Ray Dalio on the Coming Crisis in US Debt

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1:23Hello and welcome to another episode of the All Thoughts Podcast. I'm Traci Alloway. And I'm Joe Weisenthal. Joe, have you ever seen those visuals of a trillion dollars where it's like, here's 100, here's a hundred dollar bill, here's a stack of$10 ,000, here's a million dollars, and eventually you get to one trillion and it's just all these pallets of notes that are worth a billion each and they're like covering the size of a football field or something and they're double stacked. I love that. I never really know what they mean. It's like, oh, this is as big as the Statue of Liberty or something like that.

1:59And it's like, OK, like, I mean, that is objectively big. Is that a good way to visualize money in terms of what it means? I don't know. But yes, money, especially if you use small denomination bills, can really pile up before you get to real value. Well, OK, speaking of big numbers, the U.S. budget deficit was about$1.8 trillion in 2024. So if we stick with the visual, almost two football fields of double stacked pallets of$1 billion each. So quite a lot. But I think this illustrates... You know, we saw those stacked pallets. I know, but we didn't see a trillion dollars. We saw billions. And I think this kind of illustrates one of the really difficult things about finance and debt, which is all of us, as you mentioned earlier, kind of struggle to grasp the scale of these numbers that are involved here.

2:52And$1.8 trillion seems so abstract that we have to describe it using football field analogies or whatever else. And if we can't really grasp the scale of the debt because it's just this big number that no one really understands or even takes seriously, then it feels like it's difficult to tackle, to solve, right? Well, I'll say two things on that. I mean, I think, A, you have to question, like, at any given point, what is an economy solving for, right? And so people have anxiety about the size of the debt and the deficit. And it's like, but, you know, there's also high inflation. To have anxiety about social services.

3:33Yeah, and things like that. And then there is also the question of, you know, we think of a household or any entity as like you have to have money to pay your bills. Are there other dynamics besides numbers that cause a financial crisis? So, for example, you could have a country with very high debt to GDP and it's fine because, you know, it goes on for longer than people expect. And you can have countries with low debts and deficits, but because they have an internal political crisis, because people no longer have confidence in the government or the central bank to pay it back, you can have a crisis even at low levels.

4:09And so even thinking about what does it mean to solve a debt crisis, talk about debt at the national level, is simultaneously a financial discussion and one about political confidence. A social conversation. All right. Well, on that note, I am very happy to say that I think we have the perfect guest to talk about all of these things. Someone who has consistently had some very big thoughts about these very big numbers. We're going to be speaking with Ray Dalio, the legendary founder of Bridgewater, the author of numerous books, including a new one titled How Countries Go Broke, Principles for Navigating the Big Debt Cycle.

4:47and most importantly, a key player in the invention of the chicken nugget. I am very excited. Ray, welcome to the show. Wow. What an introduction. Thank you. Tracy's good at introductions. If it had been me, I would have just been like, Ray Dalio, you all know his name. Let's bring him in. But Tracy does it properly, especially for a guest of your stature. You do pretty good too, Joe. Thank you for having me. So I want to start with the really important stuff. So first, let me just thank you on behalf of millions of Americans for your contribution to the chicken nugget. What did you do exactly when it comes to chicken nuggets?

5:25What was your role? Well, when I was pretty young, I started trading commodities because they had the lowest margin requirements. So I figured if I was going to be right, and I wouldn't do it if I wasn't going to be right, that I would be able to get the most amount of leverage out of these. And so I started trading commodities before most people started to trade commodities. And then that led me in 1973, when I graduated from business school, to become a commodity investor, sort of. And what I did was I was in charge of institutional futures at one of these brokerage houses. And that brought me in contact with the mechanics of how hedging and how chickens and grain and everything works.

6:24So fast forward, I got to meet the biggest chicken producers in the world. And McDonald's hired me as a consultant of sorts to advise them on how they were going to safely price the chicken McNugget. nugget. You see, their worry was that if they, this was very volatile times then, and their worry was if they bought the chicken and they put it on the menu and the prices changed, like went up a lot, they'd have to change the menu price. So they needed to know that they could have stable prices. And we talked and I knew that the mechanics of chicken, how do you produce it? There were little chicks and they didn't cost much.

7:15And what cost most of the money to make a chicken was the corn and soy bean meal that they produce as feed to feed them, to get them to be big chickens and so on. And so I went to one of my chicken producing clients and McDonald's and I showed how this chicken producing client could hedge the price and give them a stable price. And because of that, they were able to put chicken McNuggets on the menu. I love this story for multiple. I love the idea of creating a sort of synthetic financial chicken McNugget price through the inputs. inputs. You know, I want to say, you know, for a long time, I probably bought into this view that the real creators in an economy are the farmers and the growers and the entrepreneurs who, you know, come up with a distribution mechanism.

