Ray Dalio: Our System Is in Jeopardy - Debt, AI & the Cycle That Destroyed Rome

15:00Chamath Palihapitiya:So you can, like wealth, it's important to think to distinguish wealth from money. Okay? Wealth is in stuff.

15:08Bill Friedberg:It's in buildings, it's in companies and so on.

15:12Chamath Palihapitiya:But you can't spend wealth. You have to, when you want to spend it, and that's the purpose of money, you have to sell it and then you get money to spend. And right now we have an awful lot of wealth relative to money.

15:29Bill Friedberg:And the question is, what is that money? And there's the risk that you go to get, convert your wealth into money that they're going to print money because that's what they've always done since we've had fiat currencies.

15:40Ray Dalio:So as you look out and have conversations with all the market participants that you know, and you know everyone that's of size and scale, where are we in terms of folks converting their wealth into gold or their money into gold? Like how much more do we have to run in terms of the dollar denominated value of gold

16:02David Sacks:in the market cycle as this great rush for the doors, rush for the exit happens? Two things that come to mind.

16:09Chamath Palihapitiya:What I look at is literally who has what assets,

16:16Jason Calacanis:including like central banks, what is the money in and so on, and what is that mix? And I look at the amount of wealth relative to money, or I look at the amount of wealth relative to gold.

16:33Chamath Palihapitiya:And what we've seen is that there's an enormous amount of wealth, and there was an enormous amount in central banks of the other money relative to hard money gold. And so we've seen about what I would call it go from an extremely small number to something that is a less small number. That price increase and that change in composition has brought it almost, not quite, but almost toward the average of what it's been

17:16Bill Friedberg:over a period of time. So being out of balance. However, because the total wealth is still so large relative to money. That's a real issue. So let me give you a practical example of this. Wealth taxes and wealth being a risk.

17:37Chamath Palihapitiya:One question that might be asked, are we in a bubble? In other words, are AI stocks and other such stocks in a bubble?

17:46Bill Friedberg:If you want to get into that, we'll get into that.

17:49Chamath Palihapitiya:But one of the things that we know from that is that one of the characteristics of bubbles is that there becomes a need for money that requires people to sell their assets to get money to meet that need. Now, quite often that need comes from borrowing money

18:14Jason Calacanis:to buy those assets, okay?

18:17Bill Friedberg:And then the assets go up in price and so on. But what happens is it can't be sustained because you have to make the debt service payments and they're not throwing off the cash to make that. And so they have to start to sell that.

18:33Chamath Palihapitiya:And when you have to sell it because you need money, you need cash to pay your debt service or to pay nowadays wealth taxes.

18:43Bill Friedberg:Okay, so now we have a dynamic. The bubble will burst as that dynamic takes place. There are a number of things we could talk about about the bubble if you're interested. But just imagine if you put in wealth taxes. Everybody can talk about whether they like or don't like wealth taxes or something. But anything that, if you put in wealth taxes, and there's a lot of fear of wealth taxes in and of itself that can drive money, wealth to cash. And there's only one way you're going to get the cash with the wealth, and that's either sell it or to borrow against it, which causes its own cash flow issues.

19:22Bill Friedberg:And we have a dynamic having to do with the social part of this,

19:27Chamath Palihapitiya:the wealth gap that makes that politically an issue. So anyway, all I'm saying is people should

19:36Bill Friedberg:worry, and companies should worry, or countries should worry, do they have enough gold?

19:43Chamath Palihapitiya:I mean, if you didn't know what gold was likely to do and you had no view on gold,

19:52Bill Friedberg:one should have between 5 % and 15 % of their portfolio in gold because of the fact of how it works with the other components.

20:02Chamath Palihapitiya:In other words, it's a diversifier when the shit hits the fan, okay, gold does well and the other things don't, generally speaking. And because of that correlation,

20:16Jason Calacanis:depending on what else is in the portfolio, if you put it through an optimizer, you'd have something like that. So I'm not trying to tout people on buying gold, but I would say,

20:28Chamath Palihapitiya:what is safe? What is safe? And it's safe is somewhere, if you had no view, between 5 % and 15%.

20:37Ray Dalio:Why hasn't Bitcoin performed in the same way? In the same period that gold's climbed 80 % since we last talked, Bitcoin's down 25%. What's your view on what's happened with Bitcoin and why that hasn't played the role that many thought it was going to play, which is the safe haven asset?

