Ray Dalio: Money, Power, and the Collapse of Empires | Lex Fridman Podcast #251

China's balance of payments is better than the US; China has displaced the US as the world's largest trading country in terms of exports, making it economically competitive, though it lacks the blessing/privilege of holding the world reserve currency.

“in china's case its balance of payments um is a better um china has displaced the united states as the world's largest trading country in other words more exports to other countries and as a result it's economically competitive but it doesn't have the world's reserve currency it's a real blessing so the united states it has the world's reserve currency but it is risking it because of this imbalance”

The education measures Dalio tracked show US general public education has deteriorated significantly and now ranks 38th in the world, though the US retains uniquely excellent best universities; meanwhile China's education is improving rapidly in quantity and resources, with greater results in areas China prioritizes.

“the united states is in many way is is losing its educational advantage if you were to look at compare it with china if you take general public education in the united states it's deteriorated tremendously even in comparison to developed countries there are scores pieces scores and so on and it's you know something like 38th in the world or something and that was a big plunge average public education”

In technology areas like quantum computing and AI, there is now a race between the U.S. and China with China gaining very quickly, and when looking at competitiveness trajectory rather than current levels, China is improving at a much faster rate, which is concerning given this is being measured over the big cycle timeframe.

“in terms of areas like quantum computing and a.i and and you know many areas you have a race going on and so if you take the trajectory of the competitiveness not just look at the current level you have a situation where they're improving at a much faster rate this is all good for the world if the world can get along and the main thing i think is um in just how do you have a healthy world and how do you have a strong economy and how do you have a strong situation is be strong the united states is war is with itself that's the main war”

Working well with people who have complementary strengths where they are strong where you are weak and vice versa is the most effective way of achieving success compared to trying to excel alone.

“when you also know your weaknesses and the strengths of other people there are people who um have strengths where you're weak and you have strengths where they're weak and to be able to work well together is the most effective way of achieving uh success”

China's system is more like 'collective leadership' with internal jockeying for power; it is not simply Xi as sole decision-maker but rather all members of the top leadership having power to resist; it resembles Democrats and Republicans forced to govern together, requiring negotiation and compromise.

“that characterization is view is much more black and white than it really is uh but it leans towards that direction they're like for example of the standing members of the polar bureau four are more eligi allied him three or less so you have to understand that it's kind of a collective leadership at the top and then of course there's just jockeying for power um you know in a highly political sense um at the top uh but no one leader can be successful against the uh all those powers at the top so it's very politically negotiating it's you know it's very much more like if you put um in the united states the democrats and the republicans and they had to be in the same government and they work it out”

As an international investor operating in 40 countries, Dalio believes disconnecting from countries like China would be economically disastrous and would reduce the mutual understanding that comes from working together, which helps reduce wars; he follows government guidance and respects cultural differences while relying on diversified portfolio approach.

“if if you disconnected if all those if entities like myself the businesses uh doing business with china disconnected i think that that would be disastrous economically disastrous and it would also be um reduce um the the understanding that comes from working together that helps to reduce wars and so these are all complicated”

Gold is Dalio's preferred alternative money because it cannot be traced (protecting privacy from government), is not connected to electronic/financial systems (protecting from digital risks), and has been universally recognized for thousands of years as money; central banks hold it as third-largest reserve after currencies.

“you can't trace it in in bitcoin you can trace who owns it where it's going and and so on governments can't have that ability to trace it and so on a gold piece of coin it's it's not connected i think not connected has benefits particularly in a world where maybe connections can be more risky um so and then also gold has been for many thousands of years universally recognized as a source of money and central banks it's the third largest uh source of money in central bank reserves”

If the US and China had a military war, the capacity to inflict harm on each other through new technologies (cyber, space, drones, nuclear) is so great that 'god help us'; this technological destructive capacity makes military conflict particularly dangerous.

