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Ray Dalio | The All-In Interview

28 Jan 2025

[Ray Dalio The All-In Interview](https://www.youtube.com/watch?v=1_rvVTuGRNE)

It was the government that was the big buyer. Then you get everybody leveraging up. Then you’ve got a problem. Do you own Bitcoin, right? Yeah, I have some. Not nearly as much as gold. The AI war, it’s a war that no country can lose. If China or the U.S. really lose this war, it’s more important than profits.

We’re at a civil war internally, and we’re at an international war simultaneously. Just have people behave logically. Maybe that’s too much to ask. We hope. I’m going all in. All right, besties. I think that was another epic discussion. People love the interviews. I could hear him talk for hours. Absolutely. We crushed your questions in a minute. We are giving people ground truth data to underwrite your own opinion. What’d you guys say? That was fun. I’m going all in.

Ray, good morning. Good morning. I’m going to start off by sharing a couple stats. Today, the U.S. has $36.4 trillion of federal government debt and GDP of $29.1 trillion, giving a debt-to-GDP ratio of 125%. This ratio has climbed steadily since the pandemic began in 2020, when the federal government debt was $20 trillion and GDP was just $21 trillion. So since the pandemic, federal government debt has risen by 80% while GDP has climbed 38%.

Steady inflation from the large stimulus of money from both central banks and the U.S. government caused the Federal Reserve, which is the U.S. central bank, to raise interest rates, driving up the cost of borrowing. Despite recent efforts to cut interest rates again, markets have traded treasuries down, causing the long-term interest rates of U.S. debt to spike up to levels that we have not felt since just before the 2008 global financial crisis.

To keep the economy growing, the U.S. government’s now running a nearly $2 trillion annual deficit, nearly 7% of GDP, while paying over a trillion dollars per year in interest alone on just the existing outstanding debt. The Congressional Budget Office, the CBO, projected last week that annual budget deficits are expected to be equal to 6.1% of GDP through 2035, which the CBO noted is significantly more than the 3.8% that deficits have averaged over the past 50 years.

The national debt’s slated to rise by nearly $24 trillion over the next decade, a sum that does not even include the trillions of dollars in additional tax cuts that the current administration may put into place. Is the U.S. headed for bankruptcy? What are the mechanics of the looming crisis ahead? And can we avoid it? To talk about this, what I consider to be the most important topic in the world at the moment, is Ray Dalio, who I consider to be the preeminent thought leader on this matter.

In 2021, as everyone knows, Ray published “The Changing World Order: Why Nations Succeed and Fail.” I declared it the book of the year, and I thought it was the most prescient and important thing that everyone should read. Unfortunately, I feel like many in politics, many in government have largely ignored some of the prescient warnings shared in that book. This week, Ray is releasing a new book called “How Countries Go Broke,” in which he analyzes and shares his studies on this particular topic. I’m really excited for Ray to join me here today.

Ray, thanks for being here. Thanks for having me here to talk about this important issue. Well, so let me just start by asking why you wrote the book, why you’re putting it out now, and maybe we can just talk about the timeliness of all this from your point of view. Through my roughly 50 years of being a global macro investor, I would keep to myself. Now I’m 75, and I want to pass along the things that have helped me. I’ve been involved with the bond markets, global bond markets, all over the world for a long time.

There’s a mechanical process which is not understood about the question: when is enough debt? When does it matter? How does it work mechanistically? I feel compelled to get that understanding out now. How do the mechanics work for countries? For the United States? For other reserve countries? I want to make sure that’s understood.

Thanks for doing it. The basis of the analyses is your work at Bridgewater and outside of Bridgewater. Is that right? You’ve gathered quite a bit of material together for this book, and you’ve shown a lot of historical context. Maybe just share a little bit about where the data came from and how you’ve kind of conducted these studies over what period of time.

You know, Bridgewater and I, up until my passing along Bridgewater, maybe a little over a year ago, has been indistinguishable. And through that period of time, we’ve been involved in the markets. I’ve been involved in the markets and thinking about such things. The data is largely public data that’s available for anybody. We just collect it from different spots and go back through history like I did in “The Changing World Order.”

We were, in some cases, in “The Changing World Order” because we were dealing with data that was hundreds of years ago. We would go through archives and pull data out. The data is all available to everyone. I think that’s really important because this isn’t just an opinion piece you’re writing. As an analyst, you’re sharing quite a lot of empirical data that’s publicly available that anyone can access.

You’re taking a look at that data and saying, this is the pattern. This is the trend that we’ve seen historically. It has repeated over and over again. I think you make a really important point at the front of the book. Only about 20% of the 750 currency debt markets that have existed since 1700 still remain, and all of them that still remain have devalued through the mechanistic process you described in the book. That’s really important to note.

You know, we all think that we have this kind of privileged position in the United States and the U.S. is different and this time around is different, but you highlight how so often everyone thinks they’re in a good place and then the cycle repeats. You speak about the primary premise of this being what you call the big debt cycle, and you highlight that these big debt cycles typically last about 80 years. They’re more easily forgotten than the short-term debt cycles, which last about six years on average, plus or minus three years, you say.

And we’re now 12 and a half cycles of the short-term debt cycle since 1945. So we’ve kind of been in this big debt cycle in the U.S. for about 80 years at this point. But maybe we could start by talking about what the short-term debt cycles are that you highlight, which make up the long-term debt cycle.

Yeah, and I want to emphasize just based on what you said that they’re mechanical. You can watch it; you can do the calculations. So if you read the book, you can see these, and it’ll even make common sense to you; you see the calculations. To me, it’s almost like the circulatory system. You know, I think that credit is like blood that brings nutrients to all of the parts of the body that passes through a system that is like arteries.