8:12And it always sort of the people in finance are seen as like, oh, they're just sort of speculating or betting on that. And I've changed my mind over the years. And, you know, there are many good ideas in the world that people have on paper and labs and so forth that never exist because the financing mechanisms to bring them to place don't exist. And so I would say that if you like, especially in 1975, when I imagine we didn't in the mid 1970s, when we didn't have the same level of easy running computing power and as liquid markets, et cetera, that someone who figures out how to create a synthetic McNugget price is as much the inventor of the McNugget as the person who figured out how to, you know, ball and fry the chicken.

8:57You think I can claim being the inventor of the chicken nugget? I don't know. I think that I think that'd be overreaching. OK, well, anyway, I love that. I love that story. All right. So I want to get to debt, the actual important things. So the thrust of the new book, it kind of reminds me of one of my all time financial favorites, which is A History of Interest Rates by Homer and Sidney. And you're kind of taking a similar approach, although maybe you're not going all the way back to ancient Babylon or something like that. But why did you decide to focus on debt cycles? What's the allure for you?

9:33And what do you learn from history? In 1971, after I graduated college and before I went to business school, I clerked on the floor of the New York Stock Exchange. And I followed the markets. I followed the markets since I was kid. I first got involved in markets when I was 12. I used to caddy. And then it was the time of the stock market. And the stock market was very hot. And I took my caddy money and I did that. But anyway, that led me to be on the floor of the New York Stock Exchange and follow markets. And on August 15th, 1971, Richard Nixon, Sunday night, got on the television and told people that the monetary system was going to change, that the money that they thought they could get, gold was thought of as money then, and paper money was like checks in a checkbook, didn't have any intrinsic value, no value.

10:39that they would not get because there was a fixed exchange rate. And he gave some sort of BS story about why that was, which it was really because they didn't have enough gold to back up their money claims. And I walked on the floor of the New York Stock Exchange. I thought, this is a big crisis. This is going to be terrible. And I thought the stock market was going to go down a lot. And I went on the floor and it went up the most in years. And I didn't understand that. I didn't understand why. And so I started to do research and I found that on March 15th, 1933, President Roosevelt got on the radio and made the exact same announcement for the exact same reason.

11:34and I studied then why is it that they went up a lot. Okay, you devalue money. When you devalue money and you make money very easy, things go up. And so I learned not just the nature of that mechanic, but I learned that things that surprised me in my life often were things that never happened in my lifetime. But they happened in times in history. So I studied the Great Depression. I figured, okay, I should study all big things that happened. And I studied that Great Depression. And as a result of doing that, in 2008, I was able to anticipate the global financial crisis ahead of it. And the reason is, is because when you have a debt crisis and interest rates go down and hit zero, so they can't go down anymore, cutting interest rates anymore is no longer going to work.

12:43And what I learned from studying this event in 1933 is that when that happens, the government prints money and buys the bonds. So what happened in 2008 was exactly that. And I wouldn't have understood it if I didn't study what happened back then. So that changed my whole approach to decision making, which is also why I did this study recently. And that came out as the book that you referred to, you know, principles for dealing with the changing world daughter, I needed to study things that hadn't happened in my lifetime. So we'll get into it. There are things that are happening to us in our lifetimes that haven't happened before that you have to go back to the 30s or other periods of time to understand.

13:38And related to that is this money debt thing.

13:51Thank you.

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15:00Let's talk about the present tense. And obviously, Tracy, in her fantastic intro, talked about the size of the deficit last year. And, you know, you see so much about the debt. You know, there's two things in the story you're told. There's sort of two things that struck me right now, which is one is obviously we don't have a form of currency that's, quote, backed by anything. There's nothing to, quote, run out of that we couldn't meet. It's the sort of fiat currency in the truest sense of the word. There's also the other thing is, you know, you mentioned stock surged because these moves represented this big fiscal loosening.

15:34We are in an era in which inflation has been high for several years. inflation is still above target. And many people would say this still most persistent issue right now is this issue of too much money and that there is still things are too expensive, etc. And so there's still this impulse to tighten. So when you think about these lessons that you're talking about then, when you look at our fiscal position in 2025, what do you think about what when you look at our fiscal position? What do you see? Again, I think you can tell from the way that I talk, I think about the mechanics and how does it work.