“could produce a military accident could produce a it's a very tense situation and if we had a military war god help us because of the capacity in all different new ways to inflict um harm on each other but anyway that's that's that”

Real per capita income in China has increased 26 times, longevity has increased by 10 years, and poverty rate has fallen from 88% to less than 1% since Dalio started going there in 1984—these are the most basic measures of improvement.

“where's a lot of creativity certainly happening and the system can work well if they can achieve that kind of balance it's proven to have worked well since i started going there in 1984 per capita income real per capita income has increased by 26 times the um longevity rate has increased by 10 years the poverty rate has fallen from 88 to less than 1 in terms of you know basics like starvation and things”

The US is financially concerning because it is borrowing heavily, creating debt, and printing money while its capacity to do so is limited; when the government spends more than it takes in, it must sell bonds, but these bonds now offer negative real returns, so the Federal Reserve faces a choice: raise interest rates to curtail borrowing (which slows economy and hurts markets) or fill the difference by printing money (which causes inflation in goods, services, and financial assets).

“what you see in the united states is that um we're borrowing a lot more money creating a lot of debt and we're uh printing a lot of money and our capacity to do that is very much is limited first of all because um when you when there's a sale of a bond when the government borrows more than it borrows money because it spends more than it takes in um you have to sell a bond and the world right now has a lot of us dollar denominated bonds because as the world's reserve currency they sell sold on them and they have very bad returns negative real returns negative real returns significantly”

China operates on a 'dialectic' philosophy—the idea that two opposite things exist and you want the benefits of both while managing the downsides; for example, capital markets create wealth and motivation but also produce wealth gaps and debt cycles; Deng Xiaoping famously said 'it doesn't matter if it's a white cat or a black cat, just as long as it catches mice' (meaning focus on what works regardless of ideology).

“they have a view which is the idea of a dialectic which means that two things are at obvious that everything comes with pros and cons and two opposites exist and you want the benefits of those two opposites and how do you deal with the benefits of those two opposites right so let's say you want the capital markets because it gets uh money into the hands of the entrepreneurs who are motivated they build fortunes and that drives an economy to do very well and at the same time um it produces uh the other problems the wealth gaps the other problems then the debt cycle”

The quality of education, most importantly broad-based education from the largest population, is the most important leading indicator of empire health and future strength—you can't predict where talent will emerge from, so you must draw from the broadest base.

“the most important leading indicator is the quality of education most importantly broad-based education drawn as a from the largest population because you can never tell who the talent is going to be so where they're going to come from so for example if you look at the chinese dynasties the great chinese dynasties um and the confucian approach it was meritocratic of um everybody could sit for exams and so on broad base of drawing in the populations”

The archetypal big cycle governing empires has three core components: the long-term debt and capital market cycle, the internal order and disorder cycle, and the external order and disorder cycle—these cycles interact to determine the rise and fall of empires and influence currencies and markets.

“you write that the quote archetypal big cycle governs the rising and declining empires and influences everything about them including their currencies and markets the most important three cycles are the ones you mentioned in the introduction the long-term debt and capital market cycle the internal order and disorder cycle and the external order and disorder cycle can you describe this big cycle”

After major wars determine a new world order, extended periods of peace and prosperity typically follow because no one wants to fight the dominant power; the dominant power carves up the world, determines control arrangements, and nations surrender rather than fight, leading to cooperative reconstruction and debt relief.

“there is usually period of extended peace and prosperity uh peace suits prosperity um and so there's not and the reason you have the peace is because no one wants to fight with the um dominant power you know you're going to lose you've surrendered there's been the surrendering they carve up the world they say what it's going to look like who's going to control what and then you come into that period of of peace and then prosperity where then there's uh a working together usually at that point you've wiped out a lot of the debt”

As empires become successful and expensive, they become less competitive as costs rise; newer countries can produce the same goods less expensively, and the dominant power experiences eroding work ethic as citizens, believing they are richer, choose to enjoy life rather than work hard—this marks the beginning of relative decline visible on the 'tilt' of charts.