Then credit creates debt, and the key question if it’s healthy is does the debt create an income that is more than enough to service the debt, and that’s like eating vegetables or something; it’s a healthy process. If not, credit begins to build up this debt; it begins to become like plaque in the arteries, and you can measure it just like you could measure it in the arteries, and you can see how it constricts that circulatory system because as credit and debt service rise, you see that it eats up more and more consumption.

You can watch the government do that; you can see how interest is eating up and how debt service is eating up, and that means there’s less money. You can also see how heart attacks take place, and they’re very economic debt heart attacks. The way they take place is by looking at the supply and the demand. If you have a lot of debt and then you have a large supply of debt that has to be bought, somebody’s got to buy it.

When you get to the point where there’s debt risks, there’s not only the new supply that has to be offered but also the possibility of holders of those debt assets selling those debt assets. The supply becomes overwhelming relative to the demand, and then what that means is it’s the same dynamic for the government as it is for an individual or a company, except the government can print money.

So when that debt service burden rises, or there’s a big supply-demand imbalance, if the government—most importantly, the central bank—doesn’t print money and buy it, then there has to be a rise in the price of the debt to constrict borrowing. That borrowing which is constricted, that credit that is not going to come, will weaken the economy and cause bad economic conditions. They can let that happen or they can print money and buy the debt and monetize it.

When they do that, that’s inflationary, and it lowers the value of the debt. In either case, you don’t want to hold that debt because either there’s a debt service problem, or there’s a depreciation; you get paid back with a greater supply of cheaper money. That’s the dynamics and that’s the mechanism. Because it can be measured, it can be seen in all countries; you can watch it happen.

Like you’re going to your doctor, you can measure these things, you can see them, and you can know what needs to be done. I want to just talk about two things real quick. One is just to provide an analogy for folks watching or listening on what it means to have interest levels be so high relative to one’s income.

The United States this year is expected to service debt with over a trillion dollars of interest payments on the outstanding U.S. treasury bonds. The government is only going to bring in just under five trillion of revenue, so nearly a quarter of every dollar that’s being collected by the federal government is going out the door just to pay interest on the existing debt. In order to fund new programs, the government needs to take on new debt, and the folks that are having to issue that cash to the government end up saying, wait, that’s pretty risky now; I need a higher interest rate.

Over time, that interest rate climbs. Then there’s this separate entity called the central bank that comes in and says, well I’ll buy the debt ultimately to give the government the ability to continue to operate or give the economy the ability to continue to move. When you say monetize, you mean the central bank ends up, when you say monetize the debt, that means they’re buying the bonds; they’re buying the debt that’s being issued in the market, is that the right way?

That’s right; they’re essentially making the money up, right? In the U.S., it’s our federal reserve and the U.S. government that are the two players here. The federal reserve ultimately would, in this model, and historically, during the pandemic and during 2008, go into the market and buy bonds by issuing cash that they’re making up.

A good example was in COVID money; there were two waves. The first wave was the COVID wave in which the government wanted to and actually did deliver a lot more money to people and companies than there was a loss of income. So they put out a lot of that money. Where did they get the money from? They had to borrow it. The central bank then came in and lent them; that was the primary way.

Then the second wave was when President Biden was elected; there was a second wave of that after COVID. It was mostly like a universal basic income thing—in other words, hand people money, and we’re going to be better off. They handed people money, doing that same exercise again. So naturally, all these people got a lot of money, and so they deposited them in banks, they went out and spent, and so on. Therefore, it shouldn’t be surprising that we had a big wave of inflation and we also had a lot of banks buy government bonds—which they lost a lot of money on—and that was that crisis.

So that’s how the mechanics work, right? When that money gets printed, it finds its way into the economy, and the money supply goes up. The way I kind of think about it—and you’ve got a nice image in your book that I really appreciate—here’s an overview of the big debt cycle that you talk about: there are small expansion and contraction waves as debt comes into the market. Debt should drive productivity, but at some point, you accumulate so much debt that you can’t drive productivity anymore.

Then you effectively have to monetize the debt, and everything gets devalued. But as I kind of think about the introduction of money into the economy, the increase in the money supply, I always tell people, and everyone screams, oh the markets are going up, the markets are going up. But I say the markets are going up in dollar-denominated value, and there’s more dollars. So, you know, the nominal meaning that the actual index might go up. The Nasdaq might go up, the Dow might go up, but if you’ve got a lot more dollars, a dollar is worth less.

The real question is, has your purchasing power gone up? Have you actually increased your net worth as the markets go up? When you do the studies, it turns out that inflation goes up, meaning the cost of everything goes up when you pump money into the system. So, of course, it looks like the markets go up; of course, it looks like asset values go up. But ultimately, if everything’s going up, your purchasing power goes down.

It’s almost like I tell people you have a hundred clams, and you use seashells, and you’re using seashells to buy stuff. Then you know, there are only five things to buy. Now if you have 500 seashells to buy stuff, the price of the things you’re trying to buy goes up because everyone’s got more seashells. Doesn’t that ultimately kind of describe what happens as the money supply goes up? The inflation drives the purchasing power down of everything and everyone kind of gets inflated away.

Very well said, Dave. You can’t get richer by making money, you know, and the purpose of money, purchasing power, is what matters at the end of the day. What your money is worth, what you can actually buy with it. That’s right, and there are two purposes of money, which are as a medium of exchange and a storehold of wealth. Saving is very important, and if you don’t have savers who have it as an effective storehold of wealth, then you don’t have a viable long-term credit market.

Yeah, people don’t understand that the bonds become a bad deal. You need that; like any marketplace, you need purchasers and sellers to be able to have an efficient negotiation to achieve balance without the government coming in and printing a lot of money and making a big mess. It’s like they made very severe negative real rates, right? We know what happened with the negative severe real rates.

