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Bridgewater Associates Founder Ray Dalio talks about the importance of having gold in your portfolio, Federal Reserve monetary policy, challenges facing China and the impact of tariffs on the American economy. He speaks to Bloomberg's Lisa Abramowicz at the Greenwich Economic Forum. -------- More on Bloomberg Television and Markets Like this video? Subscribe and turn on notifications so you don't miss any videos from Bloomberg Markets & Finance: https://tinyurl.com/ysu5b8a9 Visit http://www.bloomberg.com for business news & analysis, up-to-the-minute market data, features, profiles and more. Connect with Bloomberg Television on: X: https://twitter.com/BloombergTV Facebook: https://www.facebook.com/BloombergTelevision Instagram: https://www.instagram.com/bloombergtv/ Connect with Bloomberg Business on: X: https://twitter.com/business Facebook: https://www.facebook.com/bloombergbusiness Instagram: https://www.instagram.com/bloombergbusiness/ TikTok: https://www.tiktok.com/@bloombergbusiness?lang=en Reddit: https://www.reddit.com/r/bloomberg/ LinkedIn: https://www.linkedin.com/company/bloomberg-news/ More from Bloomberg: Bloomberg Radio: https://twitter.com/BloombergRadio Bloomberg Surveillance: https://twitter.com/bsurveillance Bloomberg Politics: https://twitter.com/bpolitics Bloomberg Originals: https://twitter.com/bbgoriginals Watch more on YouTube: Bloomberg Technology: https://www.youtube.com/@BloombergTechnology Bloomberg Originals: https://www.youtube.com/@business Bloomberg Quicktake: https://www.youtube.com/@BloombergQuicktake Bloomberg Espanol: https://www.youtube.com/@bloomberg_espanol Bloomberg Podcasts: https://www.youtube.com/@BloombergPodcasts
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Dalio argues that the global economy is entering a critical transition period driven by five interconnected cyclical forces—debt-money cycles, wealth inequality and political polarization, geopolitical power shifts, natural events, and technological development—and that current imbalances in debt, deficits, and trade resemble the 1930s more than prior recoveries, with outcomes likely shaped more by conflict dynamics than by monetary policy alone.
- Five major forces operating in interconnected cycles explain all economic phenomena and their current alignment creates a transformative moment
- U.S. debt mechanics (spending $7T vs. $5T revenue, 6x debt-to-income ratio, rising debt service) create unsustainable dynamics similar to the 1930s
- Current geopolitical, monetary, and political deterioration suggests conflict resolution rather than cooperative multilateral frameworks
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China's debt is denominated in its own currency and largely held domestically, but requires giant debt restructuring; this is different from a foreign currency-denominated debt problem but still requires resolution.
“China's debts are all denominated in its own currencies and among Chinese, mostly speaking, but it needs a giant debt restructuring.”
The debt-money cycle works as a circulatory system: when credit (buying power) is given to entities, it produces debt, but if it generates income sufficient to service that debt, the system is healthy; when it produces more debt and higher debt service payments that squeeze out spending, it creates economic problems and supply-demand issues.
“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. 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.”
Development of new technologies is the fifth force, and technological advancement is what has raised living standards over time, visible in increases in life expectancies and per capita GDP, and new technology development is currently a very important influence.
“And then fifth through history are man's learnings of particularly developments of new technologies. The development of new technologies is what has raised living standards over time, which you can see in terms of life expectancies and per capita GDP. And of course, the development of new technologies now is a very important influence.”
In wars and geopolitical conflicts, assets can be frozen, as seen with Russia and historically; this creates additional risk for countries holding cross-border assets, making trade imbalances more problematic under geopolitical tension.
“and then in this environment of conflict, that's that's also the problem of it's worsened 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.”
In August 1971, President Nixon announced that the U.S. would no longer convert dollars to gold at a fixed price, devaluing money and ending the gold standard; this was the same policy tool used by President Roosevelt in March 1933 to devalue money during a monetary crisis.
“on Sunday night, Paul Volcker and then President Nixon, really, who was President Nixon delivered the message that you're not going to get your money. Gold was money then...I studied history and I found out the exact same thing happened in March 1933 with Roosevelt getting on the radio and doing the exact same thing. In other words, devaluing money.”
Countries in fiscal crisis have a limited set of policy options: they can be understood by studying history; examining current conditions allows one to anticipate which policy response a government will likely pursue—a framework for predicting future policy behavior.
“What does a country do when it doesn't have enough money? Okay. There are a limited number of things in order to see that you can go back in history and get some understanding and also see what's going on now.”
The problem with governments generally is that strategic investment is often done wastefully rather than productively; the question is how the balance is struck between waste and productivity; hope is that strategic investment is done well.
“The question is whether that is done wastefully or productively. Right. The problem with governments, generally speaking, is it's done wastefully. So you have state owned enterprises or state controlled in that. And people in Washington are not usually really good at this type of that to stop resource allocation. The question is how the balance exists. But yes, I think at these types of times there needs to be more of that and you hope that that's done well.”
China's system has prioritized quantity of production over profitability, focusing on maximizing production volume while forgetting about profit margins; this has led to overproduction harming the economy and requiring major restructuring similar to the 1990s restructuring by Premier Zhu Rongji.
