"This Is What ALWAYS Happens Before A Superpower Falls..." | Ray Dalio

when we think about safety we have to think about that as purchasing power because a lot of people think if I put my money into a treasury bill I get safety look at whether that's giving you a return that's compensating for inflation and maybe we're all wrong maybe there's nothing to worry about so how do I deal with that I look at three major forces that are happening now haven't happened in our lifetimes but have happened many times in history and those three major forces are the creation of a lot of debt and the printing

of a lot of money to buy that debt particularly because the government is running large deficits they don't have enough money so that government has to print that money so that creation of all of that debt and its financial implications and its economic implications is one force the second force is the internal conflict the amount of conflict that's largely due to the wealth gaps that we've had since the 30s that produces populism of the left and the right particularly when there are financial difficulties the third force is the rising power challenging the existing power largely

in the form of China and to some extent Russia let's call it the great power conflict because in 1945 you know there's the cycle you have a war then after a war you have winners and the winners determine the rules of the game and then there's this evolution of others becoming more competitive and then you have a conflict again for who's in control so we have that Dynamic taking place so those three influences the financial the internal conflict external conflict influences I learned before that when I was surprised often it was because of things that

hadn't happened in my lifetime before but happen in history because of that reason I went back and studied history the last 500 years on these Cycles there are big cycles that last about 75 years give or take about 50 years of Rises and declines I think it's so important people understand I also learned in studying history that there were two other influences that were very big and you could see them the first was Acts of nature such as droughts floods and pandemics the changes over time in the evolution over time of people's learning and the

Technologies they make so I'd say there are really five big influences that drive everything and since they each affect each other it produces what I call the big cycle so as we go now into this it's important one man's debts are another man's assets so what happened government had to sell a lot of debt when it sold a lot of debt there were a lot of entities that bought a lot of government bonds and money was very easy which meant that short-term interest rates were very low and money was almost it was actually being given

away because they had interest only loans and interest rates were less than 1% and you didn't have to pay back principal so you can go get money and so that created a lot of debt and it created buying of government bonds what happened to many many entities all around the world not just Banks they what does a bank do a bank takes in deposits typically or debt in some way and then it Iz debt it can do that in the form of making a loan or it could do that in the form of buying a

Government Bond buying debt and then when interest rates went up the value of that debt went down money they had to give to depositors became more and more expensive and also depositors wanting them to be competitive looked at money market rates or other rates and withdrew money from the bank because they had better uses okay so what that leave them with it's a banking problem that has happened literally for thousands of years what they do is the depositors you know want their money back and they're holding assets that in this case have gone down in

value so they're broke what happens for the economy as a whole is then they print the money because they don't want defaults there's a tolerable amount of defaults and then you get past a tolerable amount of defaults and it just crushes everything and so they print the money it's not a banking issue it is a global issue all around the world Pension funds insurance companies the world is leverage la la meaning they own stuff and they borrowed money to own it and it's going down in value the big issue is the government can come in

and print the money and give money to anybody they want to give money to but when they do that that typically devalues the money think about it if you're holding a bond you know you got a claim on money but the claims are too much one way or another you're either not going to get back that money in full or you're going to get back money that's worth less because they print the money but if the money's hard if that's going to be good money that's coming back it's going to be hard for those entities

to pay back because it's a lot relative to their income and cash flows to pay it and that means that the default risk Rises however it means that the debt will be bad one way or another it's either bad because they don't pay it it needs a haircut for them to pay it or because they do pay it with money that is going to be printed to come back so think of it this way just want to make this clear when there was the position that interest rates got a lot below the inflation rate you're

losing buying power there's no good reason to own that and there's a change in Psychology because before there was I own bonds I'm getting a price appreciation even though I'm getting let's say a low interest rate but inflation isn't a problem until it's a problem then when it's a problem because they print so much money and they put it out then inflation goes up and a light bulb goes off people realize it's not safe I'm losing money to inflation and then the other side of it was you want to borrow and buy stuff because money's

