Next Big Idea Transcripts: Ray Dalio

Listen to my conversation with Ray Dalio on?Apple Podcasts ?or?Spotify .

Rufus Griscom: Ray Dalio, welcome to The Next Big Idea Podcast.

Ray Dalio: Thank you for having me.

Rufus Griscom: First of all, Ray, I loved your first book Principles. And I more broadly love the originality of your take on the world. So this is a real treat for me.

Ray Dalio: Well, I'm happy to chat about it with you.

Rufus Griscom: You have a new book out, it's called Principles for Dealing with the Changing World Order. Henry Kissinger called it, "Both a serious contribution and an urgent warning." And Bill Gates called it super provocative and super important. You, Ray, have a reputation for delivering tough love. Principles was all about how radical honesty, tough love can improve our lives. Your new book, is this tough love for the nation? Do you think America needs a little tough love of right now?

Ray Dalio: I didn't think about it that way. But that's a good way of putting it. Tough love is to get the things that you really want, but are difficult. And to know the truth, and to deal with that truth, even though it's tough is what gets you where you want to go. And that's certainly the case for the United States and the world now.

Rufus Griscom: This is a massive project that you, and your team have undertaken. You've studied 500 years of human history. You quantified 18 different gauges of the state of the top 20 countries in the world. Everything from education to debt burden, to softer factors like character, civility, and determination.

So you spent years building, as I understand it, a kind of model of the forces of history. And your conclusion is that the United States is in stage five out of six stages of the cycle of an empire. Stage six is effectively collapsed, I think, right. We're we're in stage five. This is a blaring [DEFCON] warning. You've projected a 30% probability of a civil war in the next decade. You see this as a potentially catastrophic situation.

Ray Dalio: Before we get to my conclusions. I'd like to get into just explain the reality, and also why I did this. I didn't do it to study history. I did it to understand what's happening now, and how to deal with it in the future. Because I'm a very practical decision maker. I run the world's largest hedge fund. For 50 years, I've been making global bets on these things.

And I learned in the past, that the things that surprised me, were things that didn't happen in my lifetime, but happened before that. I learned that first in 1971, there was the devaluation of the dollar, and the stock market went up, and I found out the same thing happened in March of 1933.

And that made me study the great depression. Which is why I was able to anticipate the global financial crisis in 2008, and profit from it. Three things that never happened in my lifetime, but are very big, were first an enormous amount of debt creation that was monetized, or is being monetized. Which means the printing money and buying that debt by central banks, that's first.

The second is the size of the wealth gaps, and the political gaps, and the amount of internal conflict. You have to go back to 1900, as you point out, I like to measure things. You have to go back that far, to find the wealth gaps, and the political gaps, what they are today. And you could see it around you in the news and everything.

And the third is the rising of a great power, a large, strong power to challenge the existing great power. In other words, China rising to challenge the United States by being comparably strong, comparably big, and so on. And challenging the existing world order. The existing world order began in 1945, when there was the last war.

So in order to understand those things, and how to deal with them today, and to borrow and so on, I needed to go back and follow the story. I needed to start it 500 years ago. Because these rises in declines of empires, and these challenges, they take 250 years, or 150 years. So that's what I needed to study. And that's what I think people needed to know.

I didn't intend to write it as a book. I did it as a study. Because I needed to know it, Bridgewater, my company needed to understand it in order to deal with today. And then I converted it into a book that I felt everybody needed to know. And as you say, Henry Kissinger, Bill Gates, Jamie Diamond, a lot of people felt that it was important for it to be read.

Rufus Griscom: You mentioned that you profited from the 2008 crisis. And that's of course the job of a hedge fund. Is there any concern among your team or among investors in the fund that you're giving away a additive advantage by sharing your methodology?

Ray Dalio: There's a long way from conveying these issues to knowing how to construct portfolios, to deal with them in the best way that's part of it. And at the same time, there's a sense of responsibility that I personally have that relates to the greater mission. What do you do if you see these things? What? You sit back and you don't convey them? Everybody's saying they're very important. And I believe they're very important and I could not convey them at this level.

Rufus Griscom: Yeah, yeah, yeah. So there's a sense of a moral obligation. And I would also imagine that the model that informs a lot of the book, which is of course, full of charts and graphs and an enormous amount of data, and it's a page earner. Must be much, much more or granular in its full state.

I think of how the US Government released the global positioning system. And in the early years, they restricted access to the highest resolution version only for the US military. That they made GPS available to the world. And perhaps this is what you're doing with your model to a degree.

Ray Dalio: Absolutely, great description. Because I'm showing the pictures, you see the pictures in the charts and so on. It's a long way from going to that at then at the granular algorithm model level, to making the investment decision to construct a portfolio

Rufus Griscom: You've described how you see the economy, and the world to some degree as a mechanistic system. I think about the advances we've made in being able to anticipate the weather for instance. I mean, 100 years ago, we could maybe had some sense of what kind of weather we going to see in the next couple days.