20:53Bill Friedberg:There's an important differentiating characteristics of Bitcoin. And then there's also, you know, like who owns it and why they buy it, why they bought and sell. OK, so Bitcoin does not have privacy. Any transactions can be monitored and then indirectly perhaps controlled. Central banks are not going to want to buy Bitcoin and being able to hold it. So it's not just individuals, it's institutions and so on, but most, you know, and central banks, so that there are attributes of that. There has been some question or thoughts of the development of, you know, new technologies like quantum computing and so on.

21:37Bill Friedberg:Can there be issues regarding that? And then there's, you know, who owns it and what are the other exposures that they have in their portfolio, it tends to have a pretty high correlation with the tech stocks. So from an ownership, you know, just the supply demand is affected by if somebody gets squeezed in one thing, they sell something that whatever else they have. So there are those dynamics. It's a long way. And it's a relatively small market. That's a relatively controllable market. I think a lot of attention has been given to Bitcoin. But as a money, you know, it's it's it's it's small in relationship to gold.

22:23Bill Friedberg:And so, you know, those are the dynamics. There is only one goal.

22:28Ray Dalio:What about silver? I mean, silver has had a big run up in the past year as well. Is that a derivative to gold and it's effectively people playing off of the wake of gold?

22:40Bill Friedberg:silver and its production is a residual commodity. The supply of it is difficult to increase. And through history, you know, like the pound sterling, silver was perceived as a monetary item. But it has also taken on a speculative life of its own. So, you know, people are, hot in it because it's been hot.

23:08Ray Dalio:I just want to shift gear a little bit back to something you touched on.

23:12David Sacks:But the last time we met, you also talked about the importance of making sure that interest rates remain low for us to kind of manage the effect and the impact of the stage and the cycle that we're in. What's your view, I guess, today on where rates are and how the Fed has acted over the past year relative to what needs to be done to soften the effects of the stage and the cycle that we're in.

23:35Jason Calacanis:Because we have so much debt, federal debt, interest rates are one of the three main considerations. There's the taxes, there's spending, and then there's interest rates on the debt. But you can't make interest rates severely artificially low because one man's debts are another man's assets.

23:57Chamath Palihapitiya:And if you make those interest rates too low for the creditor, you will produce the dynamic

24:07Jason Calacanis:that we understand. In other words, you'll produce a lot more borrowing, you'll put it into things, and you can fuel a bubble. And so at the same time, you can't have them so high that the debtor gets squeezed unaffectively. So there's a balancing act, you know, keep them high enough that they're adequate for the creditor, but not so high that the debtor. And so when you have a lot of debt assets and liabilities, because for every debt asset, there's a debt liability. And when you have a lot of those, that balancing act is very difficult. This made more difficult, you know, because of what's called the K economy.

24:51Chamath Palihapitiya:In other words, there are bubble elements that are going on in the part of the economy where the question is, who will be the first to be a trillionaire and that

25:06Jason Calacanis:top 1 % of the population and all of that at the same time as you have the other part of the economy where, for example, 60 % of all Americans. have below a sixth grade reading level. And to make them productive, particularly as we are also having AI have replacements for them, is a particularly difficult thing to achieve. In other words, when you have so much debt assets and liabilities, and then you have such a disparity in conditions between those that are at the top and let's call it the bottom 60 % of the population, what that's like, that's another hat trick. That's another difficult thing to pull off.

26:02So this is a challenging situation.

26:06Chamath Palihapitiya:As far as monetary policy exists, the idea of setting an interest rate and having a fiscal policy and a monetary policy that's for the economy as a whole and doesn't deal with the differences in the circumstances may be more, is more challenging.

26:34Ray Dalio:Well, so taking a look at FedAction and market activity. There's been a lot of reporting over the past year that a number of global central banks have stopped buying US treasuries and are shifting to gold. Does this mean that the Fed in the US is going to have to start buying treasuries and expand

26:57David Sacks:their balance sheet again? Is it inevitable that we see a re-expansion of the Fed's balance sheet in this phase in the cycle, given what's going on with global market action?

27:07Jason Calacanis:I think that it's likely down the road. Right now, there's the shortening of maturities as a means of trying to deal with that. Of course, that increases the debt rollover risk. but sell less long debt, try to hold the short rate down so that the longer rates attachment to it helps to hold the long rate down,

27:38Chamath Palihapitiya:and then try to use the government's power of persuasion on other countries to either buy the debt or to hold the debt

27:54Jason Calacanis:or to have other forms of capital enter the United States.

27:58Ray Dalio:How do you like Kevin Warsh's pick for Fed chair?

28:01David Sacks:What's your view on how he's going to guide interest rate policy for the central bank when he assumes his term?