free so companies borrow and buy stuff and individuals borrow and buy houses interest only loans on the houses I mean like okay I'll can buy a house I can buy an apartment but that creates the imbalance where it's terrible to be a lender and a creditor and it's good to be a borrower and do that the Federal Reserve says I better flight inflation they change things and so by raising interest rates you know real interest rates much higher lo and behold all the people who did all those things get hurt because yields got so low

tech companies and others those who have a dream they don't have to necessarily make profits they're selling a dream and the money's got to be invested you see all of that change radically when that tightening of monetary policy so now you sit there and have a low what is the value of a financial ad asset it has no intrinsic value its only value is what it can buy but there are many many more financial assets out there there's ever been relative to the value of stuff to buy there's too many claims out there it's like

musical chairs if everybody says oh wait a second let me get my stuff let me convert my debt assets I want to get real stuff that's a real problem and so that's the global picture on the first of those five influences the fact that it's happening with the other influences is very important because they affect each other so this financials picture by the way is the same as in the 1930 to 45 period and the same as they were throughout history for people that don't know that's World War II it started with a financial crisis

that then caused internal conflict what do we do about the financial crisis the populism of the left and populism of the right in this internal fighting and four countries that were democracies chose not to be democracies because of the conflicts that were existing and those countries were Germany Italy Spain and Japan because there's a lot of internal conflict over weth when you have that and so that creates a lot of internal disorder in some ways almost Civil War everywhere some form of Civil War and of course that happens also at the same time as there's

the extern internal conflict first of all everybody's fighting over resources you have populists come to power and the populists are not compromisers the way democracies work and you've got to pick a side there's no place for moderates and the sides are let's say internally in the country the left and the right and externally the Americans and the Chinese and you got to pick a side and fight that becomes the dynamic that is these periods of time and these periods of time have typically lasted about 10 to 15 years and they have various symptoms to it

like a disease like a cancer you see stage 1 2 3 4 if you have these things you could look at it and you could diagnose and you see it moving from stage one to two to three to four to five and to six you can see that taking place and each time you come closer to a bad set of circumstances bad financial circumstances and bad fighting over things the dominoes are beginning to fall I mean you know what the next dominoes are for example they're not going to buy the debt those who bought the

debt and have too much debt and have debt losses on government debt are not going to buy more of that debt for example and therefore when the government sells more of the debt there's not going to be an adequate number of buyers for that debt you know that those who are hurting because they have those losses won't make loans and a lot of those loans went to real estate particularly commercial real estate and you know that for various reasons in commercial real estate we don't use it the same way and so on so you're going

to have problems in commercial real estate you know as a result of these things that a number of entities will cut costs in their various ways and so depending on that the job market is changing you know you see it for example in tech jobs if you're in some of the those areas that are getting squeezed and you see the same thing by and large happening internationally that value has gone down a lot and because it is bought on Leverage there are bad losses in different places and then the question is what are you going

to do with those losses in most cases quite often you know don't mark them to the market don't account for them and recognize those losses which is kind of let's say hiding those losses and hoping in time you know it'll be fine but that'll produce a squeeze that'll produce a problem I think we know those things and that's happening at the same time as we have an internal conflict taking place such as the presidential election Senators congressmen and so on who are at each other's throats about this who are going to fight with each other

and fight to win not probably respect the rules as much but fight to win for their side and that's happening at at the same time as we have the situation with China most importantly China and Russia the issues in terms of their things to fight over for example even there's going to be an election in Taiwan that'll also have a big bearing on this whole thing we know I think that we're going to have financial problems and economic problems at the same time as we have this internal fighting and external risky situation happens over and

over the decline of the British found as a reserve currency before that the decline of the Dutch Gilder as a reserve currency all happened for the same reasons two things are going on first of all they're holding all of this dollars and the stuff that we talked about is going on and then also there's the weaponization through sanctions of the dollar um in other words the United States's greatest weapon to use has distinct from its military weapon is is sanctions and so sanctions mean you freeze other assets you freeze assets those assets are the bonds

