A Legendary Investor on How to Prevent America’s Coming ‘Heart Attack’

25:49Ross Douthat:Tell me how you think the debt picture and the political and social picture interact. Because it seems like if you ask people what they're divided about right now, they don't say interest payments on the national debt. And they have a much longer list of things they're divided about. And I'm just curious how you think. So interest payments go up. They crowd out other forms of investment. What is the economic force that interacts with social disarray here? um uh they're divided about who has what money and and who gets it okay uh so which is very much related to the deficit i i wrote my most recent book to explain how it works with 35 examples was called how countries go broke and i've been speaking to top levels of both the democrat and Republican Party.

26:55And everybody agrees on those mechanics. And then when I go down and I say, you've got to get to 3 % of GDP deficit through some mix of raising taxes, cutting spending, and controlling interest rates. That's how you have to do it mechanically and so on. But they, and they say, Ray, you don't understand. In order for us to be elected, I have to make at least one of two promises. I will not raise your taxes and I will not cut your benefits. Okay, so what the country's divided of is, you know, let's say the multibillionaire class and those who are struggling financially, the left and the right and populism and so on, and that has a money component.

27:43So the deficits and the money part is a very big part of the social conflict part.

27:51Ross Douthat:But so when you're talking to politicians about and they give you this spiel about how we can't raise taxes and we can't cut spending, right? I think the follow up that they would say is that people experience those things as threats to opportunity or equality, right? People who rely on Medicare and Social Security think this is the guarantee of equality. People who rely on low taxes to build a business think this is the guarantee of opportunity. So if you are trying to sell those people on cutting deficits to 3 % of GDP, what do you tell them you're saving them from? You're saving them from a financial crisis.

28:31Ross Douthat:Okay. Okay. What happens in a financial crisis in the U.S.? What does that look like? The financial crisis will mean that the capacity to spend will be very limited. In other words, you can't afford military expenses and social expenses and so on, so that you'll be very constrained. And you'll have, because the demand won't meet up with the supply, you'll have interest rates going up. which will curtail borrowing, will hurt markets, and so on, and that that will lead to the central banks trying to balance that by printing of money, which will also devalue the money and create a stagflation kind of environment.

29:25Ross Douthat:Okay. So it sounds like in the worst case, it's a combination of its 2008 financial crisis yielding 1970s-style dagflation. I'm sorry to try and demand. No, I'm happy to try to give. Because just to put it in perspective for you, I am 46 years old. I have lived my entire life in the shadow of predictions about the U.S. deficit being unsustainable. The first presidential election I really remember is Ross Perot's campaign in 1992, which was run in part on those themes, right? But like a lot of Americans, that means that I tend to tune out the deficit argument. The first time I feel like that deficits, overspending became a really big issue for people's pocketbooks since the 1990s was the wave of inflation in the first couple of years of the Biden administration.

30:19Ross Douthat:So I just think it's useful for me and for listeners to understand concretely why are the 2030s or the late 2020s different from the last 20 years when we've also had these deficits. Thank you for your curiosity. Okay. And I feel compelled to give you that answer. OK, so it is like the plaque building up. And so it's like you say, like, I haven't had a heart attack yet. OK, and I can say, OK, OK, you haven't had a heart attack yet. I understand you haven't had a heart attack yet. Can I show you the MRI of this plaque building up in your system? And can you understand what I'm saying about what that plaque that you will have a heart attack if that plaque then starts to get that?

31:16Can you understand that? Can you understand where the numbers are and where you are? Look, it's your life. It's your choices. And ask yourself, is that right or is that wrong? OK, that's what you need to do for your own well-being.

31:34Ross Douthat:And so in your story, it sounds like if you combine that diagnosis with your sense and my sense of how the American political system currently works, that you're going to get at least a mild version of the heart attack before you get change. You said at the outset you weren't really betting against America in spite of like my podcasters framing. Are you optimistic that we could have, I guess you could call it a minor heart attack and recover? I think we're going to come into a period of greater disorder as there's a confluence between the monetary part, the domestic, social and political part where there's irreconcilable differences, and the international world order part.

32:32part. And I would say then I should bring in two other factors. One of them is acts of nature through history.