Now, we have models that make it possible to see maybe 10 days out. We have a pretty good sense of what weather's coming our way. But beyond 10 days, the model breaks down. Because it's just too complicated. There are too many factors. What you're doing, and what you and your team are doing, is quite extraordinary, which is trying to quantify and build a sophisticated model to anticipate large changes in not only the economy, but by extension culture, and societies, and the fall of nations, and civil wars. You clearly see this as a useful tool. Do you think there's also some limitations to what one can predict?

Ray Dalio: Sure. First of all, everything that happens every moment of every day happens because of causes that happened before the reactions. So there are linkages. I mean, I believe that the only limitations are our abilities to understand, and to see those things. To understand the cause effect relationships.

I mean, practically, everything is almost predestined, and we just don't understand it. So there are limits to that understanding. But the capacity, and ability to understand is now much, much, much greater. That's what I mean, mechanistic. It has a cause effect. Therefore, not ideological. I'm just trying to be practical.

The second thing about this, is that it's one of those situations in which we don't know exactly, but we know a lot, even in the big cycles. Let's say there's a human life cycle. Use that as an example. I'm 72, I know where I am in my life cycle. Okay. It's not where a 22-year-old is in their life cycle.

If you look at me, and you measure what are my health measures, and so on, you could know what condition I am in, and you can make an approximation of my health, and my longevity from that. And it's also true for looking at the life cycles of countries. You could look at their health, you can look what they transpire, if you understand those things.

Rufus Griscom: So America might be a 72-ear-old at this point?

Ray Dalio: Well, you can see the data and you could see that situation. Let's get back to the fundamentals. The three are, are you spending more than you are earning and financing that on debt? Okay. That's a fundamental. You cannot do that forever. Because one man's debts are another man's financial assets.

And so it's a law that you will either pay that debt back with hard money, in other words, money that has not been depreciated in value. Or they'll print a lot of the money, and you'll pay it back with depreciated money. But you are going to pay that back and you can't continue to spend more than you earn, individuals or societies without getting it from someplace. And that's a reality. And that produces cycles. Because when you borrow, you could spend more than you earn. And when you pay back, you have to spend less than you earn. So that's fundamental. And you could judge the health. The financial health of an individual, a company, or a country by its income statement, and balances.

The second is how you are with each other. The system has got to work great for the majority of the people. If it doesn't work great for the majority of the people, then it's going to cause a problem. Particularly, if you have financial problems. And you can measure that. It's not just measured in the wealth gap. Which is of course an indicator. It's the thing that people fight the most over is wealth.

But also it's measured in political gaps. And you can see what's happening around you. When you turn on the televisions, and you listen to one station, and you switch to the next station, you can see the ideology. You can see the conflict between the left and the right. You can see that conflict. And you can see how it's going. And it can be measured.

And then the third, is this other rise, how strong is our country? So what kind of world order are we in? We're in the American World Order that started in 1945. And that's when a country is dominant. The United States had 80% of the world's money. Gold was money then. It had 80% of the world's money. It had the monopoly on the biggest and best weapons. It counted for half the world economy. And so nobody wanted to fight it. And it set the rules, which is why the United nations is in New York, and why the World Bank, and the IMF are Washington DC.

Because it was the American World Order. And there is a cycle, in which others become more competitive, and a leading empire becomes less competitive. So you can see the cycle painted in those charts, and those measures that are in the book. And as a result, you can see where we are.

Rufus Griscom: Can we dig a little deeper into each of these big three factors? So starting with the cycle of good and bad finances. You talk about the exorbitant privilege of having access to unlimited debt. And this is a story that we've seen play out multiple times, as you described in the book with the Dutch guilder, the British pound, now the American dollar.

This opportunity to have effectively unlimited credit seems to be impossible to resist. And the consequences are highly predictable. There have been some folks recently who've been talking about this idea that, "Well, maybe we can just borrow endlessly." Even came up with this fancy name for it, MMT, or Modern Monetary Theory. It's a detractive idea. Whatever we have the capacity to do, we can finance. I take it you're not a believer in that.

Ray Dalio: Well, no, it doesn't make sense. Because they're looking at it just on the basis of debt service payments. But what you have to realize is that one man's debts are another man's assets. So do you want to hold those? And right now we're at a moment of a change that you can see taking place.

The creation of a lot of debt. And the printing of a lot of money has given a lot of money, and buying power to a lot of people, which they like. But it should not be a surprise that prices go up a lot. You give a lot of people a lot of money, and spending and goes up a lot. And it should not be a surprise that inflation goes up a lot. And then when somebody's holding their money in savings, in cash, or in bonds, in other words, holding that debt, and you're receiving a negative return relative to its buying power, you might not want to hold that.