that happened with Russia and there are threats of it with other countries China and so on and there's kind of the thinking well if I hold the bonds can that happen to me and then why am I transacting in this other third currency rather than transacting directly for example the United States share of World Trade has declined and China's share of World Trade has increased to become greater so if two countries are trading let's say Saudi Arabia is trading with China what do they go to the dollars in order to do that no good reason

to go to the dollars and then they're worried about holding the dollars because they might get sanctioned so you see more of those transactions taking place in other currencies and then the usefulness of the dollar as a stor hold of wealth changes think about it in the most fundamental way everybody wants a medium of exchange and a storeold of wealth so in other words if everybody's using the dollar in World Trade then you want to save in dollars because you say okay now that's the thing I spended and I save in the dollars but over

time as the share of World Trade goes down why aren't they denominating in like China has a larger share of World Trade traditionally the countries that have the world's Reserve Curren have the largest share of World Trade and the largest share of world Capital flows and because the United States has declined and also there's a worry about that holding it because of sanctions I mean just imagine how the Chinese must feel about having a lot of money in treasury bonds I would be worried that I would be treated like Russia would be treated it's not

something I would want to hold as you know a safe asset and and other countries who might feel that they can get sanctioned and for all those reasons they less inclined to hold when we call dollars what we're really calling is dollar debt cuz you'd hold dollar debt what is a debt it's a promise to receive currency now getting out of those things and transacting in other currencies seems to be the safer thing to do for those countries and so that's the dynamic that's taking place it's not an attack on the dollar it's like I

don't want to hold those things so very similar to British p you know what happened is the British had the war and they were the most powerful empire ever in the world and they had World War II and they came out of World War II financially in debt a lot of debt and who held the debt all these countries held the debt because that was the residual from them but they had a problem they had a debt problem they needed to print more money because it was too much of a squeeze so it deteriorated and

you know they sort of said please hold my debt please hold my debt they went to Commonwealth countries the part of those that were in the former British Empire and then you had the Suez Canal incident where there's sort of a war and everybody realizes well hey wait a second that British Empire ain't the British Empire and they're heavily in debt and then they say I don't want to own that debt and there went the British pound so that's just how the Mechanics Work the reason Cycles exist is that the next stage has been determined

by what has already happened in the prior stage we are in debt a lot we can't change that we got a lot of debt what could you do I mean two things come to mind what you could do is you could be financially strong and you can not use Financial sanctions as a weapon to scare the holders of those bonds but to be financially strong requires you to not spend more than you earn that means you either have to cut your spending or raise your earnings that ain't easy okay are we going to cut our

spending infrastructure programs poverty transfers defense spending what are we going to cut the most governments now don't think how much money do I have to spend and then how do I prioritize that they think I need to spend on this I need to spend on that and I need to spend on that and they spend on it they produce a deficit and then you either have to pay it back with hard money or printed money and that's situation so when you say what could we do well you've got to get financially strong in a politically

fragmented environment in which everybody wants more be a higher percentage of World Trade so that everybody wants to use your currency and not threaten the holders of that bonds with freezing their assets it's certainly better if you have two loving parents raising a family that's good but maybe that's too much to ask for in other words good Parental Guidance okay you're raised well you're educated well you can go to a public school that educates you well and you have good guidance so you're well raised in a healthy environment and not only do you learn skills

and all that but you learn how to behave well with each other so you learn civility so you come out capable and civil to a land of opportunity in which you can work and have a good environment and really that's all you need if a society does that and I think you know the things that are going on education is deteriorating it's a real problem and in the state of Connecticut as of the last survey 22% of the high school students have either dropped out of high school whoa or have absentee rates which are greater

than 25% in our failing classes they're living in areas that don't have the things I'm talking about about parents nutrition and so on and there's not adequate resources for them for example during covid we found that 60,000 students didn't have computers or connectivities to take classes and the government wasn't going to provide it so our society when you look at this you see drugs drug problems you see how the cities are changing you know the cleanliness of the Cities the education levels of the Cities mental illness crimes and so on you seen people fighting with