“over a period of time um as they become more successful and more expensive um they became they become more expensive um and and newer countries come along like um the uk um then uh be learned to build ships from a lot the dutch and could do that less expensively and also when they become more expensive so less competitive and also the work ethic begins to change they believe that since they're richer they can enjoy life more they don't have to work quite as hard and so you start to see the tilt now you start to see the development of the top”

Reserve currency status allows dominant countries to borrow heavily because foreign savers want to hold their currency, creating a debt trap: they gradually lose competitiveness and financial health while accumulating debt, setting the stage for loss of reserve currency status.

“and they have a world reserve currency that allows you to borrow a lot of money because those who want to save want to hold your money and that means that they'll lend you money and so those countries get deeper into debt so you see that they gradually lose their competitiveness”

When empires face downturns, the critical question is whether they have sufficient financial reserves; historically nations with 'bare coffers' and empty granaries lack the buffer to manage deteriorating conditions, and when they face rival external powers, internal conflict over wealth intensifies, typically leading to internal war or external war that changes world order.

“when they have downturns um the first question is do they have enough money and traditionally you know uh money is is resources um so you classically see that the coffers are bare that they're spending more money than their than they are earning and they run out of money in the coffers and their granaries are empty rather than stocked so that they give them the buffer and as that deteriorates that's that worsens conditions and if they have a rival power that's also challenging them they see greater internal conflict over wealth and then they have the problems internally and the problems externally which usually results in an internal war or an external war”

The greatest risk to the US is not external competition but internal inability to work together; if leaders can do things in a bipartisan way that increase the size of the pie and create broad-based prosperity, Dalio is happy; the 'really scary alternative' is chaos from failure to work together.

“i think our greatest risk is in not being able to do that so i would say that's a paramount importance because we have the resources you know um wealth real wealth and and science and everything has never been better than it is but the notion is that it has to work for the majority of the people and we have to keep it being productive so that that group has got to calmly and knowledgeably work together so that they increase the size of the pie and they create broad-based prosperity so that is a paramount importance whatever they do if they do it that way i can say i'm happy about because that other alternative is the really scary alternative”

There are five kinds of wars with China: trade war, technology war, geopolitical influence war, capital war, and military war; military war is only likely over the Taiwan issue, a sovereignty matter central to China since the 'hundred years of humiliation' (1840-1949) when foreign powers exploited China.

“there are five kinds of wars there's a trade war tech um technology war geopolitical influence war um capital war and military war i um as far as military war goes i only i think it's only a taiwan issue um but that's a big issue and we could talk about that for a minute but those others there'll be uh rough competitions and we'll have that type of evolution over a period of time that's what that war looks like”

The US is at war with itself, which is the main war; strength requires financial soundness (earning more than spending), combined with strength in multiple dimensions (education, military, innovation, etc.), and if achieved, everything else will take care of itself.

“the main thing i think is um in just how do you have a healthy world and how do you have a strong economy and how do you have a strong situation is be strong the united states is war is with itself that's the main war you know it's very simple in history be financially sound earn more than you spend um and be strong in these ways and pretty much everything will take care of itself”

When causes that people believe in become more important to them than the system itself, the system is in jeopardy—historically shown in WWII when four democracies (Germany, Italy, Japan, Spain) chose autocracy because internal disorder made them desire control.

“history has shown when the causes that people are behind are more important to them than the system the system is in jeopardy so we have a situation that's very much like that in terms of let's say the 2024 elections i believe that there's a very high chance that neither side will accept losing”

The US is organized around individualism—individual rights, individual property rights, individual protection—and builds organizations from bottom-up through partnership; China is organized around Confucian family hierarchy and common good, so individual protections are secondary to collective benefit (e.g., data control, video game restrictions, high-speed rail).

“he described it and he said the united states is a country of individuals and individualism and that is its vibrancy that um we see the individual rights to speak up the individual protection of the individual individual property rights and all of those things as of uh paramount importance and we build our organization that's why democracy is from the bottom up or even a company we'll get together and we'll be partners to proper prosper together that is the american approach um he was describing that in china it's an extension of the confucian family essentially”

Pain plus reflection equals progress; understanding mistakes and weaknesses through reflection is how people learn not to repeat them; this principle is foundational to Dalio's approach to personal development and organizational learning.