And there's a change in mentality from thinking about how rich you are in nominal dollars. In other words, not inflation adjusted dollars, just how many you got, how many dollars you got. To starting to think of how much wealth you have in inflation adjusted dollars and saying, "Oh my God, I'm losing that." Which causes people to get out of cash, get out of bonds, those debtors. And that means that interest rates either go up, and shut this thing off, or the government put into position that it has to print more money.

So understanding the mechanics of that is so important. It's very naive to believe MMT as it's described. I mean, I wish it was true-

Rufus Griscom: Sure. Sure.

Ray Dalio: That you could get print money and run deficits and nobody's going to care, and it's all great. Wouldn't that be wonderful? But it's not true.

Rufus Griscom: Yeah, no, it would be nice. And you predicted rising inflation. And of course we just had reports of 7.5% inflation in January. The highest we've seen since the early '80s. Of course, some folks are saying, "Well, this is a result of supply chain bottlenecks, clearly a result of COVID 19. It should level off."

Ray Dalio: No, wrong.

Rufus Griscom: I think Goldman Sachs, is predicting that inflation will decline to 3.7% by the end of the year. Do you agree that we're going to see a decline of inflation? Or you think this is the beginning of a new set of problems?

Ray Dalio: It's the beginning of a new set of problems. But just even think about that. Okay. If you took that optimistic forecast, which doesn't include how people's behaviors are going to change. Which means they're going to do things like I don't want to hold my money in cash as much, I'm going to do something else, or cost of living increases, wages are going to have to go up.

People are going to argue, I need more money in order to live. And so on. It's going to produce political problems. Everybody's going to demand more money and so on. And that's going to change things. And so, in my opinion, that 3.7% number is an optimistic number. And it's a bad number on the way to change behaviors. Because they're not fully taking into consideration those changed behaviors.

Rufus Griscom: You write in the book that you estimate that the next downturn is coming about four years from the publication of this book, you said. So late 2025, 2026, has your view on that evolved in the last few months? What do you think?

Ray Dalio: No, and I'm not trying to be precise. Because I can't be precise. But I can say the following, there's a cycle. Many cycles. There've been recessions, stimulations, recoveries, inflations, tightening of money, downturns, recessions. And we do it again. Okay. And those cycles on average have been about seven years. But they depend on health far you are into the cycle before the inflation.

And you could look at measures like the unemployment rate, the operating rate, they can call that capacity utilization, or they can call that the GDP gap. In other words, how much capacity are we using? How much capacity do we have to produce? There are met measures of those.

And all of those show that we are near capacity, and unemployment, wage settlements are going up. Everything is going up and so on. And that's why we are in the part of the cycle that the federal reserve, and other central banks are starting to put on the brakes, and they're late in doing that.

And so we know what part of the cycle we are in. We are in the increasingly risky putting on the brakes part of the cycle. And there's a long way to go from zero interest rates than something to compensate us for inflation. Okay.

Now, so we take that cycle, we can say, "This is a typical third year in a cycle." Let's say this all began the stimulation of giving everybody a lot of money, and credit began in April of 2020. And so if we look at 2022, we're in the beginning of the tightening phase. So you carry into 2023 and it's going to get more difficult. The easy money has been made. And then if you carry that forward, with time, it becomes increasingly risky.

And that's what also makes the 2024, election period very risky. Okay. Because you can have, at that time a situation where in the financial markets, the financial markets go first, stock market goes first, credit spreads start to expand, and credit becomes more difficult. And then you see the economy follow. That's the pattern.

So you start to take that. And then when you come to a period like 2024 elections, which is a whole different set of circumstances. Because I think that we're at each other's throats enough. There's such an internal political conflict, because of populism. We'll talk about this in a minute. When I look at the confluence, 2022, looks more like a transition period. 2023 is of greater risk. 2024, and so on. So as you get to that vicinity, and whatever, it looks increasingly risky.

Rufus Griscom: Coming up after the break, it's not just the economy that has Ray worried. He says that if we can't find ways to heal our political divide, we could be headed for civil war. We'll be right back.

One of the things I found fascinating about the book, is if I'm reading it correctly, you're basically showing this pattern of large economic cycles manifesting themselves in certain stages, in the form of internal conflict, and polarization. It's almost inevitable.

You have these debt bubbles. You have increasing concentration of wealth. You have increasing polarization. And to some degree it helps us understand if this is true, why it is that we as a nation have as much internal strife conflict as we have? It's not just that maybe your mother-in-law's unreasonable, or people are going crazy. That this is something we can understand as a historical pattern.

Ray Dalio: Yes, yes, yes. Right. And I'll take you through the cycle just briefly.

Rufus Griscom: Yeah.

