on the debt. So not only does that debt have an interest burden, but you have to pay back the principle. This year that principle will be $9 trillion. So a trillion dollars of interest, $9 trillion of paying back, and then you have to add the new debt, which to fund the deficit is another $2 trillion. So you have to sell $2 trillion of debt to the buyers because who’s going to buy this debt? Who’s going to be the lender?

And what happens is we get into a situation where the amount of demand for the debt isn’t large enough relative to the amount of supply. And so what that means is that interest rates go up because they have to balance that supply. Demand means the cost of money goes up and what that causes is a reduction in the amount of money that goes to spending on credit and it weakens the economy At worse.

What can happen is because investors and others don’t have enough money and you have this debt problem, they even may want to sell their debt holdings, their bond holdings because bonds would not be a good investment under that set of circumstance. So you have a very big supply demand imbalance and that’s when central banks come in because they say, okay, now I’ll print money and make up that difference. That’s what’s happened in 2020 and 2021 and will happen again and that the values money makes money cheaper and produces more inflation pressures. That is how the big cycle works and that’s where we are in that dynamic.

Katie Gatti Tassin:

Just to break that down for people, we’re spending 40% more than we’re taking in every year, which means we are rolling over debt every year. You’re getting this, the not good side of compounding effect happening. It’s clear to me that you see the growing deficit as a problem.

You’ve also spoken in the past and in this conversation about issues that stem from wealth and equality, which is accelerating. The “Big Beautiful Bill” which would extend and expand tax cuts has been called not just fiscally irresponsible from the standpoint of expanding our deficit, but one of the most flagrant transfers of wealth from the poor to the rich. What do you foresee happening if this passes in its current form?

Ray Dalio:

There will not be a rectification in this budget of there. There will be a deficit in this coming up year that will be in that order of magnitude and there will be therefore adding more debt that will have a higher interest rate. There’s a political situation, I was just in Washington and I speak with leaders on both sides and they pretty much all agree to this description that I’ve given and they’re very concerned about it, but we also have a population that they’re saying, we’ll throw them out of office if they change things. I could tell you how we can acceptably change things.

We’re right at the moment that it’s sort of our last chance, but from 1991 until 1998, the budget deficit was reduced by 5% of GDP and it went into a surplus and they did it by three major influences. They are spending taxes, tax revenues, I don’t mean necessarily tax rates, but tax revenues, and interest rates. And we need to get the deficit go down from where it is now, which is 6.5-7% of GDP down to about 3% of GDP to stabilize it. If we can get it to there, that would make a huge difference. And if we took about 4% from each of those, in other words cut spending by 4% and raise tax revenue by 4%, it would dramatically reduce the budget deficit and it would also allow interest rates to come down because the supply demand would be improved and interest rates would then come down. And that’s a big influence.

So basically if there was a 4% cut in spending a 4% increase in tax revenue, which we all should be able to find a way to do that, that’s 4% and you get a hundred basis points or probably a little bit more in interest rate cuts, then you will get down to that 3%.

I asked them and explained to them and they agree with that and so on, and I asked, can you take the 3% pledge, 3%, three part pledge, and one way or another you’ll get to that 3%. And the answer I got all across the board is, the reason we can’t do that is because the constituents being right now very absolutist that they want a commitment like I will make a commitment that I will not raise your taxes or I will make a commitment that I will not cut your benefits. If you make a commitment that you don’t raise the taxes and you make a commitment that you don’t cut the benefits, you’re not going to be able to cut the deficit. And that even the idea of saying, listen, we have to take a little bit of here and there, that’s just the practicality and we have to work across party lines will be political suicide. So we have them unable even to speak up about that because of the political environment.

Katie Gatti Tassin:

We will continue this conversation after a quick break.

So this is your 3% three-part solution: 4% cut in spending, 4% increase in taxes, 1% real cut in interest rates phased in over three years. And to me that sounds eminently reasonable. I hear where they’re coming from. I understand that policy and politics are two totally different things and that a lot of these people are looking out for their own political careers.