“They've gone really mostly after quantity. So by and the quantity, you know, how do I help maximize the quantity of production, forgetting about the profitability of that. So when you have that, they then you have the dynamic that they're now describing, which is now called involution, which is the fact of overproduction and doing harm to the economy, that's going to require a big restructuring like these big restructurings go similar to what they did in the nineties. Zhu Rongji was the vice premier and premier at the time who did this.”
Wealth inequality and political divergence form a cycle: when large differences in wealth and values emerge and people feel the system isn't working for them, political polarization increases from left-right differences to irreconcilable divisions between hard left and hard right, making democratic resolution difficult; during the 1930s, four major democracies chose to become autocracies.
“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 becomes more of the hard left and the hard right, and those become irreconcilable differences that are not easily solved through the usual means of operating that way in such as democracies. During the thirties, for example, four major democracies chose to be autocracies during those periods.”
History shows that when political and institutional fairness is questioned, conflict can escalate from one side shooting to situations where 'who knows where it goes'; this represents the risk frontier where democratic norms break down.
“You know, history shows that that's not likely and that things can worsen because people then, you know, in you know, in history, it can get bad. I don't know, one side shoots and other side who knows where it is.”
The international geopolitical cycle involves a rising power challenging existing powers, during which the dominance of the previously dominant power fades relative to other powers and the international order itself gets challenged.
“The third is the international geopolitical cycle. In other words, of a rising power challenging existing powers and the same dominance of the dominant power fades relative to other powers. And also the order then gets challenged. And we're certainly going through that.”
Acts of nature—droughts, floods, and pandemics—have killed more people throughout history than wars and have led to more ends of previously mentioned cycles than anything else, making nature and climate change a major force.
“The fourth factor throughout history has been acts of nature. Droughts, floods and pandemics have actually killed more people than wars and actually led to more ends of the previously mentioned cycles than anything else. So nature and certainly nature, climate change and the like is a big force.”
The debt-money cycle functions like a circulatory system: credit creates buying power, and if that credit produces income sufficient to service the debt it is healthy, but when it produces excess debt and debt service payments that squeeze out other spending, it creates economic problems including supply-demand imbalances.
“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. 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.”
The economy has a significant split between the top 1% (by income, stock holdings, etc.) which has enormous liquidity and wealth, and the bottom 60% which face very different conditions with weak labor markets; these divergent conditions make a unified monetary policy ineffective because no single rate addresses both simultaneously.
“you're trying to look at the economy as a whole. But what you have is in certain sections of the economy, you have an enormous amount of liquidity, an enormous amount of wealth. Things like if you're in the top 1% of anything you know, or which is the top 1% of the income earners, the one top 1% of the stocks and a high and so on, so forth...And but we have a very diverse economy. So if you're looking at, let's say, the bottom 60% of the population and the conditions of the bottom 6% of the population and labor markets and so on, then you have a very, very different issue.”
Most of the economic system is credit-dependent (equities, bonds, businesses all depend on credit availability), so changes in credit conditions cascade throughout markets, making gold an effective diversifier.
“the most of the system is dependent on credit. Equities and everything is dependent on credit. You change credit and, you know, then all sorts of things happen. And so it's an effective diversifier as well”
China's debt is denominated primarily in its own currency and owed mostly among Chinese entities, which avoids foreign currency risk but requires giant debt restructuring involving picking which companies/local governments survive and which are liquidated or restructured.
“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 the model and they were selling off land, earning money from land sales and borrowing money to produce, to produce high production.”
China's local governments are economically broke because their business model was dependent on selling off land, earning revenue from land sales, and borrowing to fund high production; without profitable underlying business models, local governments cannot service debt.
“the local governments in China account for more of the economy and they're broke the model and they were selling off land, earning money from land sales and borrowing money to produce, to produce high production. And 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.”
Greatest technological revolutions have historically coincided with major financial bubbles (late 1920s, dot-com era, current period), indicating an interdependency between capital markets' funding and technological innovation periods.
“at each of the times, the greatest technological revolutions were taking place during those times. In other words, the late twenties, for example, was there were more patents, more inventions in the world and so on. And if you, you know, you could take 2000 or those types of period, a lot of them are dependent. There was an interdependency between the capital markets and these in terms of funding and those types of things.”
In geopolitical conflict, the vulnerability of financial assets is particularly acute because assets can be frozen (as happened with Russia), creating an additional pressure on debtor nations to ensure manufacturing capacity and self-sufficiency.
“in this environment of conflict, that's also the problem of it's worsened 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”
The natural instinct of policymakers is to use monetary policy to address problems ('if things aren't exactly like I would like...use monetary policy'), and while this often works in the short term (things go up, people are happy), there is a cost: artificial lowering of interest rates creates imbalance by making debt attractive while making asset holding unattractive.
“the natural instinct is if if things aren't exactly like I would like and I'd like to make them better, actually use monetary policy...every time you do that and then things go up and people are happy...But there's a cost of doing that, right? The cost in doing that is that there's, you know, one man's debt or another man's assets. And so when you artificially lower the interest rate so that it is not attractive in a sense to hold as an asset and it's very attractive to borrow and buy things, that creates an imbalance”
There are three major types of imbalances that have to be rectified: trade-related imbalances related to capital flows, which involve the dynamic where China exports cost-effective items to the US, Americans buy them, money is sent back, and China invests in US bonds—creating an unsustainable dynamic because in potential geopolitical conflict, China loses the ability to convert assets to goods and the US loses manufacturing capability and middle-class wealth.