“i have a principle which is pain plus reflection equals progress and so that reflection is important to know yourself know your pulls know your weaknesses and when you also know your weaknesses and the strengths of other people there are people who um have strengths where you're weak and you have strengths where they're weak”

A five-step process for achieving life goals: (1) Know your goals and prioritize since you can't have everything, (2) Identify problems and obstacles encountered on the way, (3) Diagnose root causes of problems (including your weaknesses), (4) Design ways to get around them, (5) Implement the design and follow through, then loop—this evolutionary process compounds learning over time.

“i think i'll try to say it simply there's a five-step process step one is know your goals know what you're going after you could have almost anything you want but you can't have everything you want and so you have to prioritize and you move in that direction on the way to your goals you're going to encounter your problems and your obstacles so identifying step two is understanding your problems and your obstacles identify them step three is to diagnose them to get at the root cause of the problem”

Over the last 30 years, Dalio developed the practice of writing principles originally to communicate with people he worked with and enable debate about principles; many excellent decision-makers don't write down their principles, which Dalio wishes they would do.

“over the years over the last 30 years or so that's what i've done i did it originally to communicate very well with the people i work with um you know i set up my company and and it was very important to have good communication and then we could debate the principles and so that's the process i urge people to do that there are many excellent decision makers um and i just wish that they wrote down their principles”

Bitcoin reaching $1 million is not realistic; using gold as a benchmark, if Bitcoin became worth as much as gold (which Dalio doubts), it would reach parity with the $5 trillion non-jewelry gold market, but fundamental value limitations suggest Bitcoin-equivalent-to-gold is near the reasonable ceiling.

“i don't i don't think that's possible because the way i look at it is there's a certain amount of um um a certain amount of it and there's a certain amount of gold i'll use gold as a benchmark the amount of it is worth about five uh about one trillion dollars total cryptos about 2.2 trillion but let's say bitcoin uh it's one trillion dollars if you take the amount of money that is in um gold that is not used for jewelry purposes”

Advice for young people: know yourself, follow your passion, make work and passion the same thing while considering money (which gives freedom and choice); personality profile tests help understanding self and relationships; the hero's journey includes mistakes and weaknesses which should be understood, not fought, because understanding errors prevents repeating them.

“know yourself follow your passion make your work and passion the same thing while considering the money part because money will get you freedom and choice and be able to make that but if you know yourself feel the pull um and um and pursue that passion um and along those lines by the way i found um that using personality profile tests has been very helpful”

Since 1500 when the Dutch invented capitalism and the first capital markets/stock markets, capitalism has been an effective tool for building wealth by getting resources into the hands of inventive people—this shift from agriculture to the importance of inventiveness created the conditions for modern prosperity.

“since really 1500 when the dutch invented capitalism and what i mean by that they invest invented the first capital markets the first stocks and the first stock market um that since then capitalism has been an effective tool for building wealth because it got resources into the hands of inventive people that's when we moved from agriculture to the importance of inventiveness of people”

Bitcoin has proven itself over 10-11 years—never hacked, operated well, obtained imputed value—and is one of several alternative monies emerging in an era of fiat money depreciation; there will be competition of monies including cryptos, central bank cryptos, and other assets like NFTs that can become money.

“the evolution of bitcoin over the years is one of the things that has influenced changes in my view it has proven itself something like 10 11 years ago imagine the programming of this and here's the you throw it out and that's the idea it has not been hacked it has um um operated it is built it has come an amazing way um over that 11 years to be um maybe probably the most excited topic among a lot of people”

What can great leaders do in this moment includes investing in large projects that fix education, boost innovation, and develop technologies; but these things don't happen organically and require strong leaders who can convince the populace of their importance.