Ray Dalio: All of the cycles start with you have a war, a new era begins. It's a great leveling exercise. Then you have a dominant power that nobody wants to fight. And you have a period of peace and prosperity. People working together to rebuild the gaps, aren't great new opportunities and they hate war.

Then you begin to have that building up. And it's a prosperous period. And as you have that prosperity, particularly in a capitalist environment, you start with the Dutch, the Dutch invented capitalism by the way, was first stock, public stock, and stock market based on that. And what that did was it give people with ideas, capital money, with promises to pay back, they could get resources. And they created that new kind of buying power through capitalism and so on.

And that enabled a lot of productivity. The power of the intellect and the entrepreneur, and that inventiveness together with capital, the ability to build it out was great. And what it does though, is it creates differences. Big differences in wealth and opportunities that become self perpetuating and unfair.

Unfair because those who have a lot of money can give their kids educations, and resources, and have power that is greater than those who don't. It ceases to be an environment of really equal opportunity. So you see that this disparity begins to exist. And also because of that experience, more people want to get into the action, which creates more borrowing of money, and creating more debt creation.

I know like my dad who lived through the great depression in the war afterwards, he didn't want to buy stocks. He wanted to have savings. That he would be okay. And so he missed out. And then you take another generation, and they come along, and that really would've been stupid. They look back and they want to be in.

So the creation of borrowing money, and speculating increases while the wealth gaps, and the opportunity gaps increase. And so you get to a time where those gaps are significant, and the world that those people think it's unfair. What you have is populism of the left and populism of the right.

And populism means like the fighter for you. In other words, which side are you on? And you want somebody who's going to fight for you. No longer do you want somebody who's going to compromise with the other side. And so you see it today in our primaries, and our elections. You are not seeing moderates. Moderates are perceived as being weak.

Instead, people hire the fighter for of them. And then you have the wars. And so you have that kind of polarity, and the loss of the middle. The loss of those who will compromise, bring people together. That's been the cycle. Now, you put that together with bad times, like could happen in the 2024 elections, and you have a fight. And so that's why it's possible that you have both sides having an attitude of, they must win at all cost.

Well, they may not accept losing. And if they don't accept losing, one side doesn't accept losing, and it comes down to power, you lose the rule of law. You lose the constitution and now you have a power thing going on. And that's the pattern.

Rufus Griscom: And, and that's where we get to a 30% probability of devolving into a stage six civil war type dynamic in the next, in the next 10 years. And you guys to get to that number, you guys have spent a bunch of time measuring internal strife, political conflict, really going through a very thorough quantitative assessment of how much conflict is rising right now.

Ray Dalio: Yeah. But let me emphasize, it's not scientific. One of the things that is a real plus there, is that in our history, we've only had one civil war. The United States has a long history, and there seems to be a valuing of democracy and the rule of law. If it wasn't for taking that into consideration, and it's difficult to know exactly how much weigh that, the number would be significantly higher.

But let me describe the type of civil war. And you're almost seeing signs of that now. First of all, there's people recognizing differences in values, and circumstances, and moving to other places. So moving to one state from another state. And that has a self perpetuating nature to it.

Because for example, high income states with large wealth gaps, tend to be more redistributive type of states. And so there's a tax element, but there's also a social element and an anger element. And you could see as there's movement from such states, for those reasons to other states. Then they lose the tax base. And then that makes the problem worse. Because they don't have the resources to have, let's say the same police protections, or the same garbage cleanup, or whatever it is that makes people move more. And so you see that.

And you see signs of conflict even on dealing with who will obey what rules. For example, we had what was called sanctuary cities. When the federal government said, "Well, in terms of our immigration rules, and so on, we require this, this, and the other thing." And certain cities or certain states will say, "We're not doing it that way. We're going to do it our way."

And then you have tests of power. And once you start that breakdown of rule of law, and the constitution that way, even questions like, "Is the Supreme court," and I'm hearing these types of questions, "As it's going to hear things like Roe versus Wade equivalence, or gun controls. And so on." There's a sense that maybe that Supreme court has been politicized. And that's not a fair system, and we may not go by it.

And that kind of civil war in a sense means really operations by power, not by us agreeing on how to follow rules, and compromise for the sake of the system. When the causes that people are behind, are more important to them than the system, the system is in jeopardy.

Rufus Griscom: And so when you say civil war then, this could be a cold war, opposed to a hot war in the sense that you're not necessarily saying that we're talking about militia in the streets, and people getting mowed down. This could be a collapse, or breaking of our constitutional system, or there probably any number of other scenarios we can imagine-

Ray Dalio: That's right.

Rufus Griscom: Yeah. And in your measurements of internal conflict, and you have a chart in the book that shows the last, I don't know, 150 years. The last time we had internal conflict higher than current levels was what? It was the late 1960s.

