"Most People Have No Idea What Is Coming" — Ray Dalio's Last WARNING

I've been a global macro investor for over 50 years and one of the things I learned is that some of the things that surprised me with the most were things that never happened in my lifetime but happened many times before I learned that in 1971 when I was clerking on the floor of the New York Stock Exchange and the United States on August 15th President Nixon got on the television and he told the rest of the world that the gold that the dollars are supposed to be converted into you won't get and there was a

devaluation I worked on the floor of the New York Stock Exchange and I thought it was going to go down a lot and it went up a lot and I found the same thing happened on March 1933 with Roosevelt doing the same thing and that taught me history repeats but not necessarily in our lifetime so three things are happening in our lifetimes that never happened before and I saw that a few years ago and I started to need to do that study and those three things are the amount of creation of debt and the printing

of money to monetize that debt which is having its effects on inflation on the value of money on many things the second is the amount of internal conflict that we're having the conflict over wealth and values the great polarity that has gotten to the point of having irreconcilable differences and a threatening our system and the third is the rise of a great power to challenge the existing great power and the existing World Order In other words the rise of China 1945 we created the existing world order that we're in and that is being challenged so

that's what prompted me to study those things and in order to do that I had to study last 500 years of History because these are Big Cycles thinking about the rise and decline of a reserve currency and its Empires is a big cycle and it was eye openening but I want to emphasize that the big cycle it helped me understand what's going on right right now with the Ukraine war with the elections that are going to come up with the economy and so on so that's why I did it I would not have been able

to anticipate the 2008 financial crisis if I didn't study the Great Depression so this is true and this is one of the curses of our existence is that we haven't been through Wars before our generation has not had experiences before things that happen regularly so experiences and painful EXP experiences have taught me that I needed it we're going into an environment with this large creation of debt and printing of money which is very much like going from the 1960s to the 1970s you know what happens is people get used to an environment there's a paradigm

and a paradigm is sort of a mindset and so if you look at it they often last about a decade the 70s was an inflationary decade the 80s was a disinflationary decade and they start start off with surprises because the decades are more opposite than similar to the prior decades so for example we're coming into the mechanics of you create a lot of money and debt and it's going to devalue it and it's going to produce inflation but there's not an inflation understanding so there's a mentality for example that people think well what's safe is

to keep my money in cash because it doesn't go up and down and it's safe and they haven't yet learned that it's not safe because you lose buying power and so if the inflation rate is 7% and you have a zero return you just lost 7% buying power so by helping people to understand those things how the environments have changed and the cause effect relationships and where we are in the middle of it has been very helpful what makes a country healthy and successful one of the things I did was use measurements so that you

can measure these things and there a cycle and the cycle starts off with the basics usually there's an order an order means a new system that comes into place 1945 there's a war the winners of the war get to determine the rules that war can be an external War it could be a civil war but then the new power comes in and there's a new system new rulers and the basics start off with good quality civility with each other education education is a lead ing indicator of everything if you put education and Civility and working

together and not having the conflicts that period usually after the war is a period of peace and prosperity also because there's a dominant power nobody wants to fight the dominant power and it's also Wars are great leveling devices they reduce wealth gaps they wipe out debts and so on and so there's a cycle of that kind of improvement but naturally as things improve and living standards arise wealth gaps widen and also debts increase and it's quite true for countries that have reserved currencies because they're allowed to borrow from the rest of the world because the

rest of the world wants to save in that currency and so quite often that cycle produces a lot more debt and larger wealth gaps it also produces great inventiveness but it also enters a new generation who haven't been through War who might become maybe a little bit more decadent and not invest in infrastructure and education and the fundamentals that make things healthy and as a result you get larger wealth gaps and you get angry and you have more debt and so a classic set of ingredients is that level of indebtedness and then losing the fundamentals

and of course what happens is other competitors rise so other countries after the war um Germany Japan they recover China and other countries recover and they become viable competitors in that and so the power of that one dominant power ceases to be as dominant and then there become more conflicts so there are fundamentals now the fundamentals are basically are you earning more than you're spending are you well- educated and civil with each other are you productive are you competitive in the world and so you can go from country to Country right now and almost assess

that those countries which are earning more than they're spending that people are civil with each other and there's not internal order and there's not a risk of an external conflict or the ones that are best off the Ukrainian situation is part of a greater story which is the world being bifurcated and not dominated by a single power and you can see how it's lining up you can see which countries by by their actions are lining up which ways in this conflict the United States the NATO countries as it pertains to the Ukraine but not as

it would pertain to Asia and you could see China Russia and you could see actions by India and so on who is acting in what ways so you're seeing this world polarity begin to line up and you're seeing questions we'll see this is like a test War many cases and most cases War there's not a good understanding of how the actual War would take place so it's very interesting when there is an actual War to take place to learn things such as learning what the military power is and the possibility of escalating that war by

