Ray Dalio | The All-In Interview

it was the government that was the big buyer then you get everybody leveraging up then you've got the problem do you own Bitcoin right yeah I have some not nearly as much as as gold the AI War it's a war that no country can lose if China or the US really lose this war it's more important than profits we're at a civil war internally and we're at an international War simultaneously just have people behave logically H maybe that's too much to ask we hope going all right besties I think that was another epic discussion people

love the interviews I could hear him talk for hours absolutely we crush your questions ad minute we are giving people ground truth data to underwrite your own opinion what' you guys think that was [Music] fun Ray good morning good morning I'm going to start off by sharing a couple Stats today the US has $36.4 trillion of federal government debt and GDP of 29.1 trillion giving a debt to GDP ratio of 125% and this ratio has climbed steadily since the pandemic began in 2020 when the federal government debt was 20 trillion and GDP was just 21

trillion so since the pandemic federal government debt has risen by 80% while GDP is climbed 38% and steady inflation from the large stimulus of money from both central banks and the US governments caused the Federal Reserve which is the US Central Bank to raise interest rates driving up the cost of borrowing and despite recent efforts to cut interest rates again markets have traded treasuries down causing the long-term interest rates of US debt to spike up to levels that we have not felt since just before the 2008 Global financial crisis to keep the economy growing the

US government's now running a nearly $2 trillion annual deficit nearly 7% of GDP while paying over a trillion dollars per year in interest alone on just the existing outstanding debt the Congressional budget office the CBO projected last week annual budget deficits are expected to be equal to 6.1% of GDP through 2035 which the CBO noted is significantly more than the 3.8% that deficits have averaged over the past 50 years the national debt slated to rise by nearly $24 trillion over the next decade a sum that does not even include the millions of dollars in additional

tax cuts that the current Administration may put into place is the US headed for bankruptcy what are the mechanics of the looming crisis ahead and can we avoid it to talk about this what I consider to be the most important topic in the world at the moment is Ray Doo who I consider to be the preeminent thought leader on this matter in 20121 as everyone knows Ray published The Changing World Order why Nations succeed and fail I declared it the book of the year and I thought it was the most precient and important thing that

everyone should read and unfortunately I feel like many in politics many in government have largely ignored some of the preent warnings shared in that book this week Ry is releasing a new book called how countries go broke in which he analyzes and shares his studies on this particular topic and I'm really excited for Ry to join me here uh today Ray thanks for being here thanks for having me here to talk about this important issue well so so let me just start by asking why you wrote the book why you putting it out now and

maybe we can just talk about the timeliness of all this from your point of view through my roughly 50 years of being a global macro investor I would U keep to myself and then now I'm 75 and I want to pass along the things that have helped me and um the bond markets Global Mar markets I've been involved with all over the world for a long time and there's a mechanical process which is not understood about the question when is enough debt when does it matter how does it work mechanistically and I feel compelled to

get that understanding out now how do the mechanics work for countries for the United States for other reserved countries I want to make sure that's understood thanks for doing it and the basis of the analyses is your work at Bridgewater and outside of Bridgewater is that right you you've kind of gathered quite a bit of material together for this book and you've shown a lot of historical context maybe just share a little bit about where the data came from and and how you've kind of conducted these studies over what period of time you know bridgew

and I up until my passing along Bridgewater uh maybe a little over a year ago has been indistinguishable you know one the same and uh so and over through that period of time we've been involved in the markets I've been involved in the markets and thinking about such things so the data is largely public data that's available for anybody we just you know collect it from all different spots and go back through history like I did in changing world order we we were in some cases in the changing World Order because we were dealing with

data that was hundreds of years ago we would go through archives pull data out the data is all available to everyone and so I think that's really important because this isn't just an opinion piece you're writing as an analyst you're sharing quite a lot of empirical data that's publicly available that anyone can go access and you're taking a look at that data and saying this is the pattern this is the trend that we've seen historically it has repeated over and over again I think you make a really important point at the front of the book

only about 20% of the 750 currency debt markets that have existed since 1700 still remain and all of them that still remain have devalued through the mechanistic process you describe in the book that's really important to note you know we all think that we have this kind of privileged position in the United States and the US is different and this time around is different but you highlight how so often everyone thinks they're in a good place and then the cycle repeats you speak about and and the primary premise of this is what you call the

big debt cycle and you highlight that the big debt Cycles typically last about 80 years they're more easily forgotten than the short-term debt Cycles which last about six years on average plus or minus three years you say and we're now 12 and a half cycles of the short-term Deb cycle since 1945 so we've kind of been in this big debt cycle in the US for about 80 years at this point but maybe we could start by talking about what the short-term debt Cycles are that that you highlight make up the long-term debt cycle yeah and