I think what I struggle with when I hear them say that though is that it occurs to me that what’s on the docket right now and how disproportionately that will benefit the wealthiest people. I almost reject the idea that there’s some broad base of constituents that are like, no, you can’t cut my Medicaid. Those are the people that they’re listening to. It feels more realistic to me that the folks that are really holding their feet to the fire about no you can’t, it’s the crowd that doesn’t want their taxes increased. I look at the power dynamics of who is more impactful for a politician, who do they care more about? And it seems to me that you’re probably going to weigh the interests of the people who can fund your campaigns more than the people who can’t afford healthcare.

Ray Dalio:

So we’re dealing with the politics of all of this. I look at it as a machine and how does a machine work? I know that when the wealthy consume things that are expensive and decadent, that’s not productive; when they take money and instead invest it in new technologies that’s productive. And so I try to distinguish those types of things. I’m against generalizations, I just want to be practical.

What we want is broad based investment that the most people can be productive and then have a decent living standard and so on. That’s my basic goal. And yes, the taxes that are needed cannot come from the people who don’t have the money. So you have to bring that that way and it is, but you have to make it work and not waste it.

Katie Gatti Tassin:

You’re saying you have to be strategic and smart about how you do this. You have to make sure that the tax money you’re bringing in is being used intelligently to generate the outcomes that if you are just looking at this as a machine in which certain inputs are going to equal certain outputs, that should determine how you make policy. And the problem that I have with the argument that we’re still making that more tax cuts are going to drive the growth that we need is that I believe this is our eighth tax cut of the 21st century. The original legislation was 50% larger than they expected. I would love actually if you could steelman this case for me, I think I just have a hard time buying the story that more tax cuts are going to lead to more growth.

Ray Dalio:

Here’s how I view this. Everybody’s caught in their argument of their side and we’re not moving forward. And so let’s say the other side’s argument would be that you’re not going to raise it by a lot. You have to have growth. Do you want to fuel growth and those things and then that raises tax income? My home reaction is that’s what’s killing us and my reaction is just take the 3% pledge, do it proportionally from taxes and spending and whatever.

I don’t really care. I know that we’re going to hit the rocks unless we do that. And certainly the people will argue as to what is productive and what is fair and everything, but we’re so caught up in fighting with each other about every single thing that we can’t have direction, sensible direction in our country.

Katie Gatti Tassin:

So you are clearly an avid student of history. You write in the book that the current configuration of conditions that you see is most reminiscent of the periods between 1905 to 1914 and 1933 to 1938. So why is that?

Ray Dalio:

First the financial condition is bad. The world had bad financial conditions in those times. Second, there was great wealth and values gaps. And third, there is a rising power and rising powers challenging existing powers to fight for the geopolitical world order. Those three things are existing. They are the ingredients and now through time been the ingredients.

We are seeing, for example, that we are going from the international order. We’re going from a multilateral multinational world order to a, let’s say, an America first policy or a unilateral policy. The world order that we came out of was because the United States was a dominant power, was an attempt to replicate in some ways the American system of governance for a world system of governance that put together United Nations and a lot of world organizations, World Health Organization, World Trade Organization and so forth. That has ended.

We are now in a time of great conflict internationally, which is as it was in longer term history, which is and we’re going to have conflict. So when I take those three ingredients and put them together and having studied the 500 years and many countries, I’d say those three ingredients together are what we are seeing and when we’ve seen them in the past, it creates these risks.

Katie Gatti Tassin:

You’ve mentioned 500 years, but it seems to me, if I remember correctly, you’ve studied a thousand years of history. This is a cycle that actually goes back further than that. Is that true?