28:07Jason Calacanis:It's a very, very big challenge. I think he's a practical man. He understands both sides of the pros and cons. I think it's a tough job.

28:16Ray Dalio:One of the other things that I would say was pretty surprising over the past year is how adamantly against tariffs for fear of inflation and reduced consumption, which

28:31David Sacks:would mean a negative effect on GDP growth, perhaps. tariffs might be the president and the administration put in place a number of tariffs under the emergency economic powers act which the supreme court in the last week or so

28:47Ray Dalio:overturned but looking back on the economic effect of tariffs what do you think economists got right

28:57David Sacks:and wrong about their predictions about the effect tariffs would have on the economy on consumption on inflation. And are there things that economists fundamentally missed or didn't understand and why?

29:10Jason Calacanis:Yeah, I think so. First of all, there's the tax revenue part of them. I mean,

29:17Chamath Palihapitiya:thinking of it just as revenue. And I think that people don't, all economists, make the mistake of not including taxes in inflation. And what I mean by that is, if your taxes go up, that's inflation. I mean, why should it be any different than

29:44Jason Calacanis:if your cost of housing goes up? Why shouldn't it be part of the inflation calculation number? It's taking money out of your pocket. I mean, it's probably, you know, for a lot of people, the biggest expense.

30:00Chamath Palihapitiya:And so when they say inflation is something separate, you know, I think it's changing the form of inflation in a sense.

30:12Jason Calacanis:So what I mean is, you know, through history, tariffs used to be the biggest source of revenue for government. throughout most history and in most countries. Okay. So it is a, I think it's viewed, it's a totally valid way of raising money and it should be kept in consideration for that. And you get the foreigners paying a portion of it. But there's also as part of the big cycle question is the problem that we have that we are not independent. Okay, we've had a hollowing out. This is the big question, you know, that we've had a hollowing out of manufacturing the middle class and so on. Now, are we going to try to build that?

31:06Jason Calacanis:And what is the plan to build that? or are we going to continue on with large trade deficits? And so you have unsustainable

31:17Chamath Palihapitiya:trade deficits that the United States has, and which are capital surpluses.

31:25Jason Calacanis:In other words, the dependence on foreign capital is the other side of those trade balances, and that's unsustainable. So because that's unsustainable, you need some way of rectifying that. Okay, so what is the plan to rectify that? Partially, that plan can have trade tariffs. I think they're totally valid, but it all has to be part of another greater plan, which is to develop the industries that we need to have developed, which we're seeing happen in a much more proactive way. In other words, you're seeing more government activity to create infrastructure, to bring in industries and so on. You need that not only economically, but you need it geopolitically because you can't have dependencies.

32:22Jason Calacanis:In other words, we're entering a world of greater conflict. We've moved from a multilateral world order to a power-based confrontational world economy. And in that environment, everybody's threatening to cut off everything from, you know, the goods and capital wars that we can have are threatening. And so you have to build independence. And so that's part of a plan to try to build that independence. um so i i think when i look at that i don't think that's the problem i i'd say and it's misunderstood so yes i think people are misunderstanding that and the important thing is we get the other things right you know like let's get down to three percent and by the wait, there's a bipartisan bill on this.

33:18Jason Calacanis:And Scott Bessent has come out in favor of it. I'm in favor of it. I mean, lots of people are in favor of what I'll call the 3 % three-part solution, 3 % of GDP, three parts, a bit from one thing, a bit from another, taxes, spending, and hopefully interest rates.

33:45Ray Dalio:And just to take the inflation question to its conclusion, at the State of the Union

33:50David Sacks:this week, President Trump shared his vision, which is that tariffs can completely replace an income tax in the United States. Do you think that that's a feasible path? Does it make sense at some point for tariffs, which are effectively a consumption tax?

34:03Jason Calacanis:I don't think it's going to – no, I don't think it's anywhere near that, both because of the combination of the size and then the impact of that size. Tariffs are regressive, and I think that there needs to be some – we have to deal with the wealth gap.

34:25Chamath Palihapitiya:To me, the wealth gap, the biggest problem of the wealth gap, which is a big social problem, is also the productivity gap. And you have to make most people productive.

34:38Jason Calacanis:And you have to do that through infrastructure and so on. And I think that needs to be addressed.

34:45Ray Dalio:It's a really important point you just made.