“So three major types which relate to trade, but they also relate to capital. The the first is that the dynamic by which Chinese export to the United States, 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 the next two items where those two countries can be in conflict, military conflict, there necessarily has to be insecurities on both parties and the Chinese having an insecurity of whether they're actually going to be able to turn their credit into goods and services.”
Related to local government insolvency, China lacks a profit system; it has pursued quantity of production over profitability; this creates a dynamic now called 'involution'—overproduction that harms the economy—which will require major restructuring similar to what was done in the 1990s when vice premier Zhu Rongji had to choose which companies would survive and which would be restructured.
“In other words, what do you do with businesses that don't work, that don't have a profit? 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 help maximize the quantity of production, forgetting about the profitability of that. So when you have that, they then you have the dynamic that they're now describing, which is now called involution, which is the fact of overproduction and doing harm to the economy, that's going to require a big restructuring like these big restructurings go similar to what they did in the nineties. Zhu Rongji was the vice premier and premier at the time who did this. But these the way they go is you have to pick which country, which company is going to stay and which go on the auction block and which get restructured and so on.”
Technological development is the fifth major force; development of new technologies is what has raised living standards over time, visible in increased life expectancy and per capita GDP, and is currently a very important influence.
“and fifth through history are man's learnings of particularly developments of new technologies. The development of new technologies is what has raised living standards over time, which you can see in terms of life expectancies and per capita GDP. And of course, the development of new technologies now is a very important influence.”
There is an unsustainable dynamic where Chinese exports to the United States are cost-effective, Americans buy them, send money back, Chinese invest that money in U.S. bonds, but if geopolitical conflict occurs, China cannot convert its bond holdings into goods and services it needs, creating mutual insecurity about whether assets can be converted in wartime.
“the dynamic by which Chinese export to the United States, 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 the next two items where those two countries can be in conflict, military conflict, there necessarily has to be insecurities on both parties and 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.”
As debt service payments compound, central banks face losses on their debt holdings and asset-liability problems, forcing them to monetize not only government debt but their own debt, which are characteristics of monetary order deterioration, visible in countries reducing reserve holdings and acquiring gold.
“It becomes a problem also for the central banks, because the central banks, by the way, this is not just an American problem. This is a world problem. The central banks of themselves owned, owned the debt. And so they lose money on the debt. And so when they're losing money on the debt and they have asset liability problems, then they also not only have to monetize essentially the other the government's debt, but they also have to monetize theirs. And those are the characteristics that produce a deterioration in a monetary order.”
There is a natural instinct to use monetary policy whenever conditions aren't ideal, but every time it is used, things go up and people are happy in the short term; however, there is a cost: artificially lowering interest rates creates imbalance by making holding assets unattractive while making borrowing to buy things very attractive.
“I think that there's a strong situation where, you know, the natural instinct is if if things aren't exactly like I would like and I'd like to make them better, actually use monetary policy. Okay. So, I mean, that's now we've learned that, right? Because every time you do that and then things go up and people are happy and and so on. But there's a cost of doing that, right? The cost in doing that is that there's, you know, one man's debt or another man's assets. And so when you artificially lower the interest rate so that it is not attractive in a sense to hold as an asset and it's very attractive to borrow and buy things, that creates an imbalance.”
The exact same dynamic happened in March 1933 when President Roosevelt devalued money by getting on the radio and delivering a devaluation message, mirroring the 1971 Nixon Shock.
“I studied history and I found out the exact same thing happened in March 1933 with Roosevelt getting on the radio and doing the exact same thing. In other words, devaluing money.”
When deciding international allocation of capital, one should base it on strategic asset allocation considerations: market capitalization size, ease of capital entry/exit, attractiveness of assets, etc., rather than on binary investment vs. non-investment decisions.
“how much do I allocate to each market? Right? And I think of that first as a strategic asset allocation. I look at things like, what's the size of the market capitalization? How is it easy for me to get my money in and out of the country? What is how attractive are they?”
The discipline of letting markets work—allowing failures when they occur—is not something anybody seems to want, yet it is needed; without it, monetary policy does not address the disparity in the economy well.
“I think that and I think that discipline is not something that anybody seems to want, and yet I think it's needed. So when I think about the monetary policy and so on, I think not much if any, but I also think it's not really dealing with the whole so well because of the disparity in the part.”
Large wealth and value differences, combined with the perception that the system is not working for people, produce political polarization between hard left and hard right with irreconcilable differences that cannot be easily solved through normal democratic means, as historically occurred when four major democracies chose autocracy in the 1930s.
“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 becomes more of the hard left and the hard right, and those become irreconcilable differences that are not easily solved through the usual means of operating that way in such as democracies. During the thirties, for example, four major democracies chose to be autocracies during those periods.”
There is a certain dynamic that makes conflict worse and worse, driven by debt dynamics and internal political breakdown where both sides cannot work together for results, people lose faith that the system is fair, and when people lose, they cannot accept losing, creating escalation toward conflict.