Ray Dalio: Well, the different kinds of conflict back then, what we had was more strikes and protests. Martin Luther King is shot. Robert Kennedy is shot. You had Vietnam war, you had fighting in Watts, in LA and places like that. And you had a lot of demonstrations. And so if you take the aggregate of those things, we are at about that kind of a level, although the complexion of it is different.

Rufus Griscom: How much of the resentment and internal strife do you think is a result of increasing concentration of wealth, or wealth inequality. You've called wealth inequality, a national emergency. Do you think it's the big driver?

Ray Dalio: Well, it's certainly one of the big drivers. Particularly, if there's a sense that the system is unfair. First, is it working for me? It's got to work for the majority. And the other problem that it creates, is that historically those societies that have been drawing upon the broadest population do best. Because you can't ever tell where the talent is going to come from. It can come from anywhere.

Before there were women in the workforce, and then you open the workforce, you can get a lot more talented people, and the same is true for different groups. So when there's a financial problem, and there's the sense of it's not working for me, and injustice, of course you have conflict. That's been true through history. So you can just go back and see the patterns.

The French Revolution, the Russian Revolution, the Chinese Revolution, the Cuban Revolution, all of those, you just see the same things. So seeing that you can see these things. It's just not opinions.

Rufus Griscom: Clearly something we have to do better is distributing wealth in a way that's more equitable, to get our country back, to being more cohesive, and try to stop the current trend lines.

Ray Dalio: Let me clarify.

Rufus Griscom: Yeah.

Ray Dalio: Yes. But you also have to distribute opportunity to be productive.

Rufus Griscom: Mm-hmm (affirmative). Mm-hmm (affirmative).

Ray Dalio: Because you have to simultaneously increase the size of the pie, and divide it well. You can't just redistribute wealth without having productivity rise. Collectively our living standards are going to be a function of our productivity. So you need to really divide the opportunity pie, not just the wealth pie.

Rufus Griscom: I'm guessing you would support some degree of taxing the rich. But you've opposed a wealth tax as a step too far. This gets personal, of course. We're in this moment in history where I think Elon Musk recently hit $270 billion of net worth. It's probably gone lower now. Forbes has reported yours at 15 to 20 billion. I have to think there are a lot of people out there who just think does any-

Ray Dalio: I don't think I'm well understood. I'm in favor of a redistribution of the wealth. And just to be clear, I'm in favor of anything that works. But there are practical applications. You can go online, and on LinkedIn and I did an examination of wealth taxes, and the practicality of wealth taxes is the issue. Not the idea of redistributing the wealth.

So let me give an example of that. In order to tax wealth, that means that illiquid assets such as you own your house, or you own property and so on. And you don't have the liquidity, and you actually have to come up with a value for that thing is very, very, difficult. That's different from other types of taxes that can achieve something that's somewhat similar to that, such as inheritance taxes, or something along those lines.

But in any case, I do believe that there has to be... Let's take everybody, they're basics. You have to have basic healthcare, you have to have basic education, and so on. You have to have that. And everybody has to have that in an environment that crew creates that. And so the gaps that I'm talking about are very serious. And it should be when I have such a concentration of that, it has to be well engineered to be effective. So I that's where I'm coming from regarding that.

Rufus Griscom: Yep. Yep. That makes sense. Well, because one wonders, I think we have Elon, and maybe Bezos around the 200 billion mark. It's conceivable that the way things are going, 10 years from now, we could see a first trillionaire. There must be some inflection point where we say, "Money just simply doesn't have utility for an individual [inaudible]-"

Ray Dalio: Doesn't have utility. That's right.

Rufus Griscom: Right. Yeah-

Ray Dalio: For the individuals, money doesn't have utility. That's exactly right. And we're way past that point.

Rufus Griscom: Yeah.

Ray Dalio: No, you're saying something like, "There will be a point." No, we're past that point.

Rufus Griscom: Right. I have a friend who's made the case that we should just say there's some amount of money. Let's say whether it's a billion, or whatever it is, beyond which money has no utility. So we can just give everybody a really cool jacket. We can say, "You're the wealthiest person in the world, and your second wealthiest, and third wealthiest." And they get a very special sort of branded hats and jackets. So they get the symbolic victory.

Ray Dalio: No, but I think it's not just that. I'm dealing with the mechanics. Yeah. I think that you think there's something about the ego, and maybe for some people there's something about the ego and so on. The main thing is that one way or another, we have to invest that money well. And most importantly, education and equal opportunity. Okay.

And then there are some people just in a civil society that may not be able for whatever their circumstances are. They may be mental issues. There may be whatever the thing. And they need to have a civil existence. So it's really the working together. If I was president of the United States, first thing I would do, is I'd have a bipartisan cabinet to-

Rufus Griscom: Yeah. I like that.