32:42Ross Douthat:Pandemics. Droughts, floods, impelitant pandemics. Okay. And if you take what is most people think about what's happening to climate, it's not a movement toward improvement. It's a movement toward worsening and then technology and AI. And I think that we have to talk about technology and AI as it enters into this picture because it plays a role. And the way it plays the roles, I think three ways, it can be a tremendous productivity-enhancing result that can help to mitigate maybe a number of the debt problems and so on and so forth, perhaps. perhaps we can get into this. I don't think it's going to come across with that speed and so on.

33:33Ross Douthat:Well, that's just, I hear this from AI people. They will say that in a best case, AI, if it just adds X percent to GDP growth, X percent to productivity growth, that it reduces your original problem. That's right. That's right. It makes the debt easier to bear. That's what I'm saying? Because it can produce the incomes, let's say, and the incomes can help debt service payments and the like. Okay. So I just want to say that's one of the three effects of the AI. The second effect of that AI, it is now creating enormous wealth gaps. Okay. Those who are the beneficiaries of it, we're approaching who will be the first trillionaire.

34:19Okay. The wealth gap thing has increased at great amounts and so on, and it will replace a lot of jobs. And so that's number two as a factor, right? So those gaps are an issue, however we deal with them. They will have to be dealt with, and that's going to become probably a political question, but that's an issue. And then number three is the technologies themselves can be used for harm. A lot of power. It could be used by other countries. It can be used by those who want to inflict harm. It could be used by those who want to steal money. It can be used for harm. Right.

35:01Ross Douthat:And in your pattern, in your cycles, right, you can see it as, in that last sense, it increases geopolitical tensions, potentially. It heightens Cold War dynamics. It increases domestic tensions. That's right. But it could ease fiscal tensions. Right. It could produce the productivity. But if it has some of the bad effects, it will probably have some of the good effects, too, right? And how that balances. Yeah. You know, and we won't know what it is like in the future because it's to our human capacity to anticipate what it'll be like in three to five years. So I think that we, for all these forces, these five forces, I think over the next five years, it'll be like going through a time warp.

35:54Okay? It'll be huge changes over the next five years in all of these forces coming together. And at the other side of that, it'll be almost unrecognizable. It'll be very different. And it'll be a period of great change, a great turbulence. And then back to how, okay, so what does one do? Knowing that one is not going to know what that's going to be like, Then my own approach to this and a recommendation is knowing how to balance positions.

36:27Ross Douthat:But for politicians, though, I feel like listening to that account maybe makes them say, well, I know Ray Dalio wants us to cut deficits to 3 percent, but he also thinks we're going through a five year time warp unlike anything in human history. So maybe we'll just wait and see what the world looks like in in five years before we painfully restructure Medicare and Social Security. I don't think they're going to think about where Ray Dalio thinks. Well, no. I think they're going to think about, like, what does the ballot box think? Yes. No, no, absolutely. But there are, you know, I've talked to people in Washington, D.C.

37:05Ross Douthat:who have, there's always legitimate concern about the deficit, and there are actual attempts to do something about it. I guess what I'm interested in is, in your account of the rise and fall of empires, Spanish Empire, British Empire, the Dutch mini empire, and so on. You don't have these case studies of a great power going through this cycle, hitting what you think of as the bottom, and then bouncing back and sort of having another run. Or do you? Because that's, I mean, look, as Americans, right, that's our goal. If someone buys into your narrative, they would say, okay, but history isn't determinist.

37:50Ross Douthat:We can make choices and we can have ourselves another cycle, right? Yes. And I think that's possible, but here's what has to happen, I think. And history would suggest that. Plato talked about this cycle in the Republic, okay? And he talked about the democracy and the problems with the democracy because the people don't vote for what is good for them and the strength. 60 % of the American people have below a sixth grade reading level, and there's a problem with productivity and so on, and they vote and they determine a lot. And so the question is, how in a democracy can that happen? And, you know, his view is that's when you have, ideally, the benevolent despot, somebody who is going to take control, be strong, and give for the country, in a sense, bring people together.

38:54However that happens, what you need is a strong leader of the middle who recognizes, essentially, that the partisanship and the conflict is going to be a problem, but has the strength to get people and everything working in a way that it needs to work so that there can be a debt restructuring of some form. There can be an improvement in our education system. There can be the structural changes in efficiency. It's difficult to run a big company. Imagine what it's like to run this country and to run it well. So a lot has to, you have to have a remarkable person with great strength, and you have to have strong leadership that is then followed rather than subverted by either of those sides.