I I want to emphasize just based on um what you said that they're mechanical they can watch you can watch it you can do the calculations so if you read the book you can see these it it'll either make common sense to you you see the con calculations uh to me it's it's almost like the circulatory system you know I think that credit is like blood that brings nutrients to all of the parts of the body and it passes through a system that is like arteries and then credit creates debt and the key question if

it's healthy is does the debt create an income that is more than enough to service the debt and that's like I don't know eating vegetables or something it's a health process and if not credit begins to build up this debt it begin begins to become like plaque in the arteries and you can measure it just just like you could measure it in the arteries and you can see how it constricts that circulatory system because as credit and Debt Service rise you see that it eats up more and more consumption because you have to spend that

so you could watch the government do that you can see that how interest is eating up and Debt Service is eating up and that means there's less money and then you also can see how heart attacks take place and they're very you know economic debt heart attacks and the way they take place is by looking at the supply and the demand you if the if you have a lot of debt and then you have a large supply of debt that has to be bought somebody's got to buy it and so that when you get to

the point where there's debt risks there's not only the new Supply that has to be offered but there is the possibility of holders of those debt assets selling those debt assets and so the supply becomes overwhelming relative to the demand and then what that means is it's it's the same a dynamic as it for the government as it is for an individual or a company except the government can print money so when that Debt Service burden rise or there's a big Supply demand imbalance if the government most importantly the central bank doesn't print money buy

it then there has to be a rise in the price of the debt to constrict borrowing and that borrowing constricted that credit that is not going to come will weaken the economy and and cause bad economic conditions and so they can let that happen or they can print money and buy the debt and monetize it when they do that that's inflationary and it lowers the value of the debt in either case you don't want to hold that debt because either there's a a Debt Service problem or there's a depreciation you get paid back with a

greater Supply and cheaper money and that is the Dynamics and that's the mech mechanism and because it can be measured it can be seen in all countries you can watch it happen and so like you're going to your doctor you can measure these things you can see them and you can know what needs to be done so yeah I I want to just talk about two things real quick one is just to provide an analogy for folks watching or listening on what it means to have interest levels be so high relative to one's income so

if you know the United States this year is expected to service debt with over a billion dollar of interest payments on the outstanding US Treasury bonds and the government's only going to bring in just under 5 trillion of Revenue so nearly a quarter of every dollar that's being collected by the federal government is going out the door just to pay interest on the existing debt so in order to fund new programs the government needs to take on new debt and the folks that are having to issue that cash to the government end up saying wait

that's pretty risky now I need a higher interest rate and over time that interest rate climbs and then there's this separate entity called the central bank that comes in and says well I'll buy the the debt ultimately to give the government the ability to continue to operate or give the economy the ability to continue to move and the Central Bank when you say the word monetize you mean the Central Bank ends up when you say monetize the debt that means they're buying the bonds they're buying the debt that's being issued in the market is is

that the right way to kind that's right they're they're essentially making the money up right and buying it so there's Central in in the US it's our federal reserve and the US government are the two players here and the Federal Reserve ultimately would in this model and historically obviously during the pandemic and during 2008 they would go into the market they would buy bonds by issuing cash that they're making up effectively very well described and you know a good example was in covid money there were two waves the first wave was the covid wave in

which they put out um the government wanted to and actually did deliver a lot more money to people companies then there was a loss of income so they first wave a lot of that money where did they get the money from they had to borrow it the central bank then came in and lent them that was the primary then the second when when President Biden was elected there was a second wave of that after covid it was most mostly like a universal basic income thing in other words hand people money and we're going to be

better off and so they handed people money doing that same exercise again and so naturally all these people got a lot of money and so they put them they deposited them in Banks they went out and spent and so on and it therefore shouldn't be surprising that we had a big wave of inflation and we also had a lot of banks buy uh government bonds which they lost a lot of money on and that was that crisis so that's how the mechanics work right and when that money gets printed it finds its way into the

economy and the money supply goes up and the way I kind of think about it and you've got a nice image in your book that I really appreciate here's a kind of overview of the big debt cycle that you talk about which is there's small expansion and contraction waves as as debt comes into the market debt should drive productivity but at some point you accumulate so much debt that you can't drive productivity anymore and then you effectively have to monetize the debt and everything gets devalued but as I kind of think about the introduction of

money uh into the economy the increase in the money supply I always tell people and everyone screams oh the markets are going up the markets are going up but I say the markets are going up in dollar denominated value and there's more dollars so you know the nominal meaning that the actual you know index might go up the the NASDAQ might go up the the Dow might go up but if you've got a lot more dollars a dollar is worth less the real question is has your purchasing power gone up have you actually increased your

net worth as the markets go up and when you do the studies it turns out that inflation goes up meaning the cost of everything goes up when you pump money into the system so of course it looks like the markets go up of course it looks like asset values go up but ultimately if everything's going up your purchasing power goes down it's almost like I tell people you have a 100 clams and you use seashells and you're using seashell to buy stuff and then you know there's only five things to buy now if you have

500 seashells to buy stuff the price of the things you're trying to buy goes up because everyone's got more seashells doesn't that ultimately kind of describe what happens as the money supply goes up the inflation drives the the purchasing power down of everything and everyone kind of gets inflated away very well said Dave you can't get richer by making money you know and the Val the purpose of money purchasing power is what matters at the end of the day what your money's worth what you can actually buy with it that's right and there are two

purposes of money which is as a medium of exchange and a stor hold of wealth saving is very important and if you don't have savers who have it as an effective storeold of wealth then you don't have a viable long-term credit Market yeah people don't understand that the bonds become a bad deal you need that like any Market place you need purchasers and sellers to be able to have an efficient NE negotiation to achieve a balance without the government coming in and printing a lot of money and messing up make a me big mess it's

like they made very severe negative real rates right and we know what happened with the negative severe negative real rates and the government while they were making the significant real rates it was the government that was the big buyer okay so the government takes it on and they make negative rates so what happens is then you get everybody leveraging up yes then you've got a problem and so that's how that's how it works and it's a global issue it's not just an American issue well that's what I want to get to that in a minute