The government was the big buyer. Okay, so the government takes it on, and they make negative rates. So what happens is then you get everybody leveraging up. Yes, then you’ve got a problem. That’s how it works, and it’s a global issue; it’s not just an American issue.

Well, that’s what I want to get to that in a minute because I want to talk about the relative strength of the United States and how this plays out globally. Firstly, in your book, you describe the big debt cycle following five stages. You call it the sound money stage when net debt levels are low, and money is sound, and the country is competitive. Then you talk about the debt bubble stage where debt and investment growth are greater than can be serviced from the incomes being produced.

Then you call it the top stage—the bubble pops, and the credit and debt and markets contract. This is followed by the deleveraging stage where the central bank comes in, starts buying all the debt, issues more cash, and the inflation goes up, and the value goes down. Finally, the big debt crisis recedes, and we start over again.

But you speak about, in the top stage, a debt crisis. Can you describe the debt crisis? How do we think about the mechanics of what is a debt crisis? Where are we in the United States today with respect to facing a debt crisis? What are the red flags that you look for?

First, when there’s a lot of borrowing to service debt, there’s what’s called the death spiral—we typically refer to that when a company has it. The government can have it too, and that is that dynamic where there’s too much debt, and you have to borrow to service the debt. Then investors know that that’s a problem to service the debt, so the credit is worse. That means that interest rates go up, which is the worst thing that can happen to a heavily indebted entity.

As they rise, you get that spiral; you need to borrow more and so on. That is also noticed when the debt service becomes large. The real red flag—the biggest red flag—is when there is then the selling of the debt beyond the new supply, but the holders sell it. You can see it in the market action because you can see that long-term interest rates rise while short-term interest rates aren’t rising or go down. It’s the free market losing its desire; you have a balance problem in the free market out there.

Then you start to see that when the currency depreciates, particularly relative to gold or bitcoin or other assets—sometimes other currencies. Typically, these things happen broadly speaking together, in which all currencies go down relative to other things like gold, bitcoin, or tangible values. That’s what it looks like; that’s that edge.

Then you start to see the dynamic, so you either see the central bank come in very quickly and do the buying. When that happens, you see the currency depreciate. Take Japan, for example; if you were a holder of Japanese bonds, you lost about 80% of your money relative to gold and about 60% relative to U.S. bonds because you received an interest rate that was 3% less than the corresponding interest rate in the United States.

You lose—you lost a ton of money in the debt that way because the central bank came in and printed the money. It’s very bad for holders of the debt, and it’s just a supply-demand thing. Well, are we seeing that in the U.S. today? The Federal Reserve cut interest rates a few months ago. As they’ve cut interest rates, the market has sold off U.S. bonds rather than buying them, which is normal.

When rates go down, the price of bonds is supposed to go up, and we are now seeing rates actually climb in the market relative to where they were while the Fed has been cutting rates. Is that a dynamic that’s a red flag for you? While gold has gone up, and Bitcoin has gone up, is that kind of market action I’m talking about? You’ve seen it in other countries too.

The UK is a very classic example. The dollar has been a relatively strong currency, but not measured in gold or Bitcoin. All currencies have gone down, and then you’ve had that dynamic you’re talking about. You see it also in sterling; a good example is that sterling has gone down while UK bond rates have gone up, and central banks have held it steady.

You see it in the market action; you also see it in terms of who the buyers are. You’ve seen central banks, for example, and sovereign wealth funds shift to have lesser amounts of debt, bonds, and so on at the same time as they’ve accumulated gold or hard values. Now gold is the third largest reserve currency, by the way—dollars, euros, gold, and then yen.

So yeah, you’re seeing that supply-demand shift, and it’s partially for all the reasons we’re talking about and also partially because of issues like geopolitical issues. Countries sometimes worry about sanctions. Countries like China are worried about holding bonds.

You’d think U.S. bonds grew, but Japan bought a lot of bonds as well, even as a percentage of portfolios. The bonds themselves have become such a large part of the portfolio that it’s even, from a portfolio rebalancing point of view, a concern; you don’t want so much concentration. All of those factors are in play for the supply-demand of bonds.

That’s why I emphasize you have to look at the supply and demand of bonds. You’ve got a table in the book where you look at central government debt levels to deficit levels across these major markets. So you’ve got the U.S., Japan, China, France, Germany, and the UK. The U.S. is running a deficit of 7% of GDP, so the federal government is spending more than it makes at a level that’s about 7% of the total size of the economy in the United States, which is the highest of all of these industrialized markets.

Second is France at 6%, third is the UK at 6% as well, and then China at 5%. These countries are all approaching 100% debt-to-GDP. Japan obviously is at 215%. So from a relative perspective, one of the points that I’ve heard a lot of people make is everyone’s got this problem; everyone’s got rampant spending. Everyone’s got rising debt levels; they’re increasing their debt levels to pay the interest on their existing debt and to stimulate their economy.

The U.S. is the best, strongest currency amongst the group that we just showed. Why would anyone trade out of our currency? I guess from a market perspective, right? Where else do people go with their worth, their net worth? Where do they transfer their value into if it’s not dollars? Doesn’t it have to be some denominated currency? If it isn’t, then is the U.S. ultimately the best?

Maybe you can talk about what these alternatives are—gold, bitcoin, elsewhere—but is that realistic at scale? Is there enough gold, enough bitcoin for everyone to transfer all their net worth into those assets versus hold some currency-denominated asset?

Maybe we can just talk about that dynamic of how do I make the decision about where to store my value? Where do I store my net worth? First, the United States and countries like China, you see that particular dynamic. China, Japan—they’re all educational in that the bonds, the debt, are bad assets.

So then where you store it is in those assets that benefit rather than suffer from the reduced value of money and the buying of it. Obviously, you look at money and what is international money; that is why gold is in it. Then there’s a question of bitcoin or others—it’s a conversation we can digress into.

