Source: All-In Podcast
Compilation: Felix, PANews
This is the third time that Ray Dalio, the founder of Bridgewater, has appeared on the All-In Podcast. The last time was just days after President Trump's inauguration. Dalio pointed out then that if the U.S. could reduce the budget deficit to around 3% of GDP, a smoother transition might be expected. Now, the Congressional Budget Office (CBO) estimates that the deficit will be about 6% of GDP in 2026.
In this dialogue, Dalio pointed out five major forces affecting America's future: debt and currency, wealth and value gap, great power conflict, technological change, and natural disasters. He suggested a portfolio allocation of 5%-15% in gold as the most reliable currency; while Bitcoin, due to its lack of privacy and disfavor from central banks, still has a long way to go. AI is "devouring everything" and may even consume itself, with only a small proportion of AI companies likely to survive.
Below are the highlights from the podcast.
Five Major Forces Affecting America's Future
Host: Looking back at the government's actions over the past year, Congressional efforts, and economic performance: are we on the right track now? Is our path fundamentally different from a year ago? Or are we just progressing too slowly?
Dalio: I have studied historical cycles over the past 500 years and found that there are five intertwined forces that determine the answer to your question. The first is the issue of debt and currency; the second is domestic gaps, namely wealth and value gaps, which create irreconcilable divides between the left and right, impacting taxation, democracy, and the functioning of all affairs; the third is international great power conflict, which is a classic pattern of rising powers challenging existing ones and altering the international order. The fourth is technological change, which has occurred throughout all these cycles. The fifth is natural disasters, such as droughts, floods, and pandemics.
All monetary orders collapse for the same reasons, and all political and international orders always change. The U.S. is relatively stable, with a 250-year history, but they will eventually change. There was one civil war, but at the international level, they always change. All orders are changing. The international geopolitical order is shifting from a multilateral world order to a unilateral world order, and technology is certainly changing as well.
A country's economy is essentially like that of a company or individual; it's just that governments have the privilege of printing money. You can think of it as a company, or your own company. Essentially, expected expenditures are about $7 trillion, income is about $5 trillion, with a fiscal deficit of up to 40%, and total debt reaching six times the income. The issue with debt cycles is akin to the circulatory system of the body. Capital markets bring credit to different parts of the economy, and if that credit is used for productive purposes and generates income to pay interest on the debt, that's healthy. But the reality is that if debt interest grows too fast relative to income, it causes a buildup like plaque in blood vessels, eventually squeezing out other expenditures.
Of the current $2 trillion deficit in the U.S., half is used to pay interest, and there is an additional $9 trillion in debt that needs to be rolled over. Due to the enormous scale of the debt and the high proportion of dollar-denominated debt in portfolios, as well as the potential geopolitical conflicts, the risk of foreign buyers, who account for one-third of U.S. Treasury purchases, is increasing.
Host: You pointed this issue out before. Your diagnosis was that achieving a 3% deficit level could alleviate the impact, but that hasn't happened. Last year, Elon Musk led the "Department of Government Efficiency" (DOGE) aimed at drastically cutting government spending and eliminating fraud and waste. Did DOGE fail because the actions taken were wrong, or because the system itself has become unchangeable at this stage of the cycle?
Dalio: Attempting to quickly make an inefficient government efficient is very difficult because it can provoke significant social controversy. At this stage of the cycle, it is structurally somewhat challenging.
Host: Recently there has also been major news about potential widespread public fund fraud in Minnesota, with some daycare centers that don't actually exist. Similar reports across the country are revealing that federal spending is indeed being misused. Do you think this is a symptom of this stage? How do you see it relating to the issue we are discussing?
Dalio: This is both a cyclical stage issue and a mismanagement issue. Large and complex government agencies (like motor vehicle departments) are extremely inefficient and difficult to manage properly.
Money is Debt, Recommend a 5%-15% Allocation in Gold
Host: Since our last interview, gold has skyrocketed from $2,900 to $5,200 per ounce in the past year. What changes have occurred in gold over the past year? Is the market becoming aware that we are in the cyclical stage you have emphasized for years? How do you view the trend of gold, and what is its relation to the market's perception of our current stage?
Dalio: This is the effect of the great cycle. Gold is not just a precious metal for speculation; it is also the most mature form of currency and the second-largest reserve currency held by central banks. Due to economic, supply and demand, and geopolitical reasons, central banks and individuals are actively buying gold as an alternative currency.
The question is, what is money? Mechanically speaking, money is debt. If you hold money, you are actually holding a debt instrument. If you hold a debt instrument, you are only receiving a promise from someone to give you money. When central banks carry too much debt, their only power is to print money. In contrast, gold is a physically limited asset that cannot be printed at will, does not rely on others' promises, and can be transferred globally.
It is important to differentiate between wealth and money. Wealth is tangible. It exists in buildings, companies, etc., but you cannot directly spend wealth. When you want to consume, you must sell it first. Then you get money that can be spent. Now, relative to money, we possess too much wealth. The problem is, what is that money? When you go to cash out wealth, there is a risk associated with their printing of money, because they have been doing so since we have had fiat currency.
Even if you have no view on the direction of gold, considering the interaction of gold with other assets, a person's portfolio should include 5% to 15% in gold. In other words, when the market is turbulent, gold performs well while other assets may not, helping to diversify risk. Generally speaking, due to this correlation, optimizing other assets in the portfolio can yield similar results. I'm not trying to advocate for everyone to buy gold, but I want to say what is safe. If you have no clear view, then within the range of 5% to 15%, gold is safe.