Ray Dalio:

Oh, it goes back, but I became an expert in the last 500. It was the rise in decline of the Roman Empire. It’s always been the case and the monetary thing has always been the case and it all happens in the same way. The basics of the banking system are the same, more claims than there are money. And the same dynamic has always existed repeatedly and people don’t understand that dynamic. That’s why I wrote the book. You can go into my book, How Countries Go Broke, and what you can see is the mechanicals. I’m not being theoretical, I’ve made a lot of money on this in terms of understanding. I’ve anticipated the 2008 financial crisis or the European debt crisis. The mechanics are there, you can see it. And the book before that, The Changing World Order, yes, you can see it and it’s logical, but because it happens only about once a lifetime, we’re not used to it. We don’t see it.

Katie Gatti Tassin:

I bring this up because in 2020 you did this interview with CNN, the reporter had asked you about something that prompted you to say that the state of capitalism in America is a national emergency. You had made this comment that you actually kind of brought up in this conversation too about how there has to be some bottom below which living standards are not permitted to fall or we’re not going to like the outcome effectively. And something that occurred to me while I heard you say that and then thinking about your previous work and the duration of and consistency of these themes over time is that you were studying dynasties and empires, but capitalism as a system is only about 400 years old. So I’m curious how does capitalism as a system change the way that these same dynamics show up?

Ray Dalio:

The first stock was bought in the Dutch Empire and so you’re right in terms of that, that’s the first stock market lending has gone back as long as there’s been recorded history in terms of that type of capitalism and so on. So it depends what we deal with. Capitalism. Yes, it is common sense that I’m saying that capitalism, I’m a capitalist. I believe in the circulatory system that I’ve described bringing the nutrients and so on, but it has to work for the majority of the people. It has to be effective. Everybody has to be brought up by it and so on.

And that’s the curse of it. That’s part of the cycle that what happens is it breaks down for various reasons. And so you write down the debts, that’s the breakdown. You write down the debts, you write everything down and then you start again.

And then what happens is for various reasons, there are wealth and income differences largely because of productivity and it creates great wealth and so on. But then it leads to errors that are perceived as the gilded age and the robber baron era and so on. And then when that happens, the industrial revolutions, the most productive periods ever that raise everybody’s living standards also lead to great wealth and gap differences that end up also causing conflicts.

And so in order to sustain that, we can look back in history. We have to recognize that broad-based prosperity is an important thing, but I’m saying broad-based productivity was believed in the Russian Revolution. You can look around huge wealth gaps and they figure I’m going to go take the wealth, but the wealth doesn’t last. The wealth on average, if you take anything and take the capitalization of it, whether it ranges from something that’s consumable to those that might be buildings and real estate lasts about seven years. What matters is productivity. And so when they went into communism and they got all the wealth, but they didn’t keep the productivity, and that goes back to the fundamentals of education and civility.

Katie Gatti Tassin:

So I know that was 1917, the Bolsheviks overthrowing the Russian monarchy, and my understanding of that period is that essentially Russia at that time was kind of this peasant society ruled by a king. It was broadly people living in pretty intense poverty, they leadership of the country. To me, when I look at that story and I go, okay, you are a peasant society ruled by a king and then 40 years later you’re launching something into space and beating the United States to space, that to me isn’t a story of lost productivity. It seems like that worked for a while and then it broke down. And I’m seeing a parallel here of similarly, we are in a period that was working for a while and is now breaking down. So what am I missing there?

Ray Dalio:

What you’re describing there can be also described in terms of the French Revolution. It can be described all the way. It repeats all the history, French Revolution, same Russian Revolution, same kind of thing. So the way these things go and the way it went for Russia is then you got into a period, they overthrew the monarchy, the czar and so on, and then you got into a fight of who has control within this government. And it was like China to some extent during their cultural revolution. China did the same thing. They had their civil war and the equivalent of the Bolsheviks won and so on, and then they have this internal purging so that they win and become dominant and then they became unproductive because of let’s say communism was not an effective way of allocating resources and so on. Very ineffective. So we could take China’s case, we can take Russia’s case, we can take the French Revolution’s case and so on, and then all of those cases and the disorder creates then the dictator.

So that also by the way, goes back to the thirties. All the dictator come in because people need somebody to get control of that, and then it goes on until there’s a breakdown of that system and then the system collapses under that weight.