It can be ideally international; it’s mobile; ideally, it’s relatively private. It’s relatively secure because in history, there’s the value part of it, and then there’s the confiscation part of it too in some fashion or another. That confiscation can easily take the form of taxing on holding it.

For example, one of the problems with real estate, besides the fact that it doesn’t move—so it’s not internationally—you know, you can’t use it internationally—is it is a readily taxable asset. It’s there; it’s there, and therefore they’re going to get you; they won’t take it, and you can get it.

We have to understand that taxes and confiscations are one and the same because during a time of a debt crisis. I want to get to this in a minute. You talk about the four actions: tax, or taxation; austerity, where governments cut spending; restructuring, where the debt gets restructured; and then the central bank buying the debt. Obviously, this notion of taxation has always played a critical role during these moments, and assets are seized or taxed in different ways and transferred away.

What about commodities? How did commodity markets do—non-gold? Is there a difference in commodity markets—hard, soft, etc.? It’s so interesting. I’ve studied history, and of course, I’ve been through a bunch of these—like the ’70s. Commodities ideally also those that might do well if the economy doesn’t do well because you’re dealing also with the inflation environment.

Are there always goods that you don’t want to be economically sensitive to? Unless sometimes, maybe the economy will do pretty well, but usually it doesn’t, but like in the Weimar Republic—give the example—rocks were used as storeholders of wealth. Now that sounds really funny, but they were considered building ingredients. In other words, the rocks were used to build things with, and so they would store the money in rocks.

But any asset—should I go store a bunch of GPU chips in my garage? H100 from NVIDIA? Except technology devalues them. The new technology devalues them, right? So that’s the question: what is it? Those are the things that can’t be devalued. Commodities, by the way, in real terms—every single commodity in real terms over long periods have declined because of productivity. But every commodity has declined in real terms because of productivity, so you would like productivity-producing assets that cannot be taxed and can move around from place to place.

So equities of a certain type tend to do that. That’s why currency depreciations are associated with that combination of things. Currency depreciation, lowering interest rates, and producing money causes equity assets to go up—not necessarily in real terms. Like in the ’70s, they didn’t go up in real terms; they went down in real terms. But it’s those kinds of storeholds of wealth that can’t be taxed as easily that benefit from inflation rather than not.

The purest play is gold because gold can be transferred between countries. It’s used by central banks as a reserve, so central banks will go to it; they are going to it; they’ll hold it. It can be private, more so than crypto—it’s very easily taxed. In other words, the government knows where it is and who’s doing what and so on.

It’s also an effective asset to tax, but it has benefits too. It was very interesting when we had negative rates; I was with a group of the central bankers in a discussion of how negative they can have rates. They described that they can have negative rates only to the extent that there’s not enough capacity for paper money to be stored.

So they estimated—it was funny, actually—that they could have over a short period of time up to 400 basis points negative rates; that’s crazy because there wasn’t enough. They calculated how much vault storage space there was, and then they calculated that they would produce more vault storage space because it would be profitable to do that. Then they said, and the good thing is we can tax it.

Okay, because if you have a digital currency, you can tax it. Do you own Bitcoin, right? Yeah, I have some; not nearly as much as gold. I’m a gold guy much more than I am a bitcoin guy. That’s my diverse fire; I try to find what are the productive assets. I have some, but I am a gold guy much more than I am.

So in this environment, where do I own? That’s a productive asset—that’s a business that can still see its revenue and its income grow as this inflationary effect and this devaluation occurs as we get through a debt crisis like this. What would be the best kind of productive asset—mining business? Is it a commodity trading business? I’m with you so you know. Let that chart that we showed in the beginning has this line productivity going up, you know, and I think that we’re in a, yeah, that’s it. It tends to compound on itself, and I think that that’s where AI and that is fantastic. But it depends on where you’re referring to AI. I think the super scalers in this world have risk issues. You know, you think by, you know, the super scales or video or, you know, those.

I think that the tech war certainly impacts productivity. I’m with you, man, but you want to invest in productivity. However, there’s great disruption that’s going to take place, and there are going to be the disruptors and the disruptees. It’s not necessarily those who are producing the vehicles, but it’s those who are implementing and changing as a result of having their big impact. I think that like the tech war for the AI war, it easily is, I think it is actually more important. It’s a war that no country can lose, okay? Because it’s more important than profits. If you lose—if China or the US really loses this war—it’s more important than profits.

And so you have to play that war that way, and it could be like electric vehicles or more in terms of Chinese electric vehicles. You can produce them, so I don’t think, and I think there’s such expectations. I think we are going to see applications, like I think the Chinese are a bit behind in the chips, but they’re ahead in the applications in terms of—yeah, did you see the Deep Seek announcement? Yes, this weekend. Yeah, that was known for a little while now. Yeah.

And so I think you’re going to see, well, the Chinese play is going to be chips—very inexpensive chips embedded into manufactured goods. You’ll see robotics. You’re going to see the Chinese are unbelievably good at making things inexpensively, terrifically. They own 33% of all world manufactured goods, which is more than the combined US, German, and Japanese manufactured goods. Chinese produce more.

So, you know, you’re going to see that type of competition, and it may be like solar panels or something, right? Profit doesn’t matter. So you have to go where there’s—I think that where there’s productivity and innovation and disruptors to be essentially long, those who are benefiting themselves through usage or creating the applications that are having the big effect is certainly one thing. But you also have to look at different countries and places and things. Most importantly is price.

I think a lot of investors make the mistake of thinking, “I want to buy good things.” You know, that’s a great company, but a great company that gets expensive is much worse than a bad company that’s really cheap. So you have to look at pricing. This is all part of the cycle. You know, everybody says that’s great and that it’s going to be great for the future, and like, you know, like the internet and dot-com, it was great. It’s great, okay? But the price has to be paid attention to.