because I want to talk about the relative strength of the United States and how this plays out globally firstly in your book you describe the big debt cycle following five stages you call it the sound money stage when net debt levels are low and money is sound and the country is competitive and then you talk about the debt bubble stage where debt and investment growth are greater than can be serviced from the incomes being produced and then you call it the top stage the bubble pops and the credit and debt and markets contract and then

this d leveraging stage where the Central Bank comes in and they start buying all the debt and issuing more cash and the inflation goes up and the value goes down and then finally the de the the big debt crisis recedes and we start over again but you speak about in the top stage a debt crisis can you describe the debt crisis you know like how do we talk think about the mechanics of what is a debt crisis where are we in the United States today with respect to facing a debt crisis and what are the

the red flags that you look for first when there's a lot of borrowing to service debt there's what's called you know the um death spiral is what we typically refer to that when a company has it the government can have it too and that is that Dynamic where there's uh too much debt and you have to borrow to service the debt and then people investors know that that's a problem to service the debt so the credit is worse and that means that interest rates go up which is the worst thing that can happen to a

heavily indebted entity and then as they rise you get that spiral you need to borrow more and so on so that is also noticed when then there is uh the the key spot is when The Debt Service becomes large and then like the real red flag the biggest red flag is when there's then the selling of the debt beyond the new Supply but the holders of it sell it and then you could see it in the market action because you can see that long-term interest rates rise while short-term interest rates aren't rising or go down

so it's the free market losing its desire that you have a balance problem in the free market out there um and then you start to see that when the currency then depreciates particularly relative to gold or Bitcoin or um other assets a and sometimes other currencies but typically these things happen broadly speaking together in which all currencies go down relative to other things like gold Bitcoin or or tangible values and so that's what it looks like that's that edge then you start to see uh you know the dynamic so you either see the Central Bank

comes in very quickly and does the buying and um and when that happens you see then the currency um to take a uh Japan for example if you were a holder of Japanese bonds you lost about 80% of your money relative to gold and about 60% relative to us bonds because you received an interest rate that was 3% less than the corresponding interest rate in the United States so you lost the interest rate and interest rates in the United States as you know were very low relative to inflation for most of that time plus you

had a depreciation in the currency so you lose you know you lost a ton of money in the debt that way because the Central Bank came in and printed the money it's very bad for holders of the debt and it's a basic thing you don't have to even get too technical it's just a supply demand thing you know well so are we seeing that in the US today so the Federal Reserve cut interest rates as of a few months ago as they've cut interest rates the market has sold off us bonds rather than buying them

and which is normal when you know rates go down the price of bonds is supposed to go up and uh we are now seeing r rates actually climb in the market relative to where they were while the FED has been cutting rates is is that a dynamic that's a red flag for you well gold has gone up and um the Bitcoin has gone up and it's so that is that kind of Market action I'm talking about and you've seen it in other countries too you uh the UK very classic the dollar has been a relatively

strong currency but not measured in gold or Bitcoin right so all currencies have gone down and then you've had that Dynamic you're talking about and you see it also in like Sterling is a good example Sterling is gone down while UK Bond rates have gone up and central banks have held it steady and so you see it in the market action you also see it in terms of who the buyers are and who you've seen central banks for example and Sovereign wealth funds shift to have lesser amounts of um debt bonds and so on at

the same time as they've accumulated gold or hard values now gold is the third largest reserve currency by the way dollars um Euros gold and then Yen so yeah you're seeing that Supply demand shift and it's it's um partially for all the reasons we're talking about and also partially because of issues like geopolitical issues countries sometimes worry about sanctions countries uh China is worried about holding bonds you would us bonds um Japanese bought a lot of bonds yeah even as a percentage of portfolios the bonds themselves have become such a large US Treasury bonds and

US debt has become such a large part of the portfolio that it's even from a portfolio rebalancing point of view you don't want so much concentration all of those factors are in play for the supply demand and bonds that's why I emphasize this you have to look at the supply and demand of bonds you've got a table in the book where you look at central government debt level to uh deficit level across these uh these major markets so you've got the US Japan China France Germany and the UK and the US is running a deficit

7% of GDP so the federal government is spending more than it makes at a level that's about 7% of the total size of the economy in the United States which is the highest of all of these these industrialized markets second is France at 6% third is the UK at 6% as well and then China at 5% and then these these these countries are all approaching 100% debt to GDP Japan obviously is at 215% so from a from a relative perspective one of the points that I've heard a lot of people make is everyone's got this

problem everyone's got rampant spend everyone's got Rising debt levels they're increasing their debt levels to pay the interest on their existing debt and to stimulate their economy the US is the best strongest currency amongst the group that we just showed why would anyone trade out of our currency I guess from a market perspective rate where else do people go with their worth their net worth where do they transfer their value into if it's not dollars and doesn't it have to be some denom ated currency and isn't the US ultimately the best maybe you can talk

about what these alternatives are gold Bitcoin elsewhere but is that realistic at scale like is there enough of gold enough Bitcoin for everyone to transfer all their net worth into those assets versus hold some currency denominated asset maybe we can just talk about that Dynamic of how do I make the decision about where to store my value where do I store my network first of all um the United States and countries like China you you see that U particular Dynamic China um Japan they're all educational and that means that the bonds the debt are Bad