The capitalist system is a better system, but the problem that it creates if you have this great polarity is that that other population is living in these terrible areas as we’re seeing now, and you’re losing that productivity. You create an unfair event, you create crime, you create places that people don’t want to be, and then they leave. Yes, it’s when you reach that extreme, that’s the way it works. That’s the way it’s always worked.

Katie Gatti Tassin:

You mentioned the industrial revolution being this massive explosion of productivity that then is followed by this gilded age robber barons civil unrest period—Is that the analog in today’s time, like the technological revolution?

Ray Dalio:

Yes, yes, yes. You can see that the same people who are creating the technological advances that exist, we want these inventions and so on, can enter into the periods of also having great, what I will call decadence. While there’s neglect for the port of the population, which is alienated for that, we don’t need you anymore. And there’s poverty, so the loss of the middle class, the loss of manufacturing, the loss of manufacturing jobs and all of that. Now you don’t want to inefficiently bring those people back and put them on the assembly line like the assembly line existed anymore, but you do want to make them productive.

Katie Gatti Tassin:

There’s this theme of human nature inevitability to these cycles. What are the results or the consequences they’re in? We’ve kind of talked about how there are benefits of capitalism, there are benefits of the wealth creation of the innovation, the entrepreneurship. If we’re saying that that is true and also that what you see then time and time again is this impoverished population that comes out of that. Do you think that that is inevitable too? Do you think that there are reforms that could be put in place to prevent that from happening?

Ray Dalio:

Yes, yes.

Katie Gatti Tassin:

And kind of prevent it from happening permanently. Permanently. I know nothing is permanent, but that could be make it more sustainable.

Ray Dalio:

Of course, sustain. But when we deal with these things, these things require discipline. They require people caring about each other. They require not such selfishness. They require caring about the community, the greatest risk, the greatest problem we have is not economic, and the greatest solution lies in how we deal with each other.

That is the issue of even spirituality. If you look at religions, across religions, about half the religion is follow me, don’t follow other religions, and so on and so forth. The other part of the religions are how people should deal with each other. And they are all basically similar in that karma is due unto others as you would have others do unto you. It is the notion of that community and how you have a good community where people help each other and contribute that that comes back and it benefits you as the individual. And can you operate in that way where there’s community and harmony and what is your system?

Everybody wants that harmony and that’ll raise the living standards. And that is the issue because if we go and can’t get past this and get to harming each other or being inconsiderate with each other for the whole, then we all will pay for it. We all are paid for it.

Katie Gatti Tassin:

These are really big questions. We’re hundreds of millions of people living in this country. How do we co-create a system that is good for everybody, that benefits everyone, that everyone feels they can contribute to, that they’re productive in, that they’re respected in? These are all really important elements of a flourishing society. But I do think that thinking bigger about the fact that in some ways we might be drawing from history, yes, but also making up some of these things as we go, because we also have a level of wealth and prosperity and general living standards that are kind of unheard of in however many tens of thousands of years of human history. So we are actually having to, I think, and with the technology that we have now, think bigger.

Ray Dalio:

What happens is we have a population, 60% has below a sixth grade reading level. Who knows, I want this and I will vote for I want this, or I’ll be inspired by that, and so on. And then they make the choices. You’re not having very many, we can do the right thing. It’s how our conversation began. Can we agree on the 3% three part solution? No, I mean you cannot do that.

And so how does the cycle work? The cycle works that then there are breakdowns, and then out of those breakdowns come changes in the order and things then transpire. And classically, there’s the Plato’s cycle, there’s the benevolent despot who comes in. Somebody get control of this situation. And that’s what happened. Like in the thirties, democracies chose dictators to get control of things to make the trains run on time and the like. That’s just the way it works. And so one would hope that we would rise above that and then think, okay, how do we operate in this way of mutually beneficial, mutually productive, mutually beneficial society and operating some places, and some countries do that, but they’re rare.