“there's a certain dynamic that makes it get worse and worse. You know, so there's the debt dynamic that we're talking about. But there's also, let's say, the internal political dynamic. Do we see people coming, both sides being able to work together for results and that there's going to be votes that people believe and they believe the system is going to be fair for them so that if they lose, they accept losing because they believe the system is fair and so on. You know, history shows that that's not likely and that things can worsen because people then, you know, in you know, in history, it can get bad.”
The multilateral world order based on American institutional design (UN, World Court, WHO, WTO, IMF, World Bank) intended to establish rules and systems has largely ended and is unlikely to return; conflict resolution will need to focus on avoiding severe financial crises or warfare that worsen conditions.
“The world order, the changing world order. We've gone from a multilateral world order. In other words, it was the American model that there's a United Nations, a world court, a World Health Organization, a World Trade organization, an IMF, a World Bank, and all of those world so that there is sort of an attempt to bring rules and systems into place that are multilateral. I think that's over. That's largely over. I don't think we're not likely to go back to those types of things.”
China produces 32% of the world's manufactured goods, more than the US, Japan, and Germany combined, but these markets are now being closed to China, forcing China to seek Third World markets for its manufactured exports.
“The China produces manufactured goods is dominant. 32% of the world's manufactured goods come from China. That's more than the United States, Japan and Germany combined. And now their markets are being closed to them and so on. So they have to go to the Third World.”
China has sponsored industrial development and technology companies via state intervention; the United States is now doing similar intervention through stakes in lithium, Intel, and cobbling together a sovereign wealth fund approach to compete with China.
“You mentioned something about China that I think is a subject of huge debate in the United States, which is the way that they've sponsored certain industries and certain development of technologies in the air space and beyond. And I wonder if, by the way, we're doing that, too. That's what I wanted to go to. The idea that the United States is now taking a stake in lithium companies and Intel and a whole host of others and sort of cobble together sovereign wealth fund”
The problem with government resource allocation is that it is typically done wastefully; state-owned or state-controlled enterprises are generally inefficient, and people in Washington are not usually good at productive resource allocation; the question is whether balance exists between necessary state direction and wasted spending.
“The problem with governments, generally speaking, is it's done wastefully. So you have state owned enterprises or state controlled in that. And people in Washington are not usually really good at this type of that to stop resource allocation. The question is how the balance exists.”
The world has moved from a multilateral world order (with UN, World Court, World Health Organization, World Trade Organization, IMF, World Bank—all attempting to bring rules and systems into place) to a different model; this multilateral order is largely over and unlikely to be restored.
“I think the world order, the changing world order. We've gone from a multilateral world order. In other words, it was the American model that there's a United Nations, a world court, a World Health Organization, a World Trade organization, an IMF, a World Bank, and all of those world so that there is sort of an attempt to bring rules and systems into place that are multilateral. I think that's over. That's largely over. I don't think we're not likely to go back to those types of things.”
During periods of great conflict, countries require strategic direction beyond consumer goods production for wealthy consumers; state guidance in areas like data centers and AI is necessary for competitive capability, though governments often waste resources, so the balance and execution quality matter.
“this is a period of great conflict. And if you take such periods of great conflict, the country often needs a direction. You know, it can't be just consumer goods, rich people then buying expensive things like handbags or something, you know. So it needs a direction. If you're looking at things like data centres and what does it mean for A.I. and what does it mean? In many ways, in order to be combat competitive, there needs to be much more guidance because it just is not going to be adequate by itself. So yes, I think under these types of circumstances there needs to be that.”
International geopolitical cycles involve rising powers challenging existing dominant powers and orders, and the current period involves such a challenge with fading dominance of previously dominant powers.
“The third is the international geopolitical cycle. In other words, of a rising power challenging existing powers and the same dominance of the dominant power fades relative to other powers. And also the order then gets challenged. And we're certainly going through that.”
Loss of manufacturing in the United States creates two problems: it reduces the country's ability to produce essential goods in a risky world, and it directly contributed to wealth loss for the middle class.
“the loss of manufacturing in the United States, you know, has two problems which are that it's connected to self-sustaining. You have to be able to be in a risky world. You have to be able to produce what you need. So you need to be capable of manufacturing certain items. And then also the wealth loss of the middle class has a lot to do with the loss of manufacturing.”
As a professional investor required to make bets and maintain accuracy, Dalio hopes for a peaceful resolution but recognizes that historical patterns and current dynamics suggest a probabilistic bias toward conflict; hope is not a strategy, and the data trends toward escalation.
“I'm you're asking me as a man who actually has to bet on this and has to be as accurate as I can. I mean, like hope is not a strategy. So when you ask me, I say I really hope that that's not the case. But if you look at history and you look at the dynamics, there is more the movement toward these things being resolved in the form of conflicts that we've seen in the past.”
Since Dalio started going to China in 1984, per capita incomes increased by 28 times and life expectancies increased by 10 years, representing remarkable progress; however, China now has very significant problems that will require major restructuring.
“Well, China has a number of problems that it has to deal with, which I'll touch on. However, since I started go to China, which is 1984, and I went first for Curiosity and then because it was so interesting and I like the relationship, per capita incomes increased by 28 times, life expectancies increased by ten years and so on. It's done a remarkable, but it now has very significant problems.”
The stock market cannot be evaluated as a monolithic entity because it is so bifurcated; world stock markets are also highly bifurcated, with very different characteristics in different segments.