Assets so then what where you store it is in those assets that benefit rather than suffer from the reduced value of money and the U the buying of it so and obviously you look at money and what is an international money that is why gold is in and then there's a question of you know Bitcoin or others are a conversation we can digress into that but it can be ideally it's International it's mobile ideally it's relatively private so it's relatively secure because in history there's the value part of it and then there the confiscation part

of it too in some fashion or another that confiscation can easily take the form of taxing on holding it right for example one of the problems with real estate B besides the fact that it doesn't move so it's not internationally nego you know you can't use it uh internationally is it is a readily taxable asset it's there it's there and therefore they're going to get you they won't take it and you can you can get it so we have to understand that taxes and confiscations are one and the same because during a time of of

of a debt crisis and and I want to get to this in a minute you talk about the four actions that can be taken tax or taxation austerity where governments cut spending restructuring where the debt gets restructured and then the Central Bank buying the debt obviously this notion of Taxation it's always played a critical role during these moments and assets are sees or tax in different ways and transferred away what about Commodities and how do commodity markets do non-old is there a difference in commodity markets hard soft Etc it's so it's so interesting I've you

know studied history and I've of course I've been through a bunch of these like the 70s Commodities ideally also those that might do well if the economy doesn't do well because you're dealing also with the inflation environment uh is um is are always gone to you don't want economically sensitive Commodities as much but and if unless the sometimes maybe the economy will do pretty well but there's usually that it doesn't but in like in the Weimar Republic Give an example rocks were used as store holder wealth now that sounds really funny but um they were

considered building ingredient you know in other words the Rocks were used to build things with and so they would store the money in rocks they but they but any asset I should go store a bunch of GPU chips in my garage h100s from Nidia technology devalues them the new technology devalues them right so that's the question what is it it is those things that can't be devalued Commodities by the way in real terms all Commodities every single commodity in real terms over long decline long periods of time have declined because of productivity yeah well every

commodity and has declined in real terms because of productivity so you would like a productivity producing assets that cannot be taxed can move around from place to place so equities of a certain type tend to do that that's why currency depreciations are associ iated with that combination of things currency depreciation lowering interest rates and producing money causes Equity assets to go up not necessarily in real terms like in the 70s they didn't go up in real terms they went down in real terms but it is those kinds of stor holds of wealth that can't be

taxed as easily that benefit from inflation rather than not right okay the purest play is gold because gold can be transferred between countries it's used by central banks as a reserve so central banks will go to it they are going to it they'll hold it it can be private right more so than crypto cryp is very easily taxed you know in other words the government knows where it is and who's doing what and and so on and it's also an effective asset to tax but it has you know benefits too it was very interesting when

we had negative rates I was with a group of the central Bankers in a discussion of how Negative they can have rates and they described that they can have negative rates only to the extent that there's not enough capacity for paper money to be stored so they estimate it was funny actually for that they could have over a short period of time up to 400 basis points negative rates that's crazy because there wasn't enough they calculated how much Vault Storage Bas there was and then they calculated that they would produce more Vault Storage Space because

it would be profitable to do that and then they that and they said and the good thing is we can tax it okay yeah because if you have a digital currency you can tax it yeah do you own Bitcoin right yeah I have some not not nearly as much as as gold I'm you know that's kind of my diversifier I try to find what are the I have to have some I'm I'm a but I'm a gold guy much more than I am a yeah I'm like I'm a productive asset guy I like owning businesses

that make stuff so in this in this environment Where do I own that's a productive asset that's a business that can still see its revenue and its incomes grow as this inflationary effect and this devaluation occurs as we get through a debt crisis like this what would be the best kind of productive is it a mining business is it a commodity trading business what's the right I'm with you so you know let that chart that we showed in the beginning has this line productivity going up you know and I think that we're in a um

yeah that's it and it and it and it tends to Compound on on itself and I think that that's where Ai and that is fantastic but it it depends where you're referring to AI I think the super scalers in this world have risk issues be you know you think by you know the um the super scales of or uh Nvidia or or you know those I think that the tech War certainly productivity I'm with you man but you want to invest in productivity but there's disruption great disruption yeah that's going to take place and there

are going to be the disruptors and the disrup and it's not necessarily those who are producing the vehicles but it's those who are implementing and changing as a result of having their big impact I think that like the the tech War for the AI War it easily is I think it is actually more important it's a war that no country can lose okay because it's more important than profits if you lose if China or the US really lose this war it's more important than profits and so you have to play that war that way and

it could be like electric vehicles or or more in terms of Chinese electric vehicles and the like you can produce them so I don't think and I think there's s such expectations I think we are going to see applications like I think the Chinese are a bit behind in the chips but they're ahead in the applications in terms yeah did you see the Deep seek announcement this weekend and obviously that was known for a little while now yeah and so I think you're going to even see well the Chinese play is going to be chips

very inexpensive chips embedded into manufactured goods you'll see robotics so you're you're going to see Chinese are unbelievably in making things inexpensively terrifically they own 33% of all World manufactured goods which is more than the combined us um German and Japanese manufactured goods Chinese produce more so you know you're going to see that type of competition and it may be it's like solar panels or something you know right it's profit doesn't matter so you have to go where there's I I think that where there's productivity and Innovation and disruptors to be essentially long those who

are benefiting themselves through usage or creating the applications that are having the big effect is certainly one thing but you also have to look at different countries and places and things um most importantly is price I think a lot of invest make the mistake of thinking I want to buy good things you know that's a great company but a great company that gets expensive is much worse than a bad company that's really cheap totally so you have to look at pricing this is all part of the cycle you know everybody says that's great and it's