“what can great leaders do in this moment i mean maybe um my sense is leadership is crucial here so for example to do very large projects that invest in the education system that sort of try to fix the fundamentals or maybe invest more and more into the innovation and the develop development of new technologies and so on it feels like that just doesn't happen organically so you have to have strong leaders that convince the populace of the importance of these ideas”

Dalio's book measures 18 different objective indicators of national strength (education, military power, economic output, etc.) across 500 years and multiple empires; these numerical measures allow people to monitor actual health of countries rather than rely on subjective interpretation, and enable probabilistic forecasting based on cause-effect relationships.

“it was very important for me to use actual measurements so as you see in the book you can see every level of this you can see where is the education level what is the military power each one of those and you could see them back going over the 500 years”

Putin came to power at the failure of Russia's last order (collapse of Soviet Union) with conditions of anarchy, no money, and internal fighting; he brought stability and peace to Russia as a strong leader and won democratic elections due to his popularity; Russia is not a significant economic power but is a significant military power.

“putin came to power at the failure of russia's last order so there was there was the end of communism and there was the development of the market economy the collapse of the soviet union and at that time he was appointed by yeltsin who was an alcoholic and had problems managing and was put into power and the conditions in the russian were the work there was anarchy um there was no money”

As education improves, societies move up the value chain from basic/cheap labor industries (textiles, simple manufacturing) to higher technology and higher-income industries; inventiveness follows education, then competitiveness in world markets follows, then trade position and per-capita incomes rise—these form a visible, predictable arc.

“the industries that they go into um tend to be very basic industry because they have cheap labor something like textiles and simple manufactured goods and so on but as the education rises then they move up the value chain to uh tech greater technologies and so on which raises incomes and raises productivity”

Education also means civility—how people behave together; smart people who work well together are productive, and civility creates both the reality and perception of fairness and equal opportunity, which supports social stability.

“that creates um a reality and a perception that the system is fairer equal opportunity not just one of privilege and that helps to create social stability but education is not just uh education in understanding facts and so on it is education and um civility of how to behave together and so if they're smart they understand how to be productive because they work well together and they're productive”

The cycles occur because prior circumstances create conditions that are increasingly difficult to deal with; debt monetization is a classic outcome because earning more or spending less is hard, so governments monetize debt, which is why these cycles are inevitable.

“why it's classic so yes that's why these cycles occur because what has created before put what happened before created the lay of the land that is then increasingly difficult to deal with so what can great leaders do in this moment i mean maybe um my sense is leadership is crucial here”

The resources for addressing problems are available—real wealth, science, and capabilities have never been better—but these must work for the majority of people, requiring calm, knowledgeable, productive work together to increase the size of the pie and create broad-based prosperity.

“we have the resources you know um wealth real wealth and and science and everything has never been better than it is but the notion is that it has to work for the majority of people and we have to keep it being productive so that that group has got to calmly and knowledgeably work together so that they increase the size of the pie and they create broad-based prosperity”

The most important solution is bipartisanship; without it, the nation becomes polarized and fighting with itself; Dalio would appoint a bipartisan cabinet drawing on moderates from both parties who can work together, so the nation functions as one and addresses problems in ways that work for the majority in the middle rather than the political extremes.

“what we have is a situation where everybody has their opinions and they have to sort of get them exactly right and they all fight with each other about whether their opinions so the most important thing is that we are become bipartisan so that we don't and we get over our differences i would have a bipartisan cabinet i would draw upon um both members of both parties the the moderates who are going to be able to work together so as then we have one country and then we deal with those in a means that works for the majority of the people in the middle rather than the polarity”

Evolution is not directional improvement but the process of change; the greatest force is humanity's capacity to adapt and invent; this is visible in charts showing life expectancy, health, and quality-of-life improvements over time despite temporary downturns from depressions and wars.