“We can't speak about the stock market as a whole, of course, because the stock market is so bifurcated, you know, and the world stock markets are so bifurcated.”
When currency depreciates, people ask what to hold as a store of wealth; a currency should be both a medium of exchange and a store of wealth, but when debt is so high, debt becomes money and money becomes debt (holding debt means holding a promise to receive money; holding money means putting it in a debt instrument), so it is natural to go toward alternative stores of wealth such as harder currencies, with gold being the most fundamental because it does not require depending on someone else to guarantee its value.
“And then, of course, because everyone it's all about a store hold of wealth. What is your store hold of wealth? What's it going to be? A currency should be a medium of exchange and a store hold of wealth. But when you have so much debt, you know, debt is money and money's debt. I mean, debt is money. Meaning when you hold debt, you are holding a promise to receive money. And when I say money is dead, when you're holding money, you're putting it in a debt instrument. And so for those reasons, when you have such a supply of debt and debt instruments and it's not an effective store home of wealth, it's natural to go to an alternative store or hold of wealth, which is why we're going to harder currencies, you know. And of course, gold is the most fundamental of those, not only because of the many years, but even there it's, you know, as they say, it's the only asset that somebody can hold. That doesn't mean that you don't have to depend on somebody else to pay you money for it at a time of incredible uncertainty, but also potentially incredible opportunity.”
Through history, five major interrelated forces operate in cycles: debt-money economy cycles, wealth and political polarization, international geopolitical power cycles, acts of nature (droughts, floods, pandemics), and technological development, and every significant economic phenomenon falls into one of these categories.
“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.”
The United States spends about $7 trillion this year and takes in about $5 trillion, meaning it spends 40% more than it takes in; has run deficits and sold a lot of debt; the total debt is about six times the total amount of money coming in; and debt service payments are squeezing that out, with projections showing deficits will produce lots of bond sales which will compound the problem.
“The United States spends well this year, spend about $7 trillion, and it'll take in about $5 trillion. So that means it's spending 40% more than it is taking in because it has run deficits and sold a lot of debt. The total debt is about six times the total amount of money coming in. And we're seeing those debt service payments squeeze that out.”
Raising tariffs is a historical approach to addressing trade and capital account imbalances, generates between 300 million and 500 million dollars annually in tax revenue, but this revenue is small compared to the overall debt and deficit gap.
“Raising tariffs is a way of dealing with that through history. Tariffs really have been more of a tax than other forms of taxes going way back, and they bring in tax revenue. So, you know, they'll probably bring in somewhere between 300 million and 500 million a year or something like that.”
Despite China's problems, it has powerful thinking and a large quantity of engineers; it has driven government-directed innovations; China is more advanced in the use of AI for applications than the United States is, with actual implementation and use of AI.
“While at the same time it's of course doing amazing innovations in a number of ways that are government directed. So I don't want to just say that it has those burdens because it has a lot of really powerful thinking and quantity of engineers. And what can be done is quite something. They're more advanced in the use of A.I. for applications than the United States is, for example, actually using A.I. and so on.”
In asset allocation, the first step is to create a neutral (strategic) portfolio with a balanced mix considering real after-tax returns; gold should make up about 15% of an optimal portfolio because it is the one asset that performs well when typical portfolio components go down, since those components are credit-dependent.
“I think you have to create a very good balanced portfolio. How you do that can take a long session, but I think you have to think of that and not in nominal terms, but in real terms. So in other words, when you're thinking you're doing your asset allocation, what is going to protect your real after tax returns? So you do you create that optimal mix. Gold is a very excellent diversifier of the portfolio. So if you were to look at just from the strategic asset allocation mix perspective, you would probably have something like as the optimal mix, something like 15% of your portfolio in gold because of the fact that if you didn't even have a tactical, because it is the one asset that does very well when the typical parts of your portfolio go down, because the typical parts of your portfolio are also so credit dependent.”
When examining history and current dynamics carefully, the evidence suggests movement toward resolution of conflicts through conflict (war) rather than through negotiation or cooperation, based on historical patterns of how these situations resolve.
“But if you look at history and you look at the dynamics, there is more the movement toward these things being resolved in the form of conflicts that we've seen in the past.”
Fiscal and monetary discipline is needed to address distributional problems, but nobody seems willing to pursue it, even though it is necessary; the preference for painless monetary solutions creates long-term unsustainability.
“I think that and I think that discipline is not something that anybody seems to want, and yet I think it's needed. So when I think about the monetary policy and so on, I think not much if any, but I also think it's not really dealing with the whole so well because of the disparity in the part.”
Through history and now there are five big forces that are interrelated and generally transpire in cycles: the debt-money economy cycle (credit as a circulatory system), wealth and political inequality, the international geopolitical cycle of rising powers challenging existing powers, acts of nature like droughts and pandemics, and technological development.
“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.”
The picture on Fed rate cuts is slightly mixed; the economy is split—in certain sections (top 1% income earners, top 1% of stocks) there is enormous liquidity and wealth, where the concern would be about bubbles; but the bottom 60% of the population has very different conditions in labor markets, where monetary policy cannot help and additional stimulus would just create more imbalances.