Ray Dalio: To try to bring the country together. And I'd bring together thoughtful, non extremists of those. And then I'd create a Manhattan Project, in which practical people from the left, and practical people from the right, I'd lock them up over there or do that. And I'd accept anything that they came back with.

Nobody should make one's own personal preferences dominant. I think sometimes they argue about all the particulars. But you need to reach an agreement that is going to have enough understanding of the engineering of an economy so that both productivity, and with it, the pie can grow, and be well distributed. And I take that project. And I take this bipartisan. And I think that would be what I would do. I think something like that needs to be done. It needs to be smart, and it needs to be broadly accepted and implemented.

Rufus Griscom: I think this brings us to the third, big factor in determining the health of the country. The cycle of external order and disorder. So where are we on that metric?

Ray Dalio: Well, the cycle begins after war, and you start a new world order. There's a fight about out, who's got the most power, and what kind of world should live in. And the last time that happened was 1945, at the end of World War II, the were winners. And then they set the rules of the game. The US won that. And that's why United nations is in New York, and the World Bank, and IMF are in Washington and so on. And we had the world.

And then over periods of time, the relative power shifts. This always happened. That happened in World War I, and then there was the Treaty of Versailles, and the winners got together and decided the rules. And you can go back in history, and you always see this. So you go through the cycle and you have a period of peace.

And then also it's to an equaling force. And then you also have memories. Those who went through the war, never won war again. But time passes, and competitions arise. And in the case where we are now, it's a total power measure. In other words, there are not just military power, there's economic power. And that plays a role.

China while there was Russia, Russia was never anywhere near a comparable economic power. And so by and large, it was defeated because it was out spent on military, and other things. But China's different. And so there are five kinds of wars. There's trade wars, technology wars, geopolitical influence wars, capital wars, and military wars.

And so you're seeing that China is a competitor in all of those areas. And it's now roughly comparable. It's almost now down to your splitting hairs, if you said, let's say on the technology war, who has better facial recognition, and who has better AI, and then that becomes debatable. But their gaining of strength has been faster.

I know China very, very well. I've been going to China since 1984. I admire their culture. And I admire what they've accomplished. Since then per capita income has increased by 26 times. They've increased the life expectancy by 10 years. And they lowered the poverty rate as measured by hunger from 88% to less than 1%. It's a powerful force that has been successful. And there are things to argue about in those five categories I gave. But even things like Taiwan and so on, and that's where we are.

And so even the relative dominance power of the United States, not just in relationship to China, but in relationship to a number of cases. So we have a conflict with Russia going on, and China, and Russia are allies. Because again, in historical terms, what happens is, there's the dominant power, and then other powers form alliances and so on. And the common enemy makes friends.

And there's that dynamic that takes place. And that's where we are. And so there's only one solution to that in this, if you're fighting to be the world's dominant power. And that is to be strong. It doesn't pay to make the other guy a bad guy, or something. There's no good or bad in the world in that sense. It won't get you anywhere saying that they're good or bad.

It really is, how do you become strong? And the way you have to become strong is, domestically, you've got to do the right things. You've got to be financially strong. You've got to work well together. You have to have an educated population that's effective. And so that is where we are. So it's a more challenging environment than it has been.

Rufus Griscom: And in the book, you actually take all these different metrics and add them up to an empire score, between zero and one. You have the US, at 0.87, and China at 0.75. And as you say, it's not a perfect science. So we're really at this point, neck and neck. I think Goldman Sachs has predicted that by 2050, the Chinese economy will be twice as large as the US economy.

Those trend lines seem pretty difficult to change. Although, I can't help, but find myself feeling a little bit skeptical. Because I remember so well, you remember 25, 30 years ago, we were all convinced that Japan was about to eclipse the US, was on the cover of print magazines and so on. Do you think this is fundamentally different from that perception?

Ray Dalio: I think it's fundamentally different. First of all, Japan had a much smaller population. But let's say nothing's certain. But you have to look at probabilities, and you have to deal with it. And it leads you to the same place, which is you'd first of all, damn well better be as strong as you can be. Because at the end of the day, it's a matter of power.

And then domestically fighting with each other. The parties involved have to realize that you can have a competition of systems, or you could have let's say a military war. And if everybody realizes that a military war will be worse than anybody can imagine. Because the technologies in its various ways that have been developed since the last war are enormous. So you must at all costs, put the avoidance of war, as the number one objective. And then deal each other's existential issues well. Knowing what each would die for.

If you can bring about the fear of war internally, the fear of internal war, or the fear of external war, and you could be strong, that's the path. I believe basically if you worry enough, you don't have to worry. And if you don't worry, you need to worry. Because if you worry enough, the fears of what you're worrying about will lead you to take actions that the thing you're worrying about won't happen. And it reduces its chances of happening.