40:12Ross Douthat:If you find yourself bewildered by this moment where there's so much reason for despair and so much reason to hope all at the same time, let me say I hear you. I'm Ezra Klein from New York Times Opinion, host of The Ezra Klein Show. And for me, the best way to beat back that bewildered feeling is to talk it out with the people who have ideas and frameworks for making sense of it. There is going to be plenty to talk about. You can find The Ezra Klein Show wherever you get your podcasts.

40:52Ross Douthat:So you're looking for the Franklin Roosevelt, maybe the Ronald Reagan figure of this particular crisis. Well, I think it's tougher now than it has ever been. Because we're further down. We have the, everybody's got an opinion. Do you know how difficult it is to lead? I mean, can you imagine? And everybody's wants, you know, so can you lead people down the middle, bring people together and get them to do difficult things? Right. But we're also, I mean, this is something that I think about with these debates. We're also extremely rich. Like the United States is much richer than it was even in the 1980s.

41:35Ross Douthat:It's certainly much richer than it was during the Great Depression, right? And that, you know, as much as people feel the bite of inflation or feel the struggle of a spike in the unemployment rate, that itself is a kind of stabilizer. And so it seems like you can also see scenarios where, like, let's take the example of Japan, right? Japan is a country that has carried a tremendous debt burden for a long time. And it has done so, I wouldn't say it's done so with great success. It has become less economically dynamic, less, it's more stagnant. It's not where it was in the 1980s or 1990s when people were talking about Japan taking over the world.

42:19Ross Douthat:but it also has this kind of, you know, wealthy, older society stability. Do you think that's a plausible scenario for the U.S.? I think you raised two questions, and I want to treat them separately, even though they're related. The first is about the higher living standards and us being richer. That has been true through all history. So all of these times before World War II, that has been true. And the big issue is how people deal with each other. Meaning that at the peak of debt, the empire is richer than ever before? Yes. If you take per capita income, many measures, life expectancy, any measures of well-being, and you do a chart, really, from the 1400s.

43:12In the Dark Ages, it was relatively flat. And so at every moment in time, we as a world, as a society, have been richer than before, making your point, okay? That didn't prevent World War II, didn't prevent the debt problems, didn't prevent any of those things. Because the most important thing is how people deal with each other. Can they together deal with those problems? And because realistically, so what if we had 10 percent decline in our living standards as part of a healthy adjustment? So I'm almost finished, but I want to get this out. So that is the first thing. Doesn't alleviate the debt problem.

43:53Doesn't alleviate the fighting for who control. But maybe it does a little, right? No, no, no. Just wait a second. I didn't interrupt you. Please don't. Okay, I'll finish. And then you'll reply. So, and on the Japanese case, or do you want me to answer this one and then we'll go to the Japanese case?

44:12Ross Douthat:Just wait on the Japanese. Just one question on that. Don't you think, though, that there is some, like if you take the 30s, the 70s, and the aftermath of the financial crisis in 2008 as, you know, each a period of financial, of some kind of economic crisis, it was better, right? The 30s were worse than the 70s, and the 70s were worse than the 2010s. So maybe things can stabilize a little bit because we've gotten richer. Yes, if you were to look at per capita income, life expectancy, any measures of standard of living or whatever it is, and you were to see a graph. But I'm just saying even the fighting, right, was not as bad in the 70s as it was in the 30s.

44:55Ross Douthat:That's all I'm saying. Well, I wouldn't make too much of that. Okay. Okay. In other words, I would say this is much more like the 30s. Okay. Okay, for a variety of reasons, having to do with the measures, if you were to say the severity of the debt, the severity of the internal conflict. Okay. I mean, I lived through these. Yeah. And I would say— So you think we're worse off than the 70s? Our conflicts, our debt is worse off. That's true. Okay. And the United States' dominance in the world order and the conflict is worse off. Okay. Okay. So I would say that's objectively the case. I'm not trying to make a bad case.

45:33I'm just trying to be analytical because my job is to bet correctly. All right.