I’m particularly concerned about those companies at a time when we are in a situation with the interest rates operating as we are. In other words, this looks quite a lot alike 1998 or ‘99, where the assets of the— you know, the new hot thing, the productivity drivers—yeah, so are hot. The prices are high, and you have a rising interest rate environment that is a classic issue. So we have to pay attention to the interest rates and the pricing of those assets, and you have to think, where is the next?

The other thing is I think diversification is very, very important because everybody’s leveraged long. Everybody thinks, you know, I’m going to buy assets that are going to go up, and I’m—if they’re good, I’m going to do that in a leveraged way. So the world is so leveraged long, you have to pay at least as much attention to correlation. That’s why when I look at, you know, something like gold or these uncorrelated assets, it’s interesting as you add it into the portfolio. It reduces the risk of the portfolio.

So you have to pay attention to the uncorrelated assets in that kind of an environment, and those could be geographically looked at. But so that’s part of portfolio construction. Well, there’s no simple answer for the audience on what to buy, but I do think this portfolio point of view in the book, you actually talk about having 10 to 15 uncorrelated bets at any given time. And I would imagine in your context, truly uncorrelated, whereas most folks buy U.S. equities and think that they’re in different sectors. But obviously, there’s a great degree of correlation when you’re buying a bunch of U.S. equities.

Equity prices—just to keep in mind—this, many times, equity prices and inflation adjusted, therefore purchasing power, times have declined 60 or 70 percent. Yeah, that’s incredible. That’s an incredible fact for folks to take in. So when you adjust for the value of your dollar, equity prices have really taken a hit, even though the market’s gone up. I hear this a lot. From 1966 until 1984, you had a negative real return.

I think this is super important, Ray. I just want to double down on this, and then we’ll talk about the U.S. But a lot of folks talk about markets going up without taking into account what is the denomination that those markets are measured in—in this case, U.S. dollars. And when you look at the value of your U.S. dollar and you look at the market going up, even if you bought equities, what you can now turn that dollar into has actually not gotten much stronger. Folks have really taken a hit, and I think this is super important. I’m glad you’re bringing it up.

I think it’s super important too, and I just want to emphasize—you have to look at your returns in real dollars. What can you buy? Or what—it’s funny because I watch the value go up and down, even the currency go up and down, and it’s a distorted perspective. It’s like being on a boat that’s going up and down and judging the land to be volatile.

Okay, I want to come back to the United States, and I want to talk about your point of view on measures that the United States is going to have to take or should take going forward in order to avoid a more cataclysmic debt crisis. In fact, you use this term often: the beautiful deleveraging that’s possible when there’s a great deal of debt and a country faces a debt crisis. That there are several actions that can be taken together to try and resolve the debt crisis in a way that is least harmful.

But I first want to talk about the measure that you share of risk. So first, you show what you call your risk gauge for U.S. long-term government debt. You’ve got this risk gauge on the long-term and the short-term for U.S. government debt. On the short-term, you say U.S. government debt is a 0% risk gauge. There’s no risk in the near term; the economy seems fairly balanced. But over the long-term, your risk gauge is 100%.

You follow that up with an analysis of the central bank, and you say the central bank’s short-term is a 0% risk gauge, long-term 46% risk gauge, and nearly the highest you’ve seen ever. But maybe you can just say what’s the composition of these risk gauges and what does this tell us? Then we’ll come back to the actions. Just to be clear, 100% does not mean 100% probability of it happening. It means 100% that’s the highest that it’s ever been. You know, it’s at the kind of maximum.

But, yeah, just to describe it, the longer-term risk gauge is taking existing amounts, projecting those two things that I’ve described before—the supply, demand, and the debt service creating the squeeze. So think of it as going into, you know, your doctor and having him give you your test results, and how much plaque is in there and what it’s looking like, and how you did on your stress test and what your arteries are looking like, and what your condition is. That’s what the first measure is.

The second is you’re in a seizure—in other words, now. So that second measure of the debt is exhibiting, okay, it’s now happening. And happening means things like you’re seeing the selling, you’re seeing the spreads widen. In other words, the interest rates rising on the long end without the short end. You’re seeing that the central bank is put into that position of being able, you know, having to make the difficult choice of coming in there and monetizing everything very much, and then credit problems and debt monetization because you’re in the middle of it.

That’s what the— that’s what the one on the right means. So what we have is if I’m speaking to you as the government policymakers, your condition is very bad, right? Okay, you’re not in the middle of it now. In other words, we’re not seeing that particular dynamic transpire, but you have to change your diet. You have to change your behavior. You have to maybe have a stent put into the equivalent.

So you asked about what that is. Okay? Okay, here’s what it is. Let me pull up this chart for you real quick, Ray. I just want to highlight the CBO projection. Right, so this is the U.S. government’s debt as a percent of the U.S. government’s revenue, which you indicate in your book is more important than debt to GDP. You’ve got to look at the actual revenue being generated by the government and how much debt they have.

The CBO highlights this expansion to 700%, meaning the government is going to have a debt level that’s seven times the income it’s making every year. Over the next, I believe this is a 10-year chart, and you propose a bunch of actions that can keep it flat over the next 10 years. The basis of the book is that there are a series of recommendations in the book. I just want to kind of voice over again.

You highlight that there are four actions. One is increased taxes. So obviously, citizens are going to lose assets and lose income, so there’s a loss to the citizens when this happens. Cutting spending or austerity—and there’s obviously a loss of services provided by the government to the citizens. So the citizens’ taxation becomes a factor because more money will come to the markets, and everything costs more.