But if you don't worry, and you start to think there's, "Okay, well maybe it's not necessarily true." And maybe Japan does this and maybe something else happens, and you don't do the fundamentals right, you better damn well worry.

Rufus Griscom: When writing this book, you may have imagined a sort of typical oblivious American who's just kind of bicycling along in the sunshine, and doesn't see these big cycles of history bearing down upon on us. Ray, I was that person a few weeks ago before reading your book. All of our family resources in US, big tech stocks, which is a bet I made really about 20 years ago. And it's played out pretty well in the last 20 years.

But I'm always looking for contrarian views. And I'm always looking to try to figure out why I'm wrong. And I find myself still though, feeling pretty good about US, big tech and a little less confident about whether the speed of China's rise will continue at its current pace for a few reasons. And I'd love to bounce those off you just to get your feedback. You can talk me out of them. Because I'm sure that my investment thesis is incorrect.

Ray Dalio: And I'm not sure that anything I can say is correct. But let's talk.

Rufus Griscom: Okay. Okay. So last week I took an Uber ride in New York city. I love talking with Uber drivers. I always learned something. The driver was a Chinese immigrant. He was getting his MBA on the side while driving. And investing in stocks. And he was sharing with me, his stock picks. And I asked him, "Do you believe that in 10 to 20 years, China will be the more power powerful economy than the US?" Number one. And number two, "Do you think that the big Chinese tech companies will be the dominant tech companies in the world in 10 to 20 years?"

And he said, "No, no, no, no. It will be here. They will be here." And I said, "Well, why? Why do you think that?" He said, "Because the rich people and the smart people in China want to be here." This caused me to think that maybe another criteria that may have some value, another gauge for the model is the talent magnet factor.

That the attractiveness of a given nation to talented people around the world is powerful. And when you look at what has been happening recently in China, you see there was a recent Bloomberg headline that said Hong Kong's Brain Drain Worsens and Expats and locals Flee the City.

It feels to me like right now China's maybe losing talent. And I think characteristics of Amsterdam in the 1600s of London, for centuries, and the US today, are a key part of that, I think is attracting some of the great talent from around the world. Is that a factor?

Ray Dalio: Yes. The United States is the only country in the world that really can be a home for the best in the world. We have property rights. We have the capitalist system in terms of being able to provide resources, people from anywhere with great ideas, no matter how they appear. They can dye their hair purple. They can do whatever they want to do if they come up with the great ideas and so on, they can get capital, they can follow it through. And they could be the next Elon Musk or whatever.

At the same time, if you look at what's happening in China, when I started going to China in 1984, there was nothing private. I mean, literally a restaurant was government owned, and everything was government owned. And people would take naps during the middle of the day. And so on. There's a vibrancy and an education of their children.

And there's a capital markets, the second largest capital markets in the world. There's entrepreneurship and they're creating billionaires, and they're creating other ideas. And they're at the same time also creating like there's a new program. I think it's called, The Little Giants, in which there's venture capital. And they're finding out what the best new ideas are.

There's a big difference in some cases. For example, still, if you take the best universities, and these best places, the United States has the best rarefied environments that are terrific in terms of a limit to number of universities, and the environments around those universities, and so on in the world.

And yet if you take a look in China, how many engineers are they churning out, computer engineers, about eight times as many. And so if you look at the developments of technologies, and when I first went to China, I would give $10 calculators to people who were high government officials or ran big companies.

And they thought they were miracle devices. Nowadays, they're competing with quantum computing. There's certainly a conflict of ideologies. Each side has risks. And the biggest risk of democracy is disorder. It can become anarchy, because people are fighting each other. It has a risk. And we're experiencing that.

The biggest problem of autocracy is it can stifle that creativity. I don't honestly know exactly how this is going to turn out, or anything along those lines. My general view is I'm big on diversification. I'm impressed in both ends. So that's how it looks to me. So if you were to bet on technology, I think you'd be making a serious mistake to think that it's a no brainer that American technology will win out.

Rufus Griscom: I'm fundamentally a believer in your argument, and principles for the importance of a culture of radical honesty. And I wonder how, you were talking about Chinese billionaires, and of course recently we had, Jack Ma, the CEO of Alibaba go missing for three months in November, 2020, after he made a controversial speech criticizing the Chinese Financial System.

We've got obviously the weaker population interned and forced labor. We've got 50,000 police officers monitoring and censoring the internet. Trading crypto is illegal. It's not a culture of radical honesty. And it feels to me like creativity, and the power of humans plus machines, which is something you've talked about. A power of computational power, and computing power combined with smart and creative humans is extraordinary.

And it feels to me like that's going to reward cultures of creativity. And creativity thrives and free environments. Does that resonate?

Ray Dalio: It does. I mean, I live in the American Dream. And I love it. But I think you probably haven't spent much time in China.

Rufus Griscom: It's true. Never.