Russia if Putin loses that war do they go to other escalated forms of conflict such as nuclear and also it's a test of American sanctions the greatest weapon the United States has the only really unique weapon anymore is the power of its economic sanctions so the world is getting to see will those sanctions work will they change the outcome for example what will be the economic consequences to Russia of those will that be a 10 or 12% decrease in GDP which would mean not a very tolerable set of circumstances and so we're learning three things

I think we're learning at the moment first will Putin and Russia win this war and I'll Define win the war as being able to have control of the Southeastern part of Ukraine and gain territory number two the impact on Russia is less than intolerable in other words it's tolerable number three that he remains in power if those things exist then he would have a win in other words the cost of it would have been worth it so there's that question the second question is what will this mean for sanctions the power of sanctions and also

the cost of sanctions because we have a cost in the form of holders of dollar denominated Assets in many countries are now nervous that they could be sanctioned you know will the Chinese will the Indians will the Middle Easterns who would might be sanctions and that's having an effect on Capital flows so what we'll learn what will that effect be and then we will learn of how the side line up and that is really a lot of learning for what the next episode is going to look like it's so interesting if you would to watch

these things happen on World War II you'd see almost identical in other words you would see that Japan was sanctioned series of sanctions the oil was embargoed the assets were frozen and they were trapped in a sense economically and then they responded with Pearl Harbor and you could see always economic Warfare in like that cut them off is something that happens before there's a military conflict it's almost like it reads the same but it's true that over time the world has become more interconnected it's interesting the first World War I mean think about if you

go back a few hundred years it took a day in a day you could travel 25 miles today in a day you can be on the other side of the world there's instant Communications so the first world war was the first world war and the second World War brought us more together and it was the second world war and so then we are all connected and that brings us in that position history has shown interestingly that connections did not minimize the chances of war in fact for example in World War I in order to minimize

the chances of Wars which was then run by royalties they intermarried and there was nothing closer than to be intermarried and yet they went into World War I and so on so I think the connectivity and it also brings up other issues like literally cyber connectivity and so on and it creates a dynamic it means that there are less safe places in this world war so it makes it I think very important that we don't get into a war uh today how we are with each other is scaringly different and it's measured in the statistics

and the charts that are shown in my book there is the greatest political polarity since 19 00 and there's a real question of whether in the next election either side will accept losing there's a question about the acceptance of the rules there is a moving to different states not just for tax reasons but for values differences great great great differences and there's much more fighting between the rich and the poor and there are great differences greater differences it becomes always more and more intense until there is a war we are in the early stages of

a type of Civil War you know that's what goes on and of course once you cross a line then there's a fight when the causes the people are behind are more important to them than the system the system is in Jeopardy and that's what we have an economy is not a complicated thing it just has a lot of moving Parts but the basic is there's a transaction and that transaction means somebody makes a purchase they make a purchase of a good a service or a financial assets that purchase can be made made with money or

credit if money when you make a purchase with money you end the transaction you don't owe anything when you make it with credit then there's a liability you have to come up with the money because a credit at debt is a obligation to deliver money so there's a basic transaction there's spending in other words the total amount of money in credit spent on a good or service and then there's the item that you're buying a stock a bond a car bushel of wheat there's that transaction demand is best measured in terms of spending you know

I think in traditional economics it's a mistake to measure it in terms of the quantity of goods what is given up in a purchase is money or credit what we go through is we go through a cycle we go through a credit cycle credit can be created it's not created through the velocity as is commonly believed um it it can be cre created out of thin air if I go into a store uh or I have somebody paint my house and I say I'm going to pay you later uh I've created credit that'll count in

GDP it'll be an item of production so what we have is a credit cycle if there's not much debt if you don't have much debt then you have the ability to borrow money let's say you earn $100,000 a year and you don't have any debt you can then borrow $110,000 a year you therefore can spend $110,000 your spending of $110,000 is somebody else's income of $110,000 so it has a positive effect and you go through a cycle and through that cycle you spend 110,000 they earn 110,000 and the cycle becomes re self-reinforcing through that cycle

debt Rises faster than income debt Rises faster than income debt can't rise faster than income forever so as debt Rises faster than income you have a a debt cycle what causes it to stop well traditionally as you lower interest rates um it creates that has three positive effects if interest rates are too high then you lower interest rates lowering interest rates has the effect of making it easier to service the debt it has the effect of U making items cheaper to buy on credit because the monthly payments are less it has the a present value

effect on assets so if you lower interest rates and you have something that has a cash flow let's say a piece of real estate or something they have a present value effect that causes those assets to go up that produces wealth and that allows more borrowing and so when you get to a situation where you can't lower interest rates anymore let's say you hit zero that part of the cycle ends so then you go to a deleveraging the leveraging means that you can't raise debt relative to income anymore when you can't raise debt relative to