each other a lot not all the time there are wonderful places in the United States education some of the best universities you know their neighborhoods but there is is this encroaching so you see infrastructure breaking down earn more than you spend be well educated to help you earn more that you've said then be civil with each other be productive like in Singapore but it's true in other countries there's a level below which nobody should go certainly children should not go so there should be basics of housing Health Care certain Basics because otherwise you build a

cycle when the children become adults you might say oh it's up to them to do it but if you mess up the children early they become the adults who can't do it so you have this cycle you can see the gaps the opportunity gaps you can see the mental illness gaps you know walk down the street and downtown Manhattan or lots of places and see the gaps and some adult who is screaming uh you know and homeless and whatever came from a place that made him that way think about how difficult it is for the

kid who doesn't have learning and they have one parent and that parent in a poverty and might have drug problems and all that I mean the kid can't make it so the kid's going to come up to be an adult okay what kind of an adult is it it's going to be a problem what they did was they required savings they require it I think it works like this employee gives 12% of their incomes an employer gives 10% of the income so they save something like 22% of their income is in savings they do other

things too they have a tax balance but they have a savings and as a society they earn more than they spend and then on housing for example they have a public housing that is subsidized that the person can take their savings to use to buy that public housing through that saving so everybody has housing good public housing and they own it so if it goes up in value they can sell it so the housing creates a good environment they put a lot of money into education equal education people there don't have to go to a

private school to get good education and then they have the people who work hard and are civil with each other and that's how it works forget about Singapore if you look through history these are basic fundamental things so wherever they've happened in history they've worked it's so interesting to me because I found that when people get richer the societies get richer they typically get in more debt which seems backwards like I watched the first time it happened when the United States started borrowing money from China United States had per capita income 40 times those from

China and they're borrowing money from China so I wonder like how does that really happen and there's when you don't have much money and you're in a stage of life where you know you value money you want to save so there's a psychological thing you don't have much money you get some money and you want to save it and to save it means you have to lend it to somebody then what happens is ironically when everybody earns more money and it's easy to borrow people will get in debt or Society will get in debt or

the government will get in debt and also then there become very big wealth gaps people basically are in taking care of themselves you have a fight over taxes or something and so you have a society that borrows just even think the political system cycle if you're a new politician and you run a state or you run let's say a state and it's before an election it's in your interest to borrow and spend because nobody pays any attention to the borrowing where the money comes from they pay attention to the spending so go spend give them

stuff have a party it's like having a party on debt and there's this shortsightedness it's like raising kids they call it the marshmallow test you know you ask a kid at an early age I can give you one marshmallow now or I can give you two marshmallows in 15 minutes which would you prefer the smart one says I can defer my gratification for 15 minutes and get to marshmallows we have a lot of society who wants it now so is it enjoyable to take your money and spend it on better in infrastructure so those are

the mechanics of it first you have to go to bipartisanship like if I was President I would have a bipartisan cabinet and then if I was dealing with the economic problems I'd get smart people from the right and smart people from the left who want to make this thing work and I'd put them into like a Manhattan project kind of thing in other words put them into 6 months in which they have to agree on a syst them that's going to work tie them together and force them to agree and come out with that and

have them gain control over the extremists who are going to fight like I don't really care exactly how it works if smart people from both sides can get together and make it work and then you come back to these Basics okay how do you earn more money than you spend how do you educate your children well and deal with those problems in a together way you'll get the best outcome I think it starts with worry I got principle if you worry you don't have to worry and if you don't worry you need to worry because

if you worry you'll take care of the things that you're worrying about to the best possible way if you don't worry and you just go head long into these things you're going to have a real problem so I think that you have to have people first realize what does that picture look like if we don't do these things if we don't have bipartisan if we don't solve these problems together together if we fight you know you have to see the clarity of those two paths and have people choose the good path it starts there it's