So that’s another form of taxation, where the value of your dollar or the value of your assets goes down. Then there’s this kind of restructuring of the debt where again the currency gets devalued and everyone loses things. I just wanted to walk through that—maybe you could frame this up for a little bit. Sure. Like that chart, if you go back to that chart, think about that chart as being, you know, your plaque, so to speak, in the arteries and the debt service.

So you can calculate all those numbers, and you know what the picture looks like, and that is a stability. So number one is I call it my 3% solution. Here, the solution is you must cut the deficit, which is the equivalent of bonds selling down to 3% of GDP, and it’s 7.5% expected now. Different people have different views as to how to cut it—forget it. I don’t really care; just you have to have a unified agreement.

Everybody in Congress and the president and so on should pledge to do that. Then the question is how to do it. But they should know that number—that’s about $900 billion a year roughly. And that means cutting it, as you point out, by cutting the deficit by more than half from where it sits down.

Yeah, yeah, yeah. Well, it’s, yes—because with the continuing—the tax cuts from tax cuts, that’ll be 7.5%, and you want to get it down to 3%. It sounds draconian, but we did that kind of change from 1991 till 1997. The key there are three keys to this: do it soon, fast—when the time is good, when the economy is good. In other words, do it now—now.

Okay, the temptation is going to say, “Well, we’re going to ease into this, and we’re going to be there, and we’re going to do it in three years from now.” But if you have a bad economy, you cannot do it, okay? And that’s the worst. We have the best economy, and the sooner you do it, the more you’re going to do it. So the 3% solution: do it now and recognize that you have to deliver it.

So if you’re having, let’s say cost cuts in government, you have to own the number. So everybody’s got to pledge 3% now. The argument says how to get there, but you have to own the number so much so that you’d say if it’s not 3%, throw me out of office because I’ve got to deliver that number. So if somebody—if government cost expense cutting—you know—is it really the $2 trillion number? Is it the $1 trillion number? Is it a half trillion dollar number? We all throw those numbers around.

You’ve got to own the number, and you’ve got to get to three. You can’t make it any one thing, right? But you also have to realize, like, if you did it, spread out nothing is going to be that big. So nothing is going to be insurmountable. That would mean—I go through the numbers in the book, by the way. This book is online, free, and everybody can get it. I read it this weekend, and I used a highlighter for the first time in a long time, Ray. So there was a lot of great content to pull out of there.

I might use AI; this is being put out not to sell books anyway; it’s all free so everybody can go through the mechanics. But the main thing is you take the things you can cut from or build from. So what can you cut from? You look at government expenditures—roughly 70% of government expenditures are—you can’t cut. So it comes down to a small percentage that you can cut. But you find out how much you can cut.

So the important thing is 3%. The other thing about it is to realize that if you make those moves, the bond market will benefit. You see this, and so interest rates will go down, right? Interest rates going down—interest rate expense is most important. So when the president does an interview the other day, and he says we need to get them to cut interest rates by 1%, and he’s speaking about the central bank, he’s effectively trying to force the central bank to take rate action.

If the federal government were to cut spending significantly and quickly, the market would naturally react to lower rates—that’s right. Okay, I think that is so important for everyone to hear. He’s right. If you look at my calculations, you need 100 basis points. If you get 100 basis points cut in rates, that’s equivalent to significant cutting in spending.

So he’s right, but if you do that without the other parts, you’re going to take money away. You’re going to make it less desirable to own these things—these bonds—because that’s going to be a problem. Where if you do these things together, they can support each other. So in other words, fine; cut it from spending. By the way, the longer we wait, the more interest accumulates because it’s at a higher rate—the more the debt accumulates.

Ultimately, this is the arithmetic death spiral that you get into. The longer we wait, the more you have to cut in the future to get out of the hole. It’s not linear; it’s a nonlinear cutting that’s needed to get—so the faster you do it, the less you have to cut. I think that is so important. Let me just say that again: the faster you cut, the less you have to cut.

Yes, and you can do it in a manageable way. You know, a bit here, a bit there—these bits add up. If you don’t, you’re going to have this arc of compounding. So let’s talk politics for a second. Is doge and the concept of doge enough, or do we need legislative action here? Then I want to talk about the politics of the legislative action needed, given like the election cycles.

There’s a combination of a question. It’s not just doge; it’s a matter of less regulation, productivity changes that might come from AI, which then might translate to profits that might be capital gains profits. They might be profits and all of that. So it really, you know, when I look at it, it looks very tough. But there’s also, you know, revenue also—tariffs produce revenue, so—but yeah.

People think on the tariffs; people don’t think of taxes as inflation, but taxes are inflation, right? Because it costs you more. So the real question, as you play with the numbers, is it’s very, very difficult to know and be precise about how much is going to come from productivity and profit increases from the efficiencies gained by AI and new technologies. How much comes from this and that? We don’t honestly know, but the important thing is not to—we’re at the edge and not to make it a crapshoot.

The number must be 3%, and so you should have… Handle not Hail Mary passes but a clear passage to that 3% number. Are we better off with Trump as president versus if Biden had won? In this context, yes, I do believe we are in the financial context because in terms of profitability and the likelihood of cutting, I think the Republicans are probably more likely to make these moves than the Democrats. But you also have to take into consideration the social impacts and the other impacts that are going to come from this.

We’re at a civil war internally, and we’re at an international war simultaneously, so there are second-order effects. I think the main thing is to take those numbers and make them real at 3%, not speculating. I worry, honestly, about the gap. Like the idea of when profits kick in from AI, I’m worried about that. I was going to ask you next, so AI takes off, we lose a lot of jobs. We have a million, five, three million, five million people that become unemployed, that work in call centers, that work on automotive lines, etc. They lose their jobs, and before the productivity kicks in from AI that creates new markets and new parts of the economy, we have a lot of unemployed people.