income anymore the cycle begins to work in Reverse I think that people if they don't do a very good job of calculating incrementally what the effects are on demand but let's say you're having debt growth um at something like 10% and you go to a 5% debt growth instead that has a negative effect on growth it's the marginal change from that level produces a negative effect on growth so traditionally in deleveraging that negative effect that happens on for let's say Europe is a very classic case the the Spanish banking system is a very classic case

the European banking system as the banks leverage up at a certain rate and they can't leverage up more than that rate and they lessen the rate at which they're leveraging it up it has the effect of beginning a deleveraging deleveraging means then the income the spending all produce sort of a negative cycle that produces the beginning of a depression a depression is the phase of a deleveraging in which there's u a combination of austerity and uh debt restructuring because if you have it's a basic thing if you have too much debt to service you've got

to do something about it and when you have too much debt to service um and you do something about it there are a limited number of things that you can do you can either transfer the debt you can transfer resources from the rich to the poor so you can have it transferred from example from Germany to Spain that's one way of dealing with it the other way is to you you have a combination of austerity and uh debt restructurings a debt restructuring means that you lower the debt in one fashion or another you lower the

the debt burden to something that you can afford to service because of the income that you produce restructurings can take one of three ways you can either actually write down the debt you write down the debt let's say write it down in half cuz you could service half if you service half but the problem is one man's debts are another man's assets so when you write it down in half you have a big negative wealth effect so you have a negative wealth effect you can't borrow money it has that problem so a restructuring becomes a

problem you could restructure it either in the form of writing it down or in one way or another you can lengthen the payments or you can forcibly lower the interest rate but some way or another you've got to get the payments in line for what the cash flow are producing so that you can service that kind of a debt that's a very painful process so a depression is the phase of the deleveraging when there's a a combination of austerity and writing down debts so classic the depression 1930 to 1932 March of 1933 we print money

or the third way that you can deal with it is you can print money the essentially what we call print money the the printing of money means uh that essentially a Central Bank debt is a commitment to deliver money so if a central bank slips into the system a certain amount of money each year um it can make that easier think about the debt write down that something may be is a debt and you say I'm going to write it down to a level that could be sustainable and you write it down by 50% that

has a big negative wealth effect big deal bad if it's 10 years debt maybe that's equivalent to 5% a year for 10 years if you slip in 5% a year instead and to that person who then can pay that debt they can service the debt it's 5% a year it's not that big a deal and so in all de leveraging in the end they print money it's part of the mix now the best D leveraging are ones in which you um have a balance of those things ultimately you have to bring down the debt to

income ratio so the ways that uh ultimately you'll have a balance of those three things those three things again you're going to have a certain amount of transfer of wealth you're going to have a certain amount let's call them four things a certain amount of austerity a certain amount of debt rights downs and a certain amount of printing of money the debt write downs and the austerity are deflationary the printing of money is inflationary if you can get the balance right of those things then you have um what I call a beautiful the leveraging the

leveraging when you look at the the leveraging the debt to income ratios if you look at the debt to income ratios and and say how have they come down over time England after World War II or the United States in the Great Depression in all of these cases where the debt to income ratios came down they came down how did they come down they came down um with relatively uh good conditions by trying to get by that mix there's a certain the number one reason is that there's enough of a printing of money that the

nominal growth rate in GDP has to exceed the nominal interest rate because think about it you have a certain amount of debt and there's a certain Debt Service cost and if that um interest rate on the debt is higher than the nominal GDP rate then that means that it's going to compound unless you're you keep cutting and that produces a negative consequence so so the most important thing is in these the leveraging as the United States is now doing is that you have enough of a printing of money to produce a nominal growth rate that's

above the nominal interest rate over a period of time I'm oversimplifying but that's the most important single single thing so now when we then take 2007 and that's I'm just describing a little bit the template these templates have happen repeatedly you know the IMF restructurings you can go back and study them all they're all the leveraging and and they're all classic cases and they're all pretty simple so 2007 2007 and also in the European case what we had was rates of debt growth that were unsustainable rates of debt growth um the mistake of monetary policy

I think most the most common mistake of monetary policy is that it's uh targeting uh inflation and growth and while inflation and growth are important um it really what it does is it produces debt and what it has to pay attention to is debt growth relative to income growth growth relative to sustainability um and so what happens is lots of times you have a lot of debt growth that goes into the purchase of financial assets and That's a classic bubble that's worse than that's a riskier situation than inflation so you take 2007 or such periods

and you see that there's a lot of debt growth which is accumulating for the purchase of financial assets and then you look at the Financial assets and you say they will not be able to service that debt and so that produces a bubble that's what produced the 1929 bubble that's what produced in Japan the 1989 bubble 1990 bubble that's what produced the 2007 bubble