not a structure where does the structure come from it comes from people okay and comes from people having a need to create a structure in a way of being it's like wishing for the tooth fairy or something I I mean it's like not going to root cause of why you don't have that leader if you look at history this is one of the great challenges of a Dem democracy and when it gets into everybody fighting for their own cause with populism you know mus comes to power to make the trains run on time because it's

badly managed and so on so somebody says give me the dictator and I want that dictator how do you get the leader and what do you do with the opposition okay it's almost like you have this fighting of the various types and do you accept losing and then does the opposition remain and undermine everything you're trying to do so it's almost like it gets to mob rule that's why the dictators come to power and so that's just history and that's all understandable if not desirable it's still understandable that that's the mechanics so to wish and

say okay we need a strong leader who will get control and make everything go all right sounds a little bit like wishing for the Tooth Fairy the only path I can see is the one that I'm referring to if you worry about the alternative ative if you worry look at that what is it you must not have it if the more people worry about that then the more likelihood you won't have that let me just tell you the story very quickly of Mario dragi in Italy Mario dragi used to be the head of the European

Central Bank which was like being head of the Federal Reserve for a number of years and he and I got to know each other in that and he's highly highly respected he's Italian Italy has crazy Anarchy they've had an average of one prime minister a year and so chaotic and so bad that all the political parties got together and said we will be United under Mario drogy we will let him lead we will turn it over to him and he said I will do that only as long as all the political parties remain United because

if they don't remain United we're going to get into this dysfunctional fighting and I know it's not going to work so for a period of 18 months he was prime minister of Italy and very loved people loved him and then one of the political parties dropped out because they disagreed on his approach for I think it was handling Ukraine and he said okay now I'm resigning even though everybody wanted him to stay overwhelmingly but he said I can't govern under that kind of a fragmented environment in other words he knew where it was going to

go so he resigned and in the period between him resigning and actually turning it over to the new prime minister we had lunch and we were talking about these things what he was describing and what exists is the issue that we're talking about the inability of a leader to be able to lead when there's so much fragmentation and if you look at the history of democracies and you go back to Plato you know a lot of people think Americans invented democracy no it existed way back in the Roman and Greek times and all that so

he looked at the cycles and what he said was there's the cycle of these different systems one leads to another in this way where what happens is the greatest risk of democracy is an anarchy because the fragments it becomes uncontrolled they all have their interests they fight and they tear the thing apart so what happens after that is then you get the dictator and ideally the benevolent dictator in other words the one who really knows how to make good things happen and he cares about the country he doesn't care about his personal wealth and those

kinds of things and they create that to create order that comes about that and then in that cycle after a period of time you inevitably get the incompetent or selfish dictator and then you have a revolution and then you go to a democracy and so on and these things go in Cycles you can't ignore the fragmentation and the inability to lead in that set of circumstances God give me the serenity to accept that which I can't control give me the power to control that which I can and give me the wisdom to tell the difference

and to be able to approach things in an open-minded way calming yourself down think of the reality as being like a gay like a chess game okay this thing happens and what's your next move and how does it work because it's like watching the same move you happen over and over again you can see it and you understand the cause effect relations it is what it is that's how reality works and then how do you deal with it I've heard credible people say that they think China is going to make a move on Taiwan in

the sort of chaos of the division that we have here in the current Global superpower do you see that as a logical move on the chessboard for China is that something that seems plausible to you I have very good contact so I have close contacts of both sides and my opinion is that there's a political situation in the United States that it's really the issue of how much the United States pushes the issue in Taiwan that makes it uh risky so let me just give you the facts I'm going to give you a little history