16:12And in answer to your prior question, the reason I'm writing this book is because I think that we're at an inflection point. And I think that people do not, economists and people and everybody, policymakers, don't adequately understand the big debt cycle. They understand the shorter term debt cycles. You know, things, economy's weak, inflation goes down, they make credit available, things go up, stocks and everything goes up until you get too much and you get inflation, then they tighten credit and so on. But the big debt cycle isn't understood. And yet we're there. We're at the brink of one of these.

17:01And so what I think about this is that there are really three factors that drive the big debt cycle. And I want to convey those. I'm a part of my life and I'm trying to convey those. And so, okay, most people think interest rates go up because of inflation, tightness or ease of monetary policy. But they don't realize that there are limits to debt growth. And here's how it happens. One man's debts are another man's financial assets. So when you're holding a lot of bonds, that's a large percentage of the portfolio. That's also a large debt. And think of the credit system like a circulatory system that brings nutrients to all of the parts of the body.

17:55So you give mind power. And if that mind power is used to create productivity, then what it does is it produces incomes that are large enough to pay the debts back and give you productivity. and everybody's happy. But if the debts are too large and don't produce the productivity, you don't have the income that's necessary to service those debts. And so in this circulatory system, if it's healthy, you're seeing incomes rise with the debts and you're seeing the system work well. When debts rise relative to the incomes that are needed to service the debt, it's like plaque in the system building up in the circulatory system.

18:50Because it means that first of all, you have a debt service problem, that you have to pay the debt service. And that's like plaque in that it leaves less room for spending. So for example, the U.S. government has an interest bill that's about a trillion dollars a year. And if they didn't have a trillion, they didn't have that interest bill, they'd have a trillion dollars more spending. And that process gets worse and worse over time. In addition, one has to roll over the debt that was last accumulating. So we have to roll over this year about$9 trillion, a little over$9 trillion of debt. That means it runs out, then you have to sell it again.

19:48And when they have a lot of that debt, that's a problem. And when you're putting a lot more debt on top of that pile of debt, so it's not just the existing debt, That's a problem. But you have to add more debt sales, which equals essentially the budget deficit, which now is going to be about 7.5 % of GDP. You've got to sell those. You have to sell those to people or institutions or central banks or sovereign funds that hold these bonds. Well, they're already holding too many bonds. and now they have to roll them over and you have to sell these new bonds that are coming on. And that can be a problem.

20:35And it can be worse than that because if they don't have, if they say, hey, there are too many of these bonds and I've got enough and I don't want to buy it, or worse, there could be some reasons that they don't want to buy it. Like, for example, sanctions. OK, we're living in a world similar to the 1930s. And if I was the Chinese, I would worry that what would happen to me might happen. What happened to the Japanese in the 1930s, which is that we froze their bonds, meaning they didn't get their money. And so nowadays with sanctions, too many bonds and so on, when I calculate who are the buyers and how much do we have to sell, I find a big imbalance.

21:28And I know how that works. You know, what happens is central banks buy these bonds. They print money and buy the bonds and then they lose money on the bonds and you get a negative net worth at the central bank and you get this spiral. When you reach the part of the cycle that you have to borrow money to pay debt service, and then the holders of those bonds say, okay, it's a risky situation. In the private credit market, we call that the debt spiral, the debt-death spiral, because when you have to roll over the debts, but it's risky, the credit spreads go up. And when the credit spreads go up, then it adds to the debt service and it becomes a spiral that's a problem.

22:20So the way I calculate it is that we're quite near that point. Can I just press you on the inflection idea? Because I think this is one of the things that people really struggle with, because it is true the U.S. has a lot of debt, and it's true that it's issuing more debt in order to pay down interest. But at the same time, nothing really bad has happened quite yet. And I think there's a sense of, call it maybe debt doom fatigue. We've had warnings over the deficit for decades now. How do you actually go about figuring out when the cycle will turn? Or what specific things do you look for as the proximate catalyst for that inflection point?

23:08well that that's that's why i wrote my book how countries will go broke that by the way when i say it's a book it'll come out as a book but i made it free online for anybody who wants to read it and what i wanted to show was the actual mechanics of how that happens so i i hope your listeners will get it and you know it's free it's there for you to start to consider And what it is, is a look at that mechanics and the signs that you can see that happening. In other words, first, start to do the supply demand analysis. Simple. When that dynamic I described starts happening, you can see it because the amount that is sold is not bought by the private sector anymore or those other buyers.