Katie Gatti Tassin:

You mentioned China. I know you’ve been to China. I want to talk about your involvement in China’s economic development and your perspective on it because their poverty rate fell from 81% to less than 1%. So one in a hundred Chinese people live in poverty, one in 10 Americans do. What do you think we can learn from the Chinese about shared prosperity?

Ray Dalio:

First time I went to China was 1984 as a guest of the only company that was allowed to deal with the outside world then. And that is because a few years before the leader of China, Deng Xiaoping decided to go to policy and reforms to try to modernize China and raise the living standards. They said, well, what are you doing with this sort of capitalism? And his statement was, doesn’t matter whether it’s a white cat or a black cat, as long as it catches mice. And what he meant was that as long as it gets the job done, let’s not worry about what it’s labeled as and so on. And so as a result of that, I saw a tremendous revolution to market economies opening up the door, bringing in the best technology, so trade and open door policy and going to incentives as well as education.

And that really created that tremendous change. Things began to change, I would say about 12 years ago. I think the lessons in terms of that was educate people. Well create an environment where it rewards productivity, develop the capital markets to be able to do that. I think it comes down sort of the same rules and China’s challenge will how it manages those things going forward. Because of various circumstances in China and changes in the world order, some of those things are at greater risk. You have a much more autocratic controlling. Deng Xiaoping said It’s glorious to be rich. When he said that, that was a big statement because it was considered being rich was considered to be something that you should be purged for. When he said it, it allowed it to happen.

But you also have then when you become rich and you become, let’s say so decadent and you’re forgetting the others, then that’s a problem too. But it was the unleashing of potential that was suffocating. 1945, the war ended, then they had a civil war in 1949. They began a communist controlled government, and that continued until 1978 Deng Xing came to power, and then he opened it up and made these changes, and that really accounts for the flourishing of the economy since then and the economy and many other technologies and so on, which had made them a comparable power to the United States.

Katie Gatti Tassin:

Yeah, yeah, definitely. I mean, how did they do this? If we’re just comparing these two statistics about 1% versus 11%, and this idea that they did achieve prosperity, but they were able to make it more shared, I guess.

Ray Dalio:

The wealth gap differences in China are very large. They raised everybody’s living standards a lot, so they didn’t go back. In the United States case, the bottom 60% have suffered. In their case, they raised a living standards for everybody a lot, but the wealth gap differences also became a lot, just to clarify that point. And so you have very large wealth cap differences, which they too are now dealing with that issue.

Katie Gatti Tassin:

My perspective as an American is that we don’t get very good information about China when it came out that they were so far along with ai, and I think everyone in the US was kind of like, whoa, what’s going on? I just have had the impression for a long time that we are not getting very accurate information about how that economy works, what’s going on there, how far along they are in some of these things.

Ray Dalio:

I’ve been lucky to spend a lot of time in China. I went first out of curiosity, and then I fell in love with the people and I could help them in terms of giving development while I was doing this, and that was good. And everybody, they were not perceived as enemies then. And then I built up these friendships. So I see it closely. There’s a picture, but people are removed from what the accurate picture is.

Katie Gatti Tassin:

Yeah. Do you think that’s just American exceptionalism? Do you think it’s fear that we know that they’re a rising power and that we’re threatened? What do we think that comes from?

Ray Dalio:

I think it’s normal that a lot of people who don’t have direct contact with somebody else and their systems make generalizations and caricatures of what’s happening. People all around the world will do that for the United States, and everybody does it with everybody, but if you have quality contact, then you get the deeper understanding, even an appreciation for the difficulties of their trade-offs.

Katie Gatti Tassin:

That feels like a nice lesson to end on, because I think that applies to most of what we’ve talked about today. So thank you so much, Ray, for joining me. It was a real pleasure to get to pick your brain.

Ray Dalio:

Well, thank you so much. You are right. That’s a good thing to end on.

Katie Gatti Tassin:

Our show is a production of Morning Brew is produced by Henah Velez and me, Katie Gatti Tassin with our audio engineering and sound design from Nick Torres. Devin Emery is president of Morning Brew Content and additional fact checking comes from Scott Wilson.