“evolution isn't a direction toward improvement um and the greatest force is a man's capacity to adapt and invent and so you see in the charts in the book you see that um this upward movement life expectancy um uh health or all the things that we think are better you see the there's a chart and it shows that over a period of time and you barely see the downturns from depressions and wars in that that is the greatest power man's ability to invent and adapt is evolution”

For policymakers, improvement on measured health metrics is the key indicator of success; if the health index and related charts show improvement, the nation is moving toward better life—this creates an objective accountability standard regardless of political ideology.

“for policy makers um you know are your policy policymakers doing a good job and there's so much subjectivity in that but i think it's very simple if those lines on the chart are improving if your health index is improving then you're moving toward a better life so that's what the book works like”

Russia-China alliance is strong; Ukraine is a sensitivity for Russia due to large Russian populations there and NATO's presence on Russian borders; these create geopolitical tensions but also explain Russia's position and military actions.

“um so um the issues and then there's a strong alliance between russia and china now um so that's kind of the lay of the land and then there are sensitivities the ukraine issue is uh a sensitivity um because of there are a lot of russians who live in the ukraine and there's also the issue of nato on it on their border um so there are those kinds of things and he has military power and he has a strong alliance with china”

The trend of skepticism about election results has been growing since at least 2020; it represents internal disorder and began with the emergence of populism where Trump was elected as the first populist leader in a developed country because large segments felt the system didn't work for them.

“it started before that there was the emergence of populism where before uh president uh trump was elected he was basically elected as a populist because there was a large percentage of the population that felt that the system didn't work for them and he tapped into that and he was largely elected as a populist leader first populous leader in a developed country um and so populism began that then and that was a battle of one group against the other group and so since then it's been like that and it continued to grow”

Currently, China is dealing with its rising debt issue through measures established about 4 years ago, including the 'three red lines' (financial ratios developers must live within) to address the real estate bubble; bankruptcies and adjustments happening now are healthy cleanups of bad debts and bad practices, not problems.

“they particularly getting money to small and medium-sized enterprises and developing a lending system and then establishing controls on it so right now um there's a vibrant um capital markets um and then uh lu huh became um the vice premier um responsible for that and to um and deal with uh those issues so you see right now that what's happening is uh the dealing with the real estate bubble there was a development in real estate a bubble which produced um a lot of unproductive lending and xi ping said you know houses are meant to live in not to speculate on and so that was wasteful so they established what they call three red lines which are financial ratios that the property developers had to live within and that is then causing the adjustments that are going on now which in my view are very healthy because um whenever there's uh bankruptcies and so on the most in the public think okay that's a problem it's in many cases really a cleaning up of bad debts and bad practices”

Writing down principles is crucial for clear thinking; principles are recipes for how to make decisions and what criteria matter; repeating decision-types over time makes clear that almost everything happens over and over again, so written principles apply to future instances better than ad-hoc decisions.

“i find that almost everything happens over and over again um and we're in this the blizzard of these things happening and what i found is that if i'm making a decision that that after i make the decision usually or right at the time if i pause and reflect and i write my principle down in other words principle is sort of a recipe what would i use to how would i make that decision and what are the criteria around it i find that i make it much more clear”

Henry Kissinger is unique in his ability to see geopolitics through all other parties' eyes simultaneously, like sitting at each seat of a multi-player chess game and understanding how each player sees the board calmly and objectively; this skill is rare and especially valuable combined with being both historian and practitioner.

“the first most importantly he's unique about seeing things through all the others eyes so if you were it's like there's a chess game i mean i think geopolit geopolitics is like a chess game but with multiple chess players playing the same game yes so imagine there are six people around playing the chess game and he could sit in each seat and he could know how they see it okay and see it in a calm way of how they see it he's unique in that way”

Dalio has used personality profile tests for 25 years with effectiveness and created a free online version called principles.you that helps people understand themselves and understand their relationships with others in about 30 minutes.

“i found um that using personality profile tests has been very helpful i've used those for about 25 years for people to help to understand themselves and understand each other so i created a free one that is called principles you it's online it's had remarkable loving people who've taken it learn about themselves but also you can put in somebody else and it'll tell you about your relationship with them that's like 30 minutes is a quick discovery”