24:03And then the central bank has to come in and then print money and make up that difference. And then that devalues money. So we saw, let's call it a palpitation. I give this example. It's like a heart attack. We saw that when in 2020 and 2021, when the government needed in 2020 to send out a lot of money. It actually sent out about twice the amount of money that people in their incomes lost or businesses lost. They sent out twice as much amount of money then. And then in 2021, they did it again without the need, but there was a move from a right-of-center policy to a left-of-center policy in which universal basic income and the desire to do that put out that money.

25:03And so where did the government get the money from? They got it from the central bank that produced the money and sent it out. And so everybody's getting all this money and they're surprised that prices went up. So, OK, so you have that wave of inflation. That was like a warning heart attack. So what I'm trying to do in that book is show the dynamics and the mechanics that show how you can calculate what the supply demand is and what will happen and what's likely to happen and what has happened through time. So I go back through time and I show these many, many cases of it so that you can distinguish it because I'm with you.

25:57the alternative which has been a problem it you know it's like somebody who's built up their cholesterol and lived this way and they say i haven't had a heart attack and they get that as positive reinforcement and i get to eat chicken mcnuggets and they get thanks to redelio and there we are so the question i have for everybody for those in the administration and for others is that dynamic, which you can see replayed out in there. You could see the moment by moment, literally month by month changes that are the symptoms and the indicators that you're having a heart attack, an economic heart attack, a debt crisis.

26:42It's shown in that book. And the only thing I want to do is, first of all, say, is that logical? Do you see it? And so in our conversation, I can't show you the charts and the numbers and so on, but I can tell you. And so we should be asking ourselves, is that logical? Has it happened before? And then what do we do about it rather than say we don't have to worry about it? What does it look like specifically? OK, you walk through the math and you talk about, you know, at some point you can talk about supply and demand and is the demand actually there? And there have been warnings, as both you and Tracy acknowledged for years, and we have these little tremors or maybe heart attacks and so forth.

27:26Let's say it happens, and I don't know what it is, but what is the equivalent in 2025 or 2026 or 2027 of Nixon suddenly taking us off the gold standard? Is it, and you sort of hinted at it, do you see plausibly mixing up with geopolitics and the trade wars an equivalent of saying, we don't acknowledge China's debt, that that's not real debt, we're freezing it, we're paying it off, they have no claims to it? Is that something that you could see happen? What does that day look like in your view? That day looks like what happened on August 15th, 1971, but just much bigger. What you'll see, you'll see the supply-demand problem.

28:12You will see a spike in interest rates, a tightening. Very much, by the way, these always happen. That happened in 2020. There'll be a spike in interest rates. It will show up as interest rates rising and the value of money going down, particularly in relation to gold or other currencies, perhaps, although this is something that will affect all currencies because they'll all be in the same. They'll all depreciate together. And you'll see the rates rising, even though the Federal Reserve is easing. Then you will see the Federal Reserve come in and buy and do another QE. And then you're going to see the kind of reaction that you saw back in 2020 and 21, where not only the inflation component, but gold and other asset prices in a sense going up.

29:16It'll look like that. But just to be clear, I want to press on this point. What is the equivalent announcement of Nixon going off the gold standard in August 1971? What is that thing today? Is it – do you – They won't – because we have a fiat monetary policy. Yeah, so we can't do – it can't be the same. It doesn't require an announcement. But do you expect there to be a policy announcement of we are no longer paying the debt, say, owned by China? I'll tell you what you will certainly see, and then I'll tell you what you will possibly see. What you will certainly see is the Federal Reserve coming in and buying a lot like it did.

30:03And it doesn't have to say an announcement, but it'll come in like that, like they did in 2008 or like they did in 2020, except in a bigger way. But what you might have in preparation for that, like in 1971, is certain actions taken to deal with that issue, such as extending the maturity of the debt. These are possibilities. You say you're not like a default on some people's debt. Yeah, but I think the government would do it such as that country is going to be sanctioned and therefore to sanction them, we are not going to pay the debt. That would be a very classic and certainly fireworks should go off in your mind about that signal.

30:52I'm not saying it's going to happen, but that is one of those things. And you could see then the government saying that they're going to restructure the debt. They won't say it's a default. They will say under this policy, we're going to be better off if we don't default. We won't change what you're going to get paid, but we're going to spread it out over more years. That'll be a restructuring of the debt combined with some monetization of the debt. In other words, a central bank policy where they're buying some of that debt. That'll look like that. If it gets bad, then you could have more extreme things happen.