The government representatives, the politicians, raise their hands and say we have to support these people. We have to introduce stimulus. We have to introduce new support programs. And is it not likely the case that with AI coming online, we are going to see a fairly significant demand for public support on this transition that’s coming? That’s right, but there are two dimensions. The near term is what will the impact be? I don’t think the profit impact and the financial impact on productivity is going to be nearly enough, near enough, to deal with the supply-demand issue that we now have.

So let’s say, is it this year? Is it next year? Just imagine you are at risk of a heart attack, you know? And I say someday we’ll have the productivity conveyed. Okay, it may be out there, but it’s not as immediate as it needs to be. And then we have the other aspect of it, which is how is that pie divided, which is going to be very political because the disruptive effects will be enormous.

And we’re really all guessing on how those disruptive effects will be. It’s too much of a guess, but you’re absolutely right: lots of jobs are going to be lost. Lots of change is going to happen in terms of turbulence. How do we have a plan? How can we even agree on a plan of how to deal with that? I don’t think we’re in a time—maybe in the rest of our lifetimes—that agreement is going to be easy. I see fragmentation of states from the central government. I think you’re going to see big fragmentation in the world, not just in the United States, on the failure to agree on most things.

And so I’m worried about the timeline. Think of the timeline this way: there’s the first hundred days. We’re in a honeymoon period. I’ve been through, I’m old, you know, I’ve been through this a long time. I know what the honeymoon is like. Right afterwards, there are a hundred days that you can change legislation, you move quickly, and everybody’s there.

Then there’s the next important time horizon, which is two years to the midterm elections. You get in about years, you know, 18 months after the election, and now not everything goes as anyone expects. You could have this supply-demand situation, and think of our cycle. I mentioned the average cycle is about six years, give or take three years. So, we’re going to be later into the cycle.

We have this supply-demand situation, right? Are things going to stay good into the midterm elections? And that mandate? I think there could be a lot of fighting in the midterm elections. Let me ask you two questions. The first: if we do significant cuts, there will be a lot of job loss. If AI is successful and moves quickly, there will be significant job loss. If there is significant job loss, does that not fuel the rise of socialism in the United States?

I think that we can do it. When I talk about the three percent solution, I think that we can cut and make the adjustments in a few percentages to be able to do this without great trauma. So we can get to having that limitation done without great trauma, and it will be supported by interest rate moves. So that’s first. We can get this thing done. We must get that thing done. And if we don’t, then of course I think we are in an era where we’re going to have great conflict in the United States.

This is not a run to Nirvana. This is, you know, the moment you’re going to have legal challenges. One state—the Democrats, you know, the blue states, the red states—and within the states, you’re going to have a lot of disruption. You’re going to have a lot of dissatisfaction, and it’s going to be about money and power, and so that’s ahead. And so, like you say, there’s the socialists, the left, the right, and that’s why you’re going to have this type of civil war or internal conflict with us.

This is not a straight race to Nirvana and prosperity. You have that at the same time as you have the other elements. You know, there are the five big forces. What I’m calling so you have the debt money we talked about, there’s the internal conflict that is we’re going to test the legal system. And, you know, we’re in an environment now that might is right.

And internationally, you are going to have the same kind of conflict. We touched on China. We’re going to have conflict; you’re no longer having a cooperative, even an attempt at a cooperative world order. Things like the World Health Organization, the World Trade Organization, all of those are obsolete. And so we’re going to have again might is right.

So it’s going to be a period of greater conflict. You’re going to have a technology war. You can have increased military spending in this kind of environment that creates a budget issue, and climate will have—it will be an economic issue as well as an environmental issue. So these expenses are going to go up. All of those are coming together. Yes, left, right, and conflict will be ahead of us.

Is this a hot civil war? Do people take to the streets? I mean, how does this resolve? Obviously, we’ve got historical context for social uprising. But what happens in the United States over the next ten years? I think two important aspects of it are: does the legal system work well so that the Supreme Court—you know, you asked me about the independence of the central bank. You know, does law work?

And I think there are going to be a lot of challenges. I’m not saying it doesn’t work. I’m saying that’s the question, and that’ll be very much state by state. You’re going to see conflicts between the states and the central government. So how does that decision-making system hold up? Is it might is right; you know, sanctuary city issues and such? How is—or is that going to all work well? I mean, that’s the most important thing.

And then we have in a time of great stress and challenge. You know, when things get worse, right now things are good. This is pretty good, but they’re going to get worse. And then you have the international going on at the same time. So internally within countries, we have the same kind of conflict. You’re seeing it happen in Europe. You’re seeing the same dynamic.

We talk about the problems that the United States is having regarding debt and so on. You have then the same problem within Europe. You’re seeing greater polarity: left, right. You’re seeing economic problems cause more confrontation. And so you’re seeing this around the world. So you’re coming into an environment that is likely to have, over a period of time—not immediately—greater conflict.

When you talk about ten years, there’s going to be a period in that ten-year period where it’s going to be hellacious, in that ten-year where the coordination of dealing with our problems will be greater and the cooperation for dealing with problems will be less. On that point, talk about the role that you have seen external conflict play in resolving the fiscal challenges internally. So you talk in your prior book, Changing World Order, about the historical relationship between external conflict as a cycle that seems to follow or flow with this financial cycle.

Maybe you can talk a little bit about what’s going to happen between the United States and China, given the condition in the U.S. today. Do we have a higher propensity when things are difficult at home? Folks tend to go to war. War is stimulatory. Is that a driver here? And what’s going to happen functionally with China over the next decade, do you think?

In the U.S., there’s a cycle that has to do with changes in money and all of these things where you don’t have enough money. You need money to support international conflict; you need money to make domestic people happy. And then there’s no power, you know; there’s no system for making judgments internationally. The United Nations doesn’t work; the World Health Organization doesn’t work, so there’s no system.