34:47David Sacks:I think my analysis indicates that nearly half of Americans either work for a government agency or a government service provider or contractor. The data over the past year is the federal workforce declined by 317 ,000 employees, roughly 14 % of the total federal workforce. As this administration has reduced the size of some of these agencies, reduced the size of that workforce, what happens to those individuals? Do they go work in the private workforce and become productive? Or do you think they're getting subsumed by other government agencies, either state or local or government service providers, to do work that fundamentally is not productive to growing the economy?

35:36Jason Calacanis:I haven't studied the numbers.

35:38Chamath Palihapitiya:I don't think I can adequately answer that. I would say government is extremely inefficient. It has a role.

35:50Jason Calacanis:It has an important role, but even that role it's handling very inefficiently. Other governments handle that role of maybe education, some of these things in a better way. We need fundamental, We need, you know, best thing you could invest in is education. But anyway, where they go and what they do from the government and, you know, the other inefficiencies is a problem. The one thing that's good about the system that the capitalist system, in a sense, is it doesn't live if it can't, if somebody either won't bet on it or it doesn't make a profit. So, yeah. So I think wherever it goes, it's wherever those people go.

36:41Chamath Palihapitiya:There are just so many inefficient people and inefficient systems.

36:46David Sacks:Is there not enough productivity driven economic growth in this nation at this time to give more people the opportunity to improve their income, improve their wealth, improve their livelihoods?

37:00Ray Dalio:Is that the fundamental issue we're dealing with at the moment? Or is it that, you know, people aren't prepared or educated to be productive and therefore the system itself has failed them?

37:13Chamath Palihapitiya:There are three things basically that you need to do to be successful. You have to first educate your children well and so that they are capable of being productive and also educate them in civility so that they are civil with each other.

37:30Jason Calacanis:The second is then they have to come out to an environment that is an orderly civil environment that people can compete and work with each other to be productive. That works for the most people. And the third thing is you have to stay out of wars. You have to have no civil war and no international war. If you do those three things right, you will have a successful country. That's all throughout history. OK, we're having problems with those.

38:06Ray Dalio:And are those three things the antidote to some of the rising movements that we're seeing

38:13David Sacks:in increased unionization and effects that unions are having on the political process, which is also leading to these rises in socialism and support for socialist movements in the

38:25Ray Dalio:United States, as well as the wealth taxes, which from the view that's shared by those

38:31David Sacks:participating in those movements, they are meant to solve income inequality, wealth gap issues that we're seeing in the United States. So that's their solution. Is the solution to those movements, education and civility, creating a civil environment and staying out of wars, is that all we need to do to make this successful? Or is there more to the equation? That's it. What we need is to stop fighting.

38:56Chamath Palihapitiya:Okay, we're now at a stage where we have irreconcilable differences. In other words, when the causes people are behind are more important to them than the system, the system is in jeopardy. our system is in jeopardy because people will not accept the system or the alternatives. And so they're going to fight. You know, I think when we have, we're going to have the midterm elections,

39:36Jason Calacanis:you're going to go past the midterm elections with probably that Democrats will take the House and maybe, I don't know, it's going to be difficult.

39:45Chamath Palihapitiya:And you know what? Nobody can succeed because everybody's going to be fighting. They're going to all be fighting. Okay. So,

39:54Jason Calacanis:how does that affect productivity? Okay. And then when you deal with things like, how do you get a good education system?

40:01Chamath Palihapitiya:So, you have now almost the mob disorder, mob disorder and inefficiency nobody's allowed to take charge of this if if you go back in history plato you know i think it was like 350 bc wrote about the cycle uh you know democracies and the threat to democracies what's happening now is similar to julius caesar and rome and beings you know, stabbed in the Senate. And what you need is you need a bipartisan. You need the country to

40:45Jason Calacanis:have a strong, almost a strong leader. We do need a strong leader to get the reforms done to make the country work well. But I mean, so how do you force this mob of people who are behaving this way, including in the elections and so fragment to create order? So you need a tough leader. We'll force them to do different, force things to difficult things and not fight with each other and focus on being productive. That's what you need, I think.

41:23Ray Dalio:It sounds a little like there may be this inevitable path

41:28David Sacks:of the choice that no one wants to make between some form of socialism and some form of fascism. Is that where this goes?

41:35Jason Calacanis:I think we're moving toward that war. We're in that war. We're in what I call stage five of a cycle. In the book, I describe the pattern that's happened over and over again.

41:48Chamath Palihapitiya:And when you get to this position when there are bad finances combined with large wealth and values gaps and irreconcilable differences, and you have external threats as well as domestic threats, you have this dynamic.