going to be great for the future and and like you know like the internet and come it was it's great okay but the price has to be paid attention to and I'm particularly concerned of those companies at a time when we are in a situation with the interest rates operating as we are in other words this looks qu a quite a lot alike like 1998 or 99 where the assets of the the you know the new hot thing the productivity grow driers yeah yeah so yeah are hot the prices are high yeah and you have

a rising interest rate environment that is a classic issue so we have to pay attention to the interest rates and the pricing of those assets and you have to think where is next the other thing is I think diversification is very very important because everybody's leverage long everybody thinks you know I'm going to buy assets that are going to go up and I'm and if they're good I'm going to do that in a leverage way so the world is so leverage long you have to pay at least as much attention to correlation so that's why

when I look at you know something like gold or these uncorrelated assets it's interesting as you add it into the portfolio it reduces the risk of the portfolio so you have to pay attention to the uncorrelated Assets in that kind of an environment and those could be geographically looked at or but so that's part of portfolio construction well so there's no simple answer for the audience on what to buy but I do think this portfolio point of view in the book you actually talk about having 10 to 15 uncorrelated bets at any given time and

I I would imagine in your context truly uncorrelated whereas most folks buy us equities and think that they're in different sectors but obviously there's a great degree of correlation when you're buying a bunch of us equities Equity prices just to keep in in mind there many times Equity prices in inflation adjusted B therefore purchasing power terms have declined 60 or 70% yeah that's incredible that's an incredible fact for folks to take in so when you adjust for the the value of your dollar Equity prices have really taken a hit um even though the Market's gone

up and I hear and from from 1966 y until 1984 you had a negative real return I think this is super important rate I just want to double click on this and and then we'll talk about the us but a lot of folks talk about markets going up without taking into account what is the denomination that those markets are measured in in this case US Dollars and when you look at the value of your US dollar and you look at the market going up even if you bought equities what you can now turn that dollar

into has actually not gotten much stronger folks have really taken a hit and I think this is super important yeah so I just I'm glad you're uh bringing up I think it's super important too and I just want to emphasize you have to look at your returns in real dollars what can you buy okay or any and purch what can you buy yeah it's funny because I watch the value go up and down even the currency go up and down and it's a distorted perspective it's like being on a boat that's going up and down

and judging the land to be volatile yeah absolutely okay I want to come back to the United States and I want to talk about your point of view on measures that the United States is going to have to take or should take going forward in order to avoid a more cataclysmic debt crisis in fact you use this term often the beautiful deleveraging that's possible when there's a great deal of debt and a country faces a debt crisis that there are several actions that can be taken together to try and resolve the debt crisis in a

way that is least harmful but I first want to talk about the measure that you share of risks so first is you you show what you call your risk gauge for us long-term government debt and so you've got this risk gauge on the long-term and the risk gauge on the shortterm for US Government debt on the short term you say US Government debt is a 0% risk age there's no risk in the near term the economy seems fairly balanced but over the long term your risk age is 100% And then you follow that up with

an analysis of the Central Bank and you say the Central Bank short-term 0% risk age long-term 46% risk age and nearly the highest you've seen ever but maybe you can just say what's the the composition of these risk ages and what does this tell us and then we'll come back to the actions just to be clear 100% does not mean 100% probability of of it happening it means 100% that's the highest that it's ever been you know it's it's at the ma kind of Maximum but just yeah just to describe it the longer term risk

age is taking existing amounts projecting those two things that I've described before the supply demand and the um uh The Debt Service creating the squeeze so think of it as going into you you know your doctor and having him uh give you your test results and how much plaque is in there and what the what it's looking like and how you did on your stress test and and what your arteries are looking like and what your condition is that's what the first measure is the second is you're in a seizure in other words now so

that second measure of the Deb is exhibiting okay it's now happening yeah and happening means things like you're seeing the selling you're seeing the um the the spreads widen in other words the interest rates Rising on the long end without the short end you're seeing that the central bank is put into that position of being a you know having to make the difficult choice of coming in there and monetizing everything very M and then credit problems and debt monetization because you're in the middle of it that's what the that's what the one on the right

means so what we have is if I'm speaking to you as the government policy makers your condition is is very bad right okay you're not in the middle of it now you in other words we're not seeing that particular Dynamic transpire but uh you have to change your diet you have to change your behavior you have to maybe have a stent put into an equivalent so you asked about what that is okay okay here's what it is let me let me pull up this chart for you real quick Ray so I I just want to

highlight the uh CBO projection right so this is the US government's debt as a percent of the US government's Revenue which you you indicate in your book is more important than debt to GDP you've got to look at the actual Revenue being generated by the government and how much debt they have and the CBO highlights this expansion to 00% meaning the government is going to have a debt level that's seven times the income it's making every year over the next uh I believe this is a 10-year um chart and you propose a bunch of actions

that can keep it flat over the next 10 years which is the basis of the book is there's a series of recommendations in the book I just want to kind of voice over again you highlight that there are four actions one is increased taxes so obviously citizens are going to lose asset asss and and lose income uh so there's a loss to the citizens when when this happens uh cutting spending or austerity and there's obviously a loss of services by the government provided to the citizens so the citizens are going to lose Services they're going