Taiwan was part of China and around 1840 foreign power Powers came into China and they wanted to trade and do things with China and China didn't want to do that and so around that time they had the Opium Wars in which the Chinese at the time said I don't want to trade you don't have anything that I want then they brought in opium that the Chinese wanted so that they would have this trade and whatever and then militarily won and took over large parts of China took control of that there was many foreign powers and

in 189 5 Japan takes Taiwan okay fast forward you go into World War II and after World War II the winners of the war get to divide up the world and said who gets what and Taiwan was given back to China That's 1945 then they have a Civil War as usual the left and the right they fight each other so the capitalists get kicked out by the Communists and they go to Taiwan and they control Taiwan okay so everybody agree that Taiwan is part of China but they argue who controls China the ones in Taiwan

say oh we control China and the ones in Beijing say we control China but everybody agrees with that that's a big issue in their mind because it's part of China and it's been told to them that it's part of China taiwan's part of China but capitalists they are living in Taiwan and they're not controlling it 50 years ago Henry Kissinger first gets together goes to China and deals with re unification and then Nixon follows and there's this argument and they reiterate that Taiwan is part of China everybody agrees on that there should be peaceful unification

of China and that goes on 50 years now and brings it up to where we are today so a red line for China is if the United States or Taiwan says Taiwan should be an independent country that would produce a war and everybody knows that all those government would know that would produce a war this is a big thing for them they call that period of time a 100 Years of humiliation it was taken promise back and whatever it's in their mind an indisputable reality so what will come I don't believe China is going to

initiate a move to take control of Taiwan unless the United States crosses that line pushes that line so the way that it is understood and just by different parties is it's understood by the Chinese to be the way I describe it look it's been promised it's here that's an uncompromisable thing and Americans think about this communist dictatorial bully that is trying to take a free country a free people in a aggressive way take over them and that we need to defend Liberty and protect them from that I just want to emphasize it's more complicated than

that in the way that I said and also from the Chinese point of view it's part of the American containment strategy which means China has grown and it's become a higher percentage of world economy and so on and it's expanding and it's like Taiwan is the lid on this Boiling Pot if you want to know what really happens watch it the way I describe it in other words is it unprovoked or is it provoked in the way I just described it I'm a very realistic person I'm not an ideological person I'm not trying to I'm

just like how does reality work and what's next moving I'm just trying to describe that reality I'm not taking a side in it it's just like two sides in a chessboard and I'm just looking down at the chessboard you can't expect somebody to understand all the things in finance and all the things in human nature and psychology you don't need to it just comes down to kind of pretty much simple basic stuff that repeats in a cycle for the certain reason I want you to get Balan I want you to have enough say savings have

security I think investing which is the same as savings comes in tiers tier one tier 2 tier three on risk and the first tier is if everything goes wrong I'm okay and everything could be inflation depression anything whatever it is I lose my job whatever it is I got that thing covered then your next level is okay what am I going to get the highest Returns what is my best bet but start at that level and then it's not just the investment it's where am I am I in the middle of a fight like I

don't want to be in the middle of fight what's it going to be like for people that don't know your background you have a meteoric rise you're in your 30s on top of the world unbelievable success you made a huge bet on a collapse and it didn't play out and it ended up that the market went up and you lost a lot of money almost lose Bridgewater you come up with a new strategy it ends up getting tested multiple times in the market and you got Crush when other people struggle what I learned from you

know basically this punch in the face mistake how to make good money without having big loss I learned how to improve my return relative to my risk the Holy Grail of investing is 10 or 15 good uncorrelated return streams you get that and you will have a similar path to the path I've been fortunate enough to have something comes along all the time for anything everything has its time you put your money in any one thing you know you could think okay movie theaters are good and then you get Co or cruise lines are good

and then you get Co and whatever it is is good well it's good sometimes but there's always something that always is going to mess up the one thing so you don't want like in my opinion you don't want more than 10% of your money and anything and they want to be good different things and that's the message I'm trying to convey as a generalization you know if I was to make a big sweeping generalization I would say one wants to invest in countries that have good finances you know good income statement balance sheet earning more

than they spend because they can withstand disruptions better financially and be more productive that don't have big internal conflicts and are not in the risk of being in the war situation so you see generally money going to those types of places