Ray Dalio: And you probably don't see what's going on in the entrepreneurial world. And then there's the issue of where does the government draw the line in terms of those things, and whether you would draw that line? I think you'd be shocked in many ways of how impressed about some things. Let me give you an example, kids playing video games.

The government sets the rules for what kind of get video games that they can have, and how many hours a day, or a week they can do that. In the end United States, we would say, "It's not the role of the government to do that. It's the role of the parents to do that and so on." And then we would examine what's going on in video games. And there's a lot of really scary stuff going on there.

And so then you look at the other one and you say, "So, okay, is that a good thing or bad thing?" I don't know. What works works. And so it almost becomes you can't be so sure about those things. You just have to realize there's pros and cons. And so when I come down to it, absolutely.

But if you have personal responsibility, and good behavior with freedom, you have a magical combination. If you don't have that, if you don't have personal responsibility, and good behavior with freedom, you have chaos. So it's not so simple.

Rufus Griscom: Well, I'm betting on time and video games. Building new digital things of value being a positive. I have to bet on this, Ray, given how many hours my kids spend at video games. I hope they're learning to be future builders in there. We'll find out.

Well, this gets us to the topic of what we can do in response to these, these learnings about... I mean, as you suggested in the book, these big cycles are inevitable. Empires tend to get 100 to 150 years. Hopefully we can get another 100 years out of ours, maybe. But as individuals, and collectively there's actions that we can take based upon the critical reminders, and learnings in your book about the inevitability of these big cycles.

So starting with the personal front, what do we do individually? I mean, obviously we need to be prudent with our family finances. Maybe I need to think about some diversification. What do you recommend for people individually?

Ray Dalio: First of all, planning on... Let's say your worst case scenario making it okay. So calculating how much wealth you have, and your spending of what you need. And how many months or years you can go on to be fine in the event that that didn't happen. So you want to have buying power.

You want to take that number. And after you calculate taking care of your family, and so on how many years can you do that? And you want to cut that number to be conservative. You want to cut that number in half. Because it could be lost to inflation, or taxes, or other things. And you know just from the recent market action, in terms of, let's say tech stocks, or something, you can understand how these things happen. And it happens in various ways. And so you want to start to there.

And then in keeping your portfolio well. You want to almost think of two portfolios. What is the insurance type of portfolio that you would have under that kind of, let's say the worst case scenario. Number three, on this is that you want to understand that if you diversify well, you can reduce your risks without reducing your returns.

All you have to do is find comparably, good things that move differently. And you will accomplish that. And so you want diversification probably of countries currencies,, and asset classes, and so on. So number three is diversify well. And I would say number four is, stay out of cash. Cash is trash. There's too much debt. It'll have a tax on you that you might not pay attention to. Because you might think that I'm safe by holding a certain amount of cash.

But it will be taxed by the inflation rate, and or the tax rate. So let's say you lost 7% last year. You might lose another 5% in the next year, and the cumulative effect that loss that is going to be important. So I would say, "Stay out of cash, and cash type investments." Diversify well. And make sure that you have enough money, including for whatever that worse case scenario is.

And once you've got that taken care of, then you can go on, and chase out whatever the best is, and you go make your bets, and so on. But make sure you've got that.

Rufus Griscom: And so for the All Weather Fund, we don't want to be in cash. I think I've heard you say that bonds are not particularly attractive right now. So some equity positions you'd be a buyer of foreign currencies-

Ray Dalio: well-

Rufus Griscom: A little bit of a little bit of crypto, a little bit of real estate. What would that look like?

Ray Dalio: Well, first of all, some inflation-indexed bonds, rather than regular bonds, okay. Some gold. Some assets that are in countries that have the three good characteristics I mentioned. And those three good characteristics are where they're earning more than they're spending. Where there's not going to be as much internal conflicts. And there's not going to be an external war. Be flexible, be diversified. Those are the main things.

Rufus Griscom: Given the risk of civil war and conflict, it seems as a culture, as a community, it's time to focus on what we have in common. Would you agree with that? How could we change our focus?

Ray Dalio: Yeah. What's essential is look at wars, read these stories, understand what that means. Understand how fighting among ourselves, either internally or externally is destructive, and harmful, and hellacious. And then put that the working together, and finding ways of getting around the existential issues. The most important issues must be a paramount importance.

And so it's the same thing. If you worry, you'll deal with the worrying, and you won't have to worry. But if you don't worry, then you have to worry. Not fighting and doing it well is going to be a lot better.

Rufus Griscom: Thank you, Ray, for taking time out of your hedge funding and grand parenting and hanging out with Henry Kissinger and Bill Gates to be with us today. I so enjoyed the conversation.

Ray Dalio: Well, thank you for our interesting conversation, and also helping me to help pass along what I hope is a value to your listeners. Thank you.