to lose benefits a central bank buying the debt which will typically increase inflation because more money will come to the markets and everything costs more so that's another form of Taxation where the value of your dollar the value of your assets goes down and then this kind of restructuring of the debt where again the currency gets devalued and everyone loses things and so I I just wanted to kind of walk through that maybe you could frame this up for us a little bit sure like that chart if you go back to that chart think about

that chart as being you know your your plaque so to speak in in in the arteries and The Debt Service so you could calculate all those numbers and you you know what the picture looks like um and that is a stability and so number one is I call it my 3% solution here the solution is you must cut the deficit which is the equivalent of bonds selling down to 3% of GDP and it's 7 and a half% expected now different people have different views as to how to cut it I forget it I don't really

care just you have to have a unified agreement everybody in Congress and the president and so on should pledge to do that and then the question is how to do it but they shouldn't they should know that number that's about 900 billion a year yeah roughly and that means cutting it as you point out by cutting the deficit by more than half from where it sits yeah well it's yes because it with the continuing the uh the tax guts strum tax guts uh that's that'll be 7 and a half % and you want to get

it down to three and and it sounds Draconian but we did that kind of uh change from 1991 till 1997 and the key there are three keys to this uh do it soon fast when the time is good when the economy is good in other words do it now now okay the temptation is going to say well we're going to ease into this and we're going to be there and we're going to do it in 3 years from now but if you have a bad economy you you cannot do it okay and that's the that's

the worst so we have the best economy and the sooner you do it the more you're going to do it so 3% solution do it now and recognize that you have to De deliver it so if you're having let's say Cost Cuts in government you have to own the number so everybody's got to pledge 3% now the the be arguments as to how to get there but you have to own the number um so much so that you'd say if it's not 3% throw me out of office because I've got to all I've got to

deliver that number so if somebody if um government cost expense cutting you know and is it really the two trillion number is it the one trillion number is it half a trillion dollar number we all throw those numbers around you got to own the number and you got to get to three and you can't make it any one thing right but you also have to realize like if you did it um spread out nothing's going to be that big so I mean nothing's going to be insurmountable that would mean I I go through the numbers

in the book by the way this book is online free and everybody everybody can get it I read it this weekend I have a I and I and I used a highlighter for the first time in a long time Ray so there was a lot of great content to pull out of there I might uh use AI this being put out not to sell books anyway it's all free so everybody can go through the mechanics but the main thing is you take the things you can cut from or build from so what can you cut

from and you look look at government expenditures roughly 70% of government expenditures are you can't cut so so it comes down to a small percentage that you can cut but you you find out how much can you cut so the important thing is 3% the other thing about it is to realize that if you make those moves the bond market and what it will benefit you see the and so interest R interest rates will go down right and interest rates going down interest rate expense is most important so when the president does a interview the

other day and he says we need to get them to cut interest rates by 1% and he's speaking about the Central Bank he's effectively trying to force the central bank or coer the central bank to take rate action when if we were to cut spending I think this is so important if the federal government were to cut spending significantly and quickly the market would naturally react to lower rates that's right okay I think that is so important for everyone to hear he's right if you look at the my calculations you need 100 basis if if

you get a 100 basis points cut in rates that's equivalent to significant cutting in spending so he's right but you but if you do that without the other parts you're going to take money away you're going to make it less desirable to own these things these bonds and because that's that's going to be a problem where if you do these things together they can support each other so in other words fine cut it from spending and by the way Ray the longer we wait the more interest accumulates because it's at a higher rate the more

the debt accumulates and ultimately this is the arithmetic death spiral that you get into the longer we wait the more you have to cut in the future to get out of the hole it's not linear it's a nonlinear cutting that's needed to get So the faster you do it the less you have to cut right I think that is so important let me just say that again the F for any person in government listening the faster you cut the less you have to cut yes and you can do it in a manageable way you know

what a bit here a bit there these bits add up and if you don't you're going to have this Arc of compounding so let's talk let's talk politics for a second is Doge and the concept of Doge enough or do we need legislative action here and then I want to talk about the politics of the legislative action needed given like the election Cycles there's a combination of a question it's not just Doge it's a matter of less regulation productivity changes that might come from AI which then have translate to profits that might be capital gains

profits they might be profits and all of that and so but it really you know when I look at it it looks it looks very tough and and but there's also you know Revenue also tariffs produce Revenue so but yeah people think um on the on the tariffs people don't think of taxes as inflation but taxes are inflation right because you it costs you more so the real question as you play with the numbers is it's very very difficult to know and be precise about how much is going to come from uh productivity and profit

increases from the efficiency is gained by Ai and new technologies how much going to come from this and that we don't honestly know but the important thing is not to we're at the edge and not to make it a crapshoot so and and to get the if the number must be three% and so you should have handle not hail Mar passes but uh a clear passage to that 3% number are we better off with Trump as president versus if Biden had won in this context yes I do believe we are for then the financial context

because in terms of profitability and the likelihood of cutting I think the Republicans are probably more likely to make these moves than the Democrats but you also have to take into consideration the impacts the social impacts and right the other impact s that are going to come from this we're at a civil war internally and we're at an international War simultaneously so there are second order effects I think the main thing is uh take those numbers and make them real at at 3% not speculating I I worry honestly about the Gap like the idea of

when profits kick in from AI I'm worried that's what I was going to ask you next so ai ai takes off we lose a lot of jobs we have a million five 3 million 5 million people that become unemployed that work in call centers that work on Automotive lines etc etc they lose their jobs and while before the productivity kicks in from AI that creates new markets and and new parts of the economy we have a lot of unemployed people and the government Representatives the politicians raise their hands and say we have to support these