“I think the picture on cutting rates. It's slightly mixed. So and it has to do with the split in the economy and it has to do with split in capital markets, which means you're trying to look at the economy as a whole. But what you have is in certain sections of the economy, you have an enormous amount of liquidity, an enormous amount of wealth. Things like if you're in the top 1% of anything you know, or which is the top 1% of the income earners, the one top 1% of the stocks and a high and so on, so forth. Wow. There's a tremendous amount of liquidity. And fantastic. And so you would say, if anything, you'd worry more about the bubble and how you start to pull the, you know, the punchbowl, that kind of thing. And but we have a very diverse economy. So if you're looking at, let's say, the bottom 60% of the population and the conditions of the bottom 6% of the population and labor markets and so on, then you have a very, very different issue. I don't think monetary policy at all is going to be able to do that.”
During periods of great conflict (like the 1930s), a country needs direction and cannot rely just on consumer goods and wealthy people buying expensive things; in such times, government guidance for development of capabilities like data centers and AI becomes necessary for competitive positioning; the question is whether such investment is done wastefully or productively.
“At this moment? I again want to compare it with the 1930s, because you have to look at the times and what it's like, Right. So this is a period of great conflict. And if you take such periods of great conflict, the country often needs a direction. You know, it can't be just consumer goods, rich people then buying expensive things like handbags or something, you know. So it needs a direction. If you're looking at things like data centres and what does it mean for A.I. and what does it mean? In many ways, in order to be combat competitive, there needs to be much more guidance because it just is not going to be adequate by itself. So yes, I think under these types of circumstances there needs to be that.”
In asset allocation, one should first establish a strategic neutral portfolio based on real (inflation-adjusted) after-tax returns rather than nominal terms, and only then make tactical moves, with gold serving as an excellent diversifier because it performs well when typical credit-dependent portfolio components decline.
“the first thing you have to do is create your neutral portfolio...in an asset allocation mix...before I get into the tactical, though...I've expressed my views on the tactical of gold relative to bonds. I think you have to create a very good balanced portfolio. How you do that can take a long session, but I think you have to think of that and not in nominal terms, but in real terms. So in other words, when you're thinking you're doing your asset allocation, what is going to protect your real after tax returns?...Gold is a very excellent diversifier of the portfolio...if you didn't even have a tactical, because it is the one asset that does very well when the typical parts of your portfolio go down, because the typical parts of your portfolio are also so credit dependent.”
In deciding market allocation between countries, one should use strategic asset allocation frameworks considering market capitalization, capital flow ease, and attractiveness; Dalio allocates more to the United States than China despite both having challenges and benefits.
“how much do I allocate to each market? Right? And I think of that first as a strategic asset allocation. I look at things like, what's the size of the market capitalization? How is it easy for me to get my money in and out of the country? What is how attractive are they? And so on. So there's a greater amount that I'm investing in the United States than is. And then I'm investing in China”
China produces 32% of the world's manufactured goods, more than the United States, Japan, and Germany combined, but markets are now closing to China and it must redirect exports to developing markets, compounding structural challenges.
“The China produces manufactured goods is dominant. 32% of the world's manufactured goods come from China. That's more than the United States, Japan and Germany combined. And now their markets are being closed to them and so on. So they have to go to the Third World.”
It makes perfect sense that the stock market is hitting record highs at the same time that gold is hitting record highs because both reflect currency depreciation rather than absolute asset appreciation; this is very much like the early 1970s dynamic.
“Do you think that it actually makes perfect sense that the stock market is hitting record high after record high at the same time that gold is hitting record high after record high? Yes. Yes. It's very much like the early seventies.”
This is not just an American problem but a world problem affecting all central banks; countries are letting their reserves and assets in bonds go down and acquiring gold, reflecting changing monetary order dynamics similar to what happened in the early 1970s.
“It becomes a problem also for the central banks, because the central banks, by the way, this is not just an American problem. This is a world problem. The central banks of themselves owned, owned the debt... So you're seeing a dynamic of why countries, for example, are letting their reserves or their assets in bonds and so on go down. And they're acquiring and have been acquiring gold, for example.”
When measuring economic values, we are often measuring currency depreciation rather than real value change; when currency devalues, assets denominated in that currency appear to rise but may actually be stable or falling in real terms, as occurred when both gold and the stock market rose simultaneously in 1933 and again in the early 1970s.
“we look at it through our currency lens. You know, we think things go up or down in buy when we're measuring it in our currency, but in reality, the currency goes up and down...Yes, it's a currency. It's an alternative currency. It's not a fiat currency. So do you think that it actually makes perfect sense that the stock market is hitting record high after record high at the same time that gold is hitting record high after record high? Yes. Yes. It's very much like the early seventies.”
When a country doesn't have enough money, there are a limited number of things it can do; looking at history and current conditions provides understanding of what options are available and likely outcomes.
“What does a country do when it doesn't have enough money? Okay. There are a limited number of things in order to see that you can go back in history and get some understanding and also see what's going on now.”
Hope is that a strong middle could bring people back to a system that works for most people and is fair, but history suggests this is difficult to accomplish; one must hope for peaceful resolution while recognizing that hope is not a strategy and that betting requires acknowledging that historical dynamics point toward conflict-based resolution.
“I think one would hope that there would be sort of a strong middle that would bring for most people and that you can get back to a system that's fair. But I think that that's that's a difficult thing to do. I think the world order, the changing world order. We've gone from a multilateral world order.”