So you come into this power. When we’re talking about the financial problems that we’re talking about—that we covered—and recognize that that’s worldwide. And then you have the polarity worldwide that has to do with different wealth and values. And you have that problem within the population, and then you have no rule system internationally.

So it is a might is right series. You have that confluence of things, particularly now. And then there are disruptions, big disruptions: technology. We talked about how you can’t lose the technology war because you’ll lose the military war. All of that stress and shortage of what is perceived to be needed is incendiary. You know, it’s a risky situation, of course. Productivity helps, but you have to understand to put it in its place. The 1920s, leading up to the stock market bubble, that was the decade that we had the greatest number of inventions, patents, innovation, and great productivity increases, while we simultaneously had big debt increases and we simultaneously had these wealth gap and values increases.

And so you don’t get away from that. So this is going to be a lot of tension in a world where it’s difficult to get all the parties to cooperate. In wars, if you look at history—when I say wars, there are military wars there, and then there are less than military wars—and I can’t tell you that we’re going to go into military wars. I think, like the Soviet Union and the United States, because of the risk of mass destruction, was able to avoid those. But in history, it’s going to be a very difficult period.

You describe in your book the difference between how the United States goes to war and how China goes to war. Correct me if I’m wrong, but you speak to the U.S. going to war head to head, open confrontation, whereas China is much more like a Sun Tzu art of war style. It’s a little bit more tricky, a little bit more careful. They never let you know what they’re going to do. Is that a fair characterization?

Yeah, the general belief of the Chinese on the art of war—and this has existed throughout and it exists today—is that if you’re going into a fighting war, you must not have been smart enough to win without a fighting war. And you win through deception and manipulation because fighting wars are going to damage you a lot. You don’t want to be damaged; you want to get to your objectives.

So that’s how they fight wars. That sounds like a smart way to fight wars. Also, in international relations, there’s what’s called the tribute system. The tribute system was your power determines where you are in your hierarchy. If you have more power, you have more hierarchy; you’re higher in the hierarchy. It’s like Confucian. And if you are, everybody should know what each other’s power is. The lesser power should give tribute to the greater power internationally, and the greater power should respect that and treat.

They should work and have harmony together rather than to have conflict because it’s all about getting what you want. Harmony and prosperity is what you want, and fighting—that destroys things—is not what you want. Whereas the man who was vice president and great historian of China, a man by the name of Wang Shishan, described it to me that there’s the Mediterranean approach.

Right, right, right, right. Yeah, and the Mediterranean approach, which is a very different approach, really began out of that. There were families, and there were no borders. And the way it worked is there were no limitations. In fact, we didn’t have countries with borders and ideas that you don’t cross borders until what’s the Peace of Westphalia after 30 in the mid-17th century. I think it was like 1650-something.

They had thirty years of war, and everybody would fight, so they were fighting experts, and that’s what the norm was. And then after thirty years of war, they decided, “Okay, let’s draw a boundary around it and try to see what goes on.” And there’s your business, and that’s how it came about.

So, and that’s, by the way, in history, one of the reasons that the Chinese and Japanese lost what they called their hundred years of humiliation when the foreign powers came in in the late 1830s, and they had to fight the opium wars and so on. The western powers were strong at fighting because they were practiced at it.

And then there was the hundred years of humiliation, as they call it in China, where the foreign powers came in. So anyway, I’m giving you too much history, but I’m saying that there’s a whole different attitude about how to play that game. And so that’s what I think you’re going to see. You know, that’s when we come back now to the chips war, and you took a look at today’s news. You know, there we are, there we are.

Well, look. Ray, I feel like I always tell people the kid that stands up in the middle school and says, “I’m going to make the vending machines free,” wins the presidency of the middle school. And unfortunately, in a democratic system, the election process kind of follows a similar pattern. It’s very hard. I watched these hearings this week, and I was deeply frustrated when I hear senators say, “I got this money for my constituents. I got this…” Their initiative, their intention is to stand up and say, “I’m going to get you this.” They go into Congress, they get you that money, and over time, government spending swells.

And there is no incentive to reduce it, and we find ourselves now on the precipice of a really difficult crisis. I really do hope that politicians find within themselves the leadership to stand up and say we need to do difficult things. Because ten years from now, I really do hope that your message gets to them and that their leadership allows them to stand up and say we need to make these really difficult changes deeply and quickly in order to preserve the union.

And that they can make those changes and we can move forward and continue to build our lives. So I really appreciate you taking the time to write this book, share this with us, and I really do hope it’s heard. I think it’s so important, so thank you so much.

Right, we can do this, and if we don’t do this, the power of the United States is going to be greatly diminished. So it’s domestic; it’s international. So I appreciate you, Dave, that we can have this kind of conversation. Just have people behave logically. Maybe that’s too much to ask.

Yeah, well, no, look. I mean, let’s not give away the vending machines for a couple of years and, you know, kind of think about keeping the school open for the next generation. But that was great. Thanks, Ray. You know your stuff; you’re great, and this is really invaluable. Thank you for doing that for your listeners. I think it’s so important to Ray.

And I spent a lot of time thinking about it and worrying about it. Your message is so clear and important. I think you present it well and write it well. I read your whole book this weekend, and I appreciate you putting it all out there. I really do hope that the folks that listen to this—I cannot tell you how disappointed I was after I spent the weekend at the inauguration.

I met a lot of members of Congress. I met most of the members of the new cabinet, and it’s just not there. I’m just frustrated, and I’m disheartened by it. So anyway, I think it’s important to keep harping on it, though we’re not going to stop. I’ll keep talking about it and appreciate your efforts here too. We just have to do our best.

That’s right. Really appreciate it, Ray. Thank you. Thank you, Dave. Bye.