people we have to introduce stimulus we have to introduce new support programs and is it not likely the case that with AI coming online we are going to see a fairly significant demand for you know public support on this transition that's coming that's right but there are two Dimensions the near term is what will the pro I don't think the profit impact and the financial impact on productivity is going to be nearly enough near enough to deal with the supply demand issue that we now have so let's say we have is it this year is

it next year just imagine you are at risk of a heart attack you know and then I say someday we'll have the productivity conveyed to profits that will cover the budget deficit okay it may be out there but it's not um as immediate as it needs to be and then we have the other aspect of it which is how is that pi divided which is going to be very political because the disruptive effects will be enormous and we're really all guessing on how those disruptive effects will be it's it's too much of a but you're

you're absolutely right lots of jobs are going to be lost lots of Chang is going to happen in terms of turbulence and um how do we have a plan how can we even agree on a plan of how to deal with that I don't think we're in a time maybe in the rest of our lifetimes that agreement is going to be easy I think we're going to see fragmentation of States from from the central government I think you're going to see big fragmentation in the world not just in the United States on the failure to

agree on most things and so I I'm worried about uh the timeline think of the time line is this way this is the first 100 days we're in a honeymoon period I've been through I'm old you know I've been through this a long time I know what the honeymoon is like right afterwards there's a 100 days that you can change legislation you move quickly and everybody's there then there's the next important time Horizon is two years to the midterm elections you get in about years you know 18 months after the election and now not everybody

goes everything goes as anyone expects you could have the supply demand situation and think of our cycle I mentioned you know the average cycle is about six years give or take three years and so we're going to be later into the cycle we have this Supply demand situation right are things going to stay good into the midterm elections and and and that mandate I think there there could be a lot of fighting in the interum elections let me ask you two questions the first if we do significant Cuts there will be a lot of job

loss if AI is successful and moves quickly there will be significant job loss if there is significant job loss does that not fuel the rise of socialism in the United States I think that we can do it when I talk about the 3% solution I think that we can cut and make the adjustments in a few percentages to be a able to do this without great trauma so we can get to having that limitation done without great trauma and it will be supported by interest rate moves so that's first we can get this thing done

we must get that thing done and if we don't then of course I think we are in an era that of course we're going to have great conflict in the United States this is not a run to Nirvana this is you know the the moment there you're going to have legal challenges one state the Democrats you know the blue States the red States and within the states you're going to have a lot of disruption and you're going to have a lot of dissatisfaction and it's going to be about money and power and so that's ahead

and so like you say there's the Socialists the left the right and that's why you're going to uh this type of civil war or internal conflict is going to be with us this is not a straight race to Nirvana and prosperity and and you have that at the same time as you have the other elements you know they're the five big forces so what I'm calling so you have the debt money we talked about there's the internal conflict that is we're going to test the legal system and you know and we're in an environment now

that might is Right internationally you are going to have the same kind of conflict we touched on China we're going to have conflict you're no longer have a a cooperate even an attempt at a Cooperative world order things like the World Health Organization the World Trade Organization all of those are Obsolete and so we're going to have again might is right and so it's going to be a period of greater conflict you're going to have a technology War you can have mil increased military spending in this kind of environment that's that creates a budget issue

and climate will have uh it it will be an economic issue as well as a um environmental issue so these things these expenses are going to go up so all of those coming together so you're yes left right and conflict will be ahead of us is this a hot Civil War do people take to the streets I mean how does this resolve obviously we've got historical context for social Uprising but what happens in the United States over the next 10 years I think two important aspects of it is does the legal system work well so

that the Supreme Court you know you asked me about the independence of the Central Bank you know do the does law work and I think there's going to be a lot of challenges I'm not saying it doesn't work I'm saying that's the question and that'll be very much state by state you're going to see conflicts between the states and the central government so how does that decisionmaking system system hold up is it might as is right you know Sanctuary City issues and such how is or is that going to all work well I mean that's

you know that's the most important thing and then we have in a time of great stress and challenge you know when things get worse right now things are good this is pretty good and but they're going to get worse and then you have the international going on at the same time and so internally within countries we have the same kind of conflict you're seeing it happen in Europe you're seeing the same same Dynamic we talk about the problems that the United States is having regarding debt and so on you have then the expense same problem

within the Europe you're seeing greater polarity left right you're seeing economic problems cause more confrontation and so you're seeing this around the world so you're coming into an environment that is likely to have over a period of time over a period of time not immediately uh greater conflict when you talk about 10 years there's going to be a period in that 10-year period where it's going to it's going to be hellacious in that 10year period where you know the coordination of dealing with our problems our problems will be greater and the cooperation for dealing with

problems will be less on that point talk about the role that you have seen external conflict play in resolving the fiscal challenges internally so you talk in your prior Book Changing World Order about the historical relationship between external conflict as a cycle that seems to follow or flow with this financial cycle maybe you can talk a little a little bit about what's going to happen between the United States and China given the condition in the US today do we have a higher propensity when things are difficult at Home Folks tend to go to war war

is stimulatory is that a driver here and what's going to happen functionally with China over the next decade do you think and the US there's a cycle that has to do with changes in money and all of these things where you don't have enough money you need money to support con International conflict you need money to make domestic people happy and then there's no power you know there's no system for making judgments internationally the you know the United Nations doesn't work the World Health Organization they don't work so there's no system so you come into