When measuring in currency terms, things appear to go up or down, but in reality the currency itself goes up and down; therefore, when looking at the world now, one must look through a currency lens rather than assuming the currency is stable.
“In other words, So when we're looking at the world now, we look at it through our currency lens. You know, we think things go up or down in buy when we're measuring it in our currency, but in reality, the currency goes up and down. And so as we start to think about that. Okay. Think about what's happening.”
One should not assume that a cycle will follow a predetermined path; instead, each cycle is somewhat different, caused by measurable symptoms and conditions; one can analyze the economy like a doctor reading a CAT scan, seeing the circulatory system squeeze, supply-demand dynamics, and political-geopolitical breakdowns; the process is observable and can be understood through direct analysis of numbers and indicators.
“I think one shouldn't just believe a cycle is going to follow. I think it's like almost like a life cycle. You know, each person's life cycle is somewhat different and it's caused by symptoms and conditions that could be measured. So you can look at the economy. You can look at the numbers themselves and see the health indicators. And that's what I did in the books, the books I wrote and so on. So you could look at them directly. You can see how much like a doctor taking, you know, CAT scan or bone circulatory system. You could see how it's squeezing out. You can see the supply demand. You can see this dynamic happening. You can see it politically. You can see it go globally.”
China is more advanced than the United States in using AI for practical applications and deployment, not just theoretical capabilities.
“They're more advanced in the use of A.I. for applications than the United States is, for example, actually using A.I. and so on.”
Valuation concerns in the AI bubble are more focused on super-scale AI companies rather than broader AI infrastructure; opportunity is greater in users/adopters of AI technologies who will become more efficient and profitable, or platforms enabling effective AI use.
“I think it's more in the areas of applications than than, let's say, the super scholars themselves. I'm not I don't wouldn't want to short the super scholars. But if I'm thinking about what what's going it's going to be in the users, either the users of those technologies becoming more effective and so their profits will be better and so on, or those who will provide the platforms for the effective use of those.”
Since 1984, China has increased per capita incomes 28 times and life expectancies by 10 years, achieving a remarkable transformation, but now faces significant structural problems requiring debt restructuring.
“since I started go to China, which is 1984...per capita incomes increased by 28 times, life expectancies increased by ten years and so on. It's done a remarkable, but it now has very significant problems.”
Rather than shorting AI infrastructure, Dalio sees greater opportunity in companies using AI to become more effective (increasing their profits) or providing platforms for AI application; the users of technology and platform providers will see better returns than foundational tech suppliers.
“I don't wouldn't want to short the super scholars. But if I'm thinking about what what's going it's going to be in the users, either the users of those technologies becoming more effective and so their profits will be better and so on, or those who will provide the platforms for the effective use of those. I think that that's an area of greater opportunity.”
One hopes for a strong middle ground that can bring people together and return to a fair system, but history shows this is very difficult to achieve; internal political dynamics suggest conflict resolution may be via conflict rather than compromise.
“I think one would hope that there would be sort of a strong middle that would bring for most people and that you can get back to a system that's fair. But I think that that's that's a difficult thing to do.”
There is froth and bubble-like conditions in certain market slices, particularly around AI; historical precedent (dot-com, tulip bulbs) shows such conditions precede collapses.
“Yes, there's something that feels frothy to me.”
Dalio recalls being a floor clerk on the New York Stock Exchange in August 1971 when President Nixon announced that the US would no longer convert dollars to gold; at the time, gold was viewed as money and fiat money was viewed as checks redeemable for gold; people viewed things through a gold lens; he thought the stock market would crash but it rose instead, which led him to study history.
“I've been trading market since I was a kid, and between my college year and going to graduate school in the summer of August 1971, I was clerking on the floor of the New York Stock Exchange, and I. I followed markets. And on Sunday night, Paul Volcker and then President Nixon, really, who was President Nixon delivered the message that you're not going to get your money. Gold was money then. So we viewed things differently, you know, like money, fiat money, as we think about it today, was like checks in a checkbook so that you could go get your gold. And we looked at things through a gold lens. And it it I walked on the floor of the stock exchange. I thought, this is a big crisis because you're not going to get your money. People are not. And the stock market, I thought, was going to go down a lot. Stock market went up a lot.”
Watching current dynamics is like watching the same movie over and over again—the technologies are different, clothes are different, people are different, but the core dynamics look very similar; current events are pretty much the typical process.
“Just to me, these all look like watching the same movie over and over again, except there's people use different technologies and they have different clothes and so on and there are different people, but they look so much alike. So I think that this is pretty much looking like the typical process.”
There is something that feels frothy in the AI space; there is great promise and the Internet did come to fruition and change the world, but valuations must be considered; the late 1920s saw more patents and inventions than many periods, and there was interdependency between capital markets and technological development.
“Yes, there's something that feels frothy to me.”
Historical cycles show breakdowns in monetary order (1944, 1971), political order (1945), and geopolitical order occur periodically; the current situation resembles the 1930s with similar structural conditions that can be measured as health indicators.
“the whole cycle of the great cycle in there. There are breakdowns of of orders, right? So 1944, we had the breakdown of the monetary order. We had another breakdown in 1971. All right. So 1945, we had the breakdown of the most countries political orders and most countries general and geopolitical order. Right. So we're really we have those those cycles which are part of then, you know, the overall greater cycle are worth keeping in mind. So they look a lot alike to me. So when I look at it and I look at the thirties, I think there's a lot to be learned about that, that particular dynamic.”