42:12Jason Calacanis:I think that's where we are. I'm like a mechanic. My goal, I'm not ideological. I'm just a practical guy trying to make money in the markets and trying to describe things. And that's what it looks like. I think when we look at the bubble question on AI, what a lot of people don't realize in bubbles is that through all technologies, they think that they are betting on the technology

42:39Chamath Palihapitiya:when they buy the stocks in the companies. That's not true. Okay.

42:45Jason Calacanis:There's a giant difference between the behavior of the companies and the behavior of the technologies. And that the norm is in these is that a lot of companies won't survive in the start. Very small percentage, and they'll all fight and so on. But the technologies will go on and it'll be great. The technologies will. So I want to emphasize to people that dynamic. And I can go on and describe, you know, what it's like. Of course, we've seen it to some extent with the 2000 bubble in the technologies and what went on. But even if I describe what it was like in the late 20s, you know, it's just it was unbelievable.

43:30Jason Calacanis:But the technologies will go on, but the companies won't necessarily go on. And so when I'm looking at that, that has big implications.

43:41Chamath Palihapitiya:Right now, it looks to me like AI basically is eating everything and it might eat itself. And what I mean by that is not produce adequate profits.

43:58Jason Calacanis:We can't take just a domestic view of that. We have to look also at what's happening in China and make interesting distinctions there. You know, there's a difference in philosophy that's carried through in the economy of how the economies of the United States and China work in that we have basically primarily a profit-based system. They have a system in which they might believe that profits are a second consideration. They're not necessarily needed in order to achieve the best results.

44:33Chamath Palihapitiya:For example, in China, they would say usage of AI is fantastic. So it should be like electricity or something, and let's make it free for everyone. And let's make it open source for everyone. Okay, and they might get much higher usage, and they'll get their productivity gains through the usage, and we have a profit system to pay back. Okay, well, now we're in one world.

45:06Jason Calacanis:How do you compete in that world? What do you do with that? In other words, just imagine that their technologies are almost as good as ours, because they are. They're not far behind.

45:18Chamath Palihapitiya:But you could get them for free, open source. Okay, now you've got to pay it back. Okay, so I just want to emphasize that these are also systematic risks.

45:34Jason Calacanis:that enter into the picture of AI. But you certainly, yeah, there are a lot of unknowns here.

45:41Ray Dalio:As we wrap, looking back on the history of this nation, I ask myself the question a lot,

45:48David Sacks:how did we get to the point that we've gotten to in terms of the amount of debt, the amount of government spending, the role that the central bank has played, and the risks that we find ourselves in today that all seem largely avoidable if we hadn't taken or made the decisions we made along the way. You've highlighted that they repeat over and over again. But if you could go back and restructure the United States and be a founding father and write the Constitution yourself, what are one to three things that you would have done differently? What would you have written into the Constitution that may have prevented us from getting into the situation that we're in today?

46:22Jason Calacanis:Well, I mean, it's like the marshmallow test. You know, the marshmallow test, you want to see it as a kid at early age, you give them the choice between one marshmallow now and two marshmallows in 20 minutes. And the kid that chooses the two marshmallows in 20 minutes is going to have a better life and make better decisions kind of thing. I mean, that therein lies our problem, the immediate gratification and also the not knowing if things are going to be productive. But the system has been remarkably adaptable, too. In other words, we've gone through crises, we've wiped out debts, and we've gotten past it.

47:04Jason Calacanis:And there are certain ways of getting past it. But it's a tough question to balance financial prudence with innovative inventions. Because particularly, take AI now. nobody knows what's going to come of it and what way, right? Is it going to pay? Is it not going to pay? And all of that. And so what do you write into the law that is going to get you financial prudence and controlled? And when you write it into the law, does that lessen the experimentation and, you know, the entrepreneurship and all of the things that, you know. So it's tough to do this with rules. I think maybe the main thing is I would say read history.

47:59Jason Calacanis:Read history and know these things and try to get that balance right. You know, everything's a matter of the balance. So the balance of the pain of failing or the pain of putting money into something that fails.

48:15Ray Dalio:Well, Ray, I want to thank you once again for taking the time to be here with me. It's always great to catch up, hear your perspective. Obviously, so much has changed in the last year and yet so much hasn't.

48:26David Sacks:It's been great to get your view on it. And I think it's really helpful to do this. So thanks so much.

48:32Jason Calacanis:And thank you for what you guys do. I'm riveted to your program and I think you make a great contribution. so conversations like this are are really practical helps for a lot of people so anyway thank you for letting me participate and thank you for what you do for a lot of people thank you I'm doing.