this power so when so when we're talking about the financial problems that we're talking about that we covered and recognize that that's worldwide and then you have the polarity worldwide that has to do with wealth different wealth and values and you have that Pro problem within the population and then you have no rule system internationally so it is a might is Right series you have that Confluence of things uh particularly now then you and then there's disruptions big disruptions technology we talked about how you can't lose the technology War because you'll lose the military war

all of that stress and shortage of what is perceived to be needed is incendiary you know it's it's a it's it's a it's a risky situation of course productivity helps but it was like you have to understand put it in its place the 1920s leading up to the stock market bubble that that was the decade that we had the greatest number of inventions patents Innovation great productivity increases while we simultaneously had big debt increases and we simultaneously had these wealth Gap and values increases and so you don't get away from that so this is going

to be a lot of tension in a world where it's difficult to get all the parties to cooperate in Wars if you look at history when I say Wars there are military Wars there and then there's less than military Wars and and I can't tell you that we're going to go into military Wars I think like the Soviet Union and the United States because of the risk of mass destruction was able to avoid those but it it in history it's going to it's going to be a very U it's going to be a very difficult

period you describe in your book the difference between how the United States goes to war and how China goes to war correct me if I'm wrong but you speak to the US goes to war head-to-head open confrontation whereas China is much more like a sunu Art of War style it's a little bit more tricky a little bit more careful they they never let you know what they're going to do is that a fair characterization yeah the the the um the general belief of um the Chinese on The Art of War and this is existed throughout

and it exists today is that uh if if if you're going into a fighting War you must not have been smart enough to win without a fighting war and you win through deception and manipulation because fighting Wars are going to damage you a lot you don't want to be damaged you you want to get to your objective so that's how they fight Wars that's the sounds like a smart way to fight Wars uh also international relations there's What's called the tribute system and the tribute system was your power determines where you are in your hierarchy

if you have more power you have more hierarchy you're higher in the hierarchy it's like confusion and if you are and everybody should know what each other's power is and the Lesser power should give tribute to the greater power this is internationally and the greater power should uh respect that and treat and they should work and have Harmony together rather than to have the conflict because it's all about getting what you want Harmony and prosperity is what you want and fighting that destroys things is not what you want whereas um yeah the the man who

was uh vice president great uh historian of China A Man by the name Wan described it to me that um there's the Mediterranean approach right yeah and the Mediterranean approach which is a very different approach really began out of that there were families and there's no borders and the way it worked is there were no limitations in fact we didn't have countries with borders and ideas that you don't cross borders until what's a piece of West failure after the 30 in the mid 17th century I think it was like 16 50 something up they had

30 years of war and everybody would fight so they were fighting experts and that's what the norm was and then after 30 years of war they decided okay let's draw a boundary around it and try to what goes on in there is your business and and that's how it came about so and that's by the way in history one of the reasons that the Chinese and Japanese lost they had what they called their hundred years of humiliation when the fore Powers came in in late 1830s um and they had a fight the the Opium Wars

and so on the western Powers were at strong at fighting because they were practiced at it and then there was the Hundred Years of humiliation they call it in China where they they the foreign powers came in so anyway I'm giving you too much history but I'm saying that there's a whole different attitude about how to play that game and so that's what I think you're going to see you you know that's when we come back now to the chips war and you took look at today's news you know there we are there we are

well look Ray I feel like I always tell people the the kid that stands up at the middle school and says I'm going to make the vending machines free when the the presidency of the middle school and unfortunately in a democratic system the El election process kind of follows a similar pattern it's very hard I watched these hearings this week and I was deeply frustrated when I hear Senators say I got this money for my constituents I got this their initiative their intention is to stand up and say I'm going to get you this they

go into Congress they get you that money and over time government spending swells and there is no incentive to reduce it and we find ourselves now on the precipice of a really difficult crisis and I really do hope that politicians find within themselves the leadership to stand up and say we need to do difficult things because 10 years from now or 20 years from now if we don't things are going to be very bad for all of us and convey that to people and I really do hope that your message gets to them and that

their leadership allows them to stand up and say we need to make these really difficult changes deeply and quickly in order to preserve the union and that they can make those changes and we can move forward and continue to build our lives and so I really appreciate you taking the time to write this book share this with us and I really do hope it's heard I think it's so important so thank you so much Ray we can do this and if we don't do this the power of the United States is going to be greatly

diminished so it's domestic it's inter International so I appreciate yeah I'm appreciate you Dave that we can have this kind of conversation just have people behave logically that's too much to ask yeah well no look I mean let let's not give away the vending machines for a couple years and you know kind of think about keeping the school open uh for the Next Generation but that was great thanks Ray you know your stuff you're great and this is really invaluable thank you for doing that for your listeners I think it's so important too Ray and

I spent a lot of time thinking about it and worrying about it your message is so clear and important I think you present it well and write it well I read your whole book this weekend I appreciate you putting it all out there I really do hope that the folks that listen to our show in DC listen to this I I I cannot tell you how disappointed I was after I spent the weekend at the inauguration I met a lot of members of Congress I met most of the members of the new cabinet and it's

just not there I'm just frustrated and I'm just heartened by it so anyway I I think I think it's important to keep harping on it though we're not going to stop and and I'll keep talking about it and appreciate your efforts here too we just have to do our best that's right really appreciate it Ray thank you thank you Dave [Music] bye I'm going all in