Bitcoin Has Its Own Characteristics, Inferior to Gold as Currency
Host: Why is Bitcoin's performance different from that of gold? Since our last conversation, gold prices have risen by 80%, while Bitcoin has fallen by 25%. How do you view the current state of Bitcoin? Why has it not become a safe haven asset as many expected?
Dalio: Bitcoin itself has some important characteristics, such as who its holders are and why they buy and sell Bitcoin. Bitcoin lacks privacy, and any transaction could be monitored and even indirectly controlled. Central banks do not buy and hold Bitcoin. Therefore, not only individuals hold Bitcoin, but also institutions, etc., but most central banks are reluctant to hold it. These are some characteristics of Bitcoin.
People have concerns or doubts about the development of new technologies like quantum computing. Could there be problems in this area? Additionally, who owns Bitcoin and what other assets do they have in their portfolios? Bitcoin often has a high correlation with tech stocks. So, from the perspective of ownership, supply and demand relationships will be affected. The Bitcoin market is relatively small and is a relatively controllable market, and there is still a long way to go. I think Bitcoin has received a lot of attention, but as a currency, it is much smaller compared to gold.
Host: What about silver? Silver has also seen a significant rise in the past year. Is it a derivative of gold? Are people actually speculating on the wave of rising gold prices?
Dalio: Silver is a residual commodity in its production process. Its supply is hard to increase, and historically, pure silver like the pound has always been seen as a currency. But it has also gradually developed a speculative nature. So, people are enthusiastic about investing in silver because it has been very popular.
It Is Difficult to Manage the Overall Economy with Uniform Fiscal and Monetary Policies
Host: What are your current views on interest rates and the actions taken by the Fed over the past year? How helpful have these actions been in alleviating the impact of the current economic cycle phase?
Dalio: Because we are burdened with massive debt, especially federal debt, interest rates are one of the main considerations. The other three factors are taxes, spending, and debt rates. However, you cannot artificially lower interest rates drastically because one person's debt may be another person's asset. Interest rates that are too low can stimulate borrowing and fuel bubbles, while rates that are too high can severely squeeze debtors. When you have a lot of debt assets and liabilities, maintaining balance becomes very difficult.
The current situation is even more complicated due to the so-called "K-shaped economy". In other words, there are bubble factors in the economy, such as people discussing who will become the first trillionaire, representing 1% of the population, the top tier. Meanwhile, another part of the economy faces enormous challenges, for example, 60% of Americans read below a sixth-grade level. It is extremely challenging to enhance their productivity, especially as AI may replace them. In other words, when there is so much debt, assets, and liabilities, and the living conditions between the top tier and the bottom 60% of the population are so disparate, it poses a problem. Therefore, it is exceptionally difficult to manage the entire economy with uniform monetary and fiscal policies.
Host: Over the past year, numerous reports have indicated that many global central banks have stopped buying U.S. Treasuries and shifted to buying gold. Does this mean the Fed will have to start buying Treasuries again and expand its balance sheet? Given the current state of the global market, will we inevitably see the Fed expand its balance sheet again in this cycle?
Dalio: I think this situation might occur in the future. Currently, shortening debt durations is one way to respond to this. Of course, this increases the risk of debt rollover.
Host: Data from the past year shows that the number of federal government employees has decreased by 317,000, about 14% of the total federal workforce. With this administration reducing the size of some agencies and decreasing their workforce, what will happen to these individuals? Will they enter the private sector and boost productivity, or will they be absorbed by other government agencies to engage in roles that do not benefit economic growth?
Dalio: I have not studied these numbers and cannot answer thoroughly. But the government is extremely inefficient. Other governments might handle things better in areas like education. The best investment is education. However, where these individuals go is a question. The system, or the capitalist system, in a sense, only has one advantage: if no one is willing to invest or it can't be profitable, it can't survive. Therefore, I think regardless of where it leads, wherever those individuals go, there will be inefficiency and inefficient systems.
Three Things for a Successful Country; AI is "Devouring Everything"
Host: Is the current economic growth in the U.S. insufficient to drive productivity improvements to provide more opportunities for people to increase income, wealth, and improve their lives? Is this the fundamental issue we are facing? Or do you think people lack the skills or education required for productivity, so the system itself has let them down?
Dalio: To succeed, essentially three things need to be accomplished. First, educate children so they are productive and civilized, able to coexist respectfully with others. Second, compete and cooperate in an orderly, civilized environment. Third, stay away from war. No civil wars or international wars. If you do these three things, you will have a successful country.
However, the U.S. is currently in the fifth stage of a historical cycle, filled with irreconcilable divides, enormous wealth gaps, and mob-like disorder. When people prioritize their supported ideologies over the system, the system is thrown into crisis. America now resembles the late Roman Republic, desperately in need of a strong leader to quell the disputes and compel people to focus together on increasing productivity.
When we examine the bubble issue of AI, many people believe they are betting on this technology when they buy stocks. This is not the case. There is a huge difference between the behavior of companies and the behavior of technology, and typically, many companies cannot survive in their early stages, with only a small percentage being able to survive, while technology will continue to develop. We saw this during the tech bubble of 2000. The same goes for the late 1920s. Technology will keep evolving, while companies may not. This has profound implications.
In my view, AI now seems to be devouring everything, and it may even devour itself. It may not generate enough profit. We cannot look at the issues solely from a domestic perspective. We must also consider what is happening in China. There is a philosophical difference between the two countries: the U.S. system is primarily based on profit. China may consider profit to be a secondary concern. To achieve the best results, profit is not necessarily required. They may allow AI to be open-sourced for free for everyone like electricity. This increases usage rates and productivity; whereas we must seek returns. We are in the same world, how do we compete? Their technology is nearly as good as ours. What if they provide open-source technology for free? This poses a systemic risk for AI. There are indeed many unknowns.
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