Ray Dalio Talks Fed, US Manufacturing, Tariffs and more

35.168 - 50.541 Lisa Abramowicz

Podcasts. Radio. News. Thank you so much for being here. I want to start with these five forces that you see right now that are affecting markets that are important to understand in order to understand where we are. Could you just talk a little bit about what those forces are?

51.022 - 84.39 Ray Dalio

Sure. Through history and now, there are five big forces that are interrelated and generally transpire in cycles as I described. And we know they exist because everything that we are going to talk about will fall into one of those categories. That is the debt money economy cycle, meaning credit is buying power. You give buying power to entities like, it's like the circulatory system.

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You give credit, and if that credit produces, it'll produce debt. But if it produces an income that is good enough to pay the debt, it's a healthy system. but when it produces more debt and more debt service payments, that squeezes out the spending, and that produces a problem, and then there's a supply-demand problem, and then there are economic problems. Okay, that's one cycle.

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The second cycle related to that, because money and wealth have political and social effects is that there becomes big differences in wealth and values. And so when there are big differences in wealth and values, and the people feel that the system isn't working for them, you see greater political polarity between the left and the right. It becomes more the hard left and the hard right.

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And those become irreconcilable differences that are not easily solved through the usual means of operating that way, such as democracies. During the 30s, for example, four major democracies chose to be autocracies during those periods. The third is the international geopolitical cycle, in other words, of a rising power challenging existing powers.

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items that are cost effective and Americans buy them and then they sell send the money back and the Chinese earn the money and take that money and invest in bonds has created a unsustainable dynamic because as we're living in this environment related to to the next two items, where those two countries can be in conflict, military conflict.

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There necessarily has to be insecurities on both parties, the Chinese having an insecurity of whether they're actually going to be able to turn their credit into goods and services. In other words, there's no purpose of holding a bond or an asset unless you can then sell it and get money and buy things.

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And when that dynamic works the other way, it's quite painful for the debtor to have to pay back in real stuff. And then in a geopolitical conflict, that's a problem. And then, of course, in this environment of conflict, that's Also, the problem of, it's worsened.

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Because in wars and prior times, or even with Russia, then there were freezing of assets, and there could always be that kind of issue. So that's a consideration. And then, of course, there's the loss of manufacturing. And the loss of manufacturing in the United States has two problems, which are that it's connected to self-sustaining. You have to be able to be in a risky world.

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You have to be able to produce what you need, so you need to be capable in manufacturing certain items. And then also the loss of the middle class has a lot to do with the loss of manufacturing. So for those reasons, that imbalance, that let's call it trade and capital account imbalance, It's both a trade issue and a capital issue. And raising tariffs is a way of dealing with that.

1505.965 - 1524.201 Lisa Abramowicz

I just wonder whether some of the rebalancing and the rejiggering of the trade flows in the world are stymieing that progress, or whether they're a speed bump, or how you see that fitting into the trajectory that you've been witnessing over the past 10 years.

1524.181 - 1547.308 Ray Dalio

Well, China has a number of problems that he has to deal with, which I'll touch on. However, since I started to go to China, which is 1984, and I went first for curiosity, and then because it was so interesting and I liked the relationship. Per capita income has increased by 28 times. Life expectancy has increased by 10 years and so on. It's done remarkable.

1547.569 - 1576.191 Ray Dalio

But it now has very significant problems. I'll quickly take you through four or five of those. On its debt problems, its debts are all denominated in its own currencies, and among Chinese, mostly speaking, but it needs a giant debt restructuring. The difficult one is the local governments, because the local governments in China account for more of the economy, and they're broke.

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The model... They were... selling off land and earning money from land sales and borrowing money to produce high production. And so not only do they have a debt, but they have a model for those that, local governments that is not an economic model. In other words, what do you do with businesses that don't work, that don't have a profit?

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And related to this is the rationing system that they don't have a profit system. They've gone really mostly after quantity. So by, and the quantity, you know, how do I maximize the quantity of production? forgetting about the profitability of that.