45:39Ross Douthat:So how about our Japanese future? Could we have a Japanese future? The Japanese situation is two main things. Very interesting. The Japanese debt is an internal debt. In that particular case, the way it was dealt with is that the central bank printed a lot of money and bought the debt. Okay. That's how they did it. And as a result of that, the Japanese yen declined. And so they had a tremendous depreciation in the value of the wealth because of the depreciation in the value of the money and the debt. So, yes, we can see something happening like that. OK, but we also have a foreign one third of our debt is held by foreigners.

46:31OK, so that's a different thing. And so and we as a country, you know, owe money to other countries. And here, but yes. And if you think that that's a good outcome. No, I don't. Well, I think it's like the decline of the British Empire. No, I don't have the decline of the British Empire. The same sort of thing.

46:52Ross Douthat:No, I don't think it's a good outcome. I'm interested in it because in the case of Japan, it's sort of a sustainable stagnation rather than crisis and collapse. But I think where I would agree with you is that there are, for various reasons that are beyond the scope of this conversation, Japanese society seems more likely to accept a depreciation in living standards than American society. And in that sense, it probably isn't a model. Let me ask you a last question in the form of a comment about my own optimism that you can respond to, right? which is that I mentioned earlier that I've lived my entire life in a world of people worrying about deficits and deficit spending.

47:41Ross Douthat:And I think it is completely reasonable to say, as you've said, that just because the crisis hasn't arrived doesn't mean that you aren't going to have a heart attack tomorrow. And so I totally expect everything you're describing to have significant negative impacts on the United States. At the same time, I do think it's a weird moment where the U.S. looks weak if you look at certain indicators, but, you know, we also can look very, very strong in many ways, right? Just if you look at the last 10 or 15 years, our GDP growth has substantially outpaced Western Europe, Canada, sort of peer economies, right?

48:23Ross Douthat:We still have the world's most profitable cutting-edge technology companies. We still have the world's most capable military. And then socially, and we have a lot of problems, but are there other big countries in the world that are better at assimilating immigrants that have higher birth rates that are geographically isolated from major wars and refugee streams and so on? I'm not sure there is a better bet. So I guess if I'm looking forward 50 years, isn't America still, in the context of the whole world order, a place to have a certain kind of confidence in? What do you make of that? I think we can't frame it as, like in the beginning of what I objected to, was is the United States going to win or lose or any of that thing?

49:13I think we know what healthy is. There are only three things any country has to do in order to be healthy, and this is throughout history. First, educate your children well in terms of their capabilities, the quality of their ability to be productive, and their civility. Number two, have them come out to a country in which there's order and that people work together to be productive so that there's broad-based productivity and prosperity. And don't get into a war. Don't get into a civil war or don't get into an international war. That's all you have to do. Then you can look at the fundamentals of that.

50:07Are we educating our children well so that they can be productive and capable and they're civil with each other, that we have a civil population? Do we have an environment where there is productivity and we can get along? I think we have terrible circumstances. I live in Connecticut, and my wife helps the poorest kids trying to get through high school. The gaps in education, the gaps in these things and civility are real problems. OK, so I think that it really comes to them. And, you know, it's basics. Do you earn more than you spend? What's your income like? What is your balance sheet like? These are basics.

50:53You know those basics. So if we can have those basics. Yes, I lived. I thank God that I grew up in the United States because, oh, my God, it was unbelievable. It was the place that anybody from anywhere in the world could come and truly be a citizen. So it had that real meritocracy. And I grew up in a lower middle class family. My dad was a jazz musician. I could go to a good school and I can, I don't know, make my way. OK, and and I think of that creativity and all the wonderful things, broad based education, a middle class that we had a middle class and we had those things. And so I've seen the difference.

51:37And right. And so I know what the fundamentals are. And I look at measures and I'm worried about that.

51:47All right.

51:48Ross Douthat:Ray Dalio, thanks for joining me. Thank you for having me.

52:06Ross Douthat:Interesting Times is produced by Sofia Alvarez Boyd, Victoria Chamberlain, and Emily Holsneck. Jordana Hochman is our executive producer and editor. Original music by Isaac Jones, Sonia Herrero, Amin Sahota, and Pat McCusker. Mixing by Afim Shapiro. Audience strategy and operations by Shannon Busta, Christina Samulewski, Andrea Batanzos, and Emma Kelbeck. Special thanks to Jonah Kessel, Alison Brusek, Marina King, Jan Kobel, and Mike Puretz. And our director of opinion shows is Annie Rose Strasser. Thank you.