Gold is a currency and the second largest reserve currency globally, functioning differently from fiat currencies in that it is a physical store of value not dependent on any government's solvency.
“gold is a currency. You know, we think of currencies as being fiat, the major fiat currency. But gold is a currency. It's the second largest reserve currency”
The U.S. currently spends about $7 trillion annually and takes in about $5 trillion, meaning it spends 40% more than it receives, and the total debt is about six times the total annual income, creating a debt trap where debt service payments squeeze spending and debt compounds.
“the United States here are the numbers. The United States spends well this year, spend about $7 trillion, and it'll take in about $5 trillion. So that means it's spending 40% more than it is taking in because it has run deficits and sold a lot of debt. The total debt is about six times the total amount of money coming in.”
On a tactical basis, Dalio does not like debt assets per se, including not just government debt but also private credit, especially given very low credit spreads; he tilts away from debt assets and toward gold, though gold allocation should generally be above normal in current conditions.
“If I'm making tactical bets, I don't like debt assets per say and I would say I don't like debt assets per se, not just government debt assets, but also if you're looking, let's say a credit or private credit and you look at where the credit spreads are, credit spreads are very, very low. And so for those various reasons, my tilts would be away from those things and toward gold.”
China has sponsored industries and technological development in the AI space and beyond; the United States is now taking a stake in lithium companies, Intel, and other companies, cobbling together a sovereign wealth fund learned about in real time; the question is whether this is the right approach for the country at this moment.
“You mentioned something about China that I think is a subject of huge debate in the United States, which is the way that they've sponsored certain industries and certain development of technologies in the air space and beyond. And I wonder if, by the way, we're doing that, too. That's what I wanted to go to. The idea that the United States is now taking a stake in lithium companies and Intel and a whole host of others and sort of cobble together sovereign wealth fund that we're learning about in real time.”
Gold is effectively a currency—specifically, the second-largest reserve currency after the US dollar. It is a non-fiat alternative to fiat currencies and has historically served this function.
“So gold is a currency. You know, we think of currencies as being fiat, the major fiat currency. But gold is a currency. It's the second largest reserve currency.”
Instead of restored multilateralism, the concern should be avoiding a bad fight between countries that worsens debt or creates a financial crisis; deterioration in the global order is likely, and the primary objective should be managing conflict to avoid worse outcomes.
“So I don't think I think we have to instead worry about not having such a bad fight with each other, that debt or a financial crisis that we that we've make things worse than they are.”
Dalio allocates significantly more capital to US markets than China based on strategic considerations, though both have challenges and benefits; US markets face high valuations and concerning flows, while China faces inexpensive assets but capital flow problems.
“And I think of that first as a strategic asset allocation. I look at things like, what's the size of the market capitalization? And so there's a greater amount that I'm investing in the United States than is. And then I'm investing in China, I think... And both have their their challenges and, you know, and their benefits in the United States, if we're it depends what market we're talking about. But if we're talking about a lot of the market, it's quite expensive. And the nature of the flows are concerning and the nature of a number of circumstances are concerning. If I'm looking at China, it's a different thing. It's relatively inexpensive, some of those assets, but at the same time, capital flows and other issues also make it a problem.”
Ken Griffin (Citadel CEO) sees gold as a better safe haven than the dollar currently, reflecting concerns about dollar stability; Dalio agrees with this assessment.
“Ken Griffin yesterday of Citadel said that he sees gold as more of a safe haven right now than the dollar. Do you agree? Oh, certainly.”
In 1971, people incorrectly expected the stock market to crash after the gold standard was abandoned, but it rose significantly instead; this counterintuitive result led Dalio to study history and discover the pattern had occurred before in 1933.
“I walked on the floor of the stock exchange. I thought, this is a big crisis because you're not going to get your money. People are not. And the stock market, I thought, was going to go down a lot. Stock market went up a lot. And I went and I studied history. That's, by the way, why I study history”
Credit spreads are currently very low, making debt and private credit assets unattractive; combined with general concerns about credit-dependent assets, tactical positioning should shift away from debt instruments and toward gold.
“If I'm making tactical bets, I don't like debt assets per say and I would say I don't like debt assets per se, not just government debt assets, but also if you're looking, let's say a credit or private credit and you look at where the credit spreads are, credit spreads are very, very low. And so for those various reasons, my tilts would be away from those things and toward gold.”
Raising tariffs is a way of dealing with trade and capital account imbalances through history; tariffs have been more of a tax than other forms of taxes, bringing in revenue of somewhere between 300 million and 500 million dollars per year.
“And raising tariffs is a way of dealing with that through history. Tariffs really have been more of a tax than other forms of taxes going way back, and they bring in tax revenue. So, you know, they'll probably bring in somewhere between 300 million and 500 million a year or something like that.”
The arc of current history looks like watching the same movie repeatedly with different technologies, clothes, and actors; the underlying patterns and dynamics are similar despite surface variation.
“Just to me, these all look like watching the same movie over and over again, except there's people use different technologies and they have different clothes and so on and there are different people, but they look so much alike. So I think that this is pretty much looking like the typical process.”