![Ray Dalio]()
Summary List PlacementOne evening in early February, I logged into a Zoom meeting with Ray Dalio, the billionaire founder of Bridgewater Associates, to discuss the future of capitalism.
I knew he wasn't optimistic about it. He'd said as much before— like that America's jarring inequality is a 'national emergency' — and I'd written about it. Still, I wasn't prepared for what he was going to say this time.
Inequality is at a tipping point, he said, that will only fuel more antagonism, hate, and perhaps even violence.
"I'm not trying to scare people," he added before leaving the meeting. "I'm not trying to deal with histrionics. I'm just trying to make them aware of history and how it works."
I've spoken with a number of experts saying capitalism needs to change. But there was an urgency in Dalio's voice that left me wondering where the world was headed.
The system that made him a billionaire can't continue as is, he said. He spoke to a "Thucydides Trap," the historical pattern of conflict that comes when an emerging player threatens a global power — as in, China challenging the US.
"I've watched this story play out," he said of both inequality and China's rise. "And it's playing according to script, and it's very difficult to imagine a cohesive resolution of that story," he added.
In our wide-ranging conversation, which has been condensed and edited for clarity, Dalio talked about what exactly has him concerned about capitalism, how the American dream needs to be fixed, and what business leaders can do to start addressing inequality.
In your essay "Why and how capitalism needs to be reformed," you describe the state of capitalism as a machine that's broken and needs fixing. Are you now more or less concerned than when you wrote that piece more than a year and half ago?
Well, I'm more concerned. We have irreconcilable differences. I have a principle, which is, when the causes that people are behind are what they are willing to fight for, at the expense of the system, the system is in jeopardy.
I've watched through history. I've studied a lot of history. I've watched how civil wars and revolutions take place. There need to be changes, really structural changes. And ideally those structural changes are smart enough to make big changes to make it work better at the same time as they're done peacefully. I'm not sure that we're there.
So let me clarify what I mean by "it doesn't work." I'm a capitalist, which, by the way, can, if history repeats itself, be a dangerous thing to be.
But what I'm saying is, that if you take the objectives, what are the objectives of the system? The objective of the system is that it has to work well for most people. And then there are certain basic things like, "Does it provide equal opportunity?" Maybe not necessarily equal results, but let's say equal opportunity. Does it work well to create a harmonious, productive society?
And then we look at measures of that, the benchmarks. We could say that we don't have those outcomes. And that's what we're feeling, that's the situation we're in. We now have the greatest divides in wealth, incomes, values, and political positions that we have had since, in some cases, 1900 — and in some cases the 1930s.
So we know that it's not working. And there are structural reasons it's not working, so it needs to be reformed. But I don't think we have the commitment and the willingness to work it out.
Has there been anything specific that's made you more concerned?
Only that we're moving right down that classic path — we're further along, down that classic path to the irreconcilable differences and fighting. I think it's pretty clear.
The piece I wrote on LinkedIn, which is called "The Changing World Order," painted a picture based on history of how these things transpire. And I wrote that well before when we had the Washington problems and so on. They're very much in keeping with that. So we are walking down that path.
What's at play? What's going on on a global scale?
There are three big things that are happening — and that have not happened since the 1930s. They're interrelated. Those three things are: What's happening with the creation of debt and money with the zero-interest-rate environment, the printing of a lot of money for the debt.
The second is the gaps that we're talking about, justifiable antagonisms because the system is not working for a lot of people — the wealth and the political and opportunity gaps.
And the third is the rise of a great power to challenge an existing great power — the Chinese to rise and challenge the United States.
My general perspective is, I've watched this story play out, and it's playing according to script, and it's very difficult to imagine a cohesive resolution of that story.
The need for bipartisan support to address inequality
So you're sounding the alarm. You describe capitalism today as a self-reinforcing feedback loop that widens the income and wealth gap, to the point where the American dream is in jeopardy. How do we break the loop?
The first thing you have to do is know enough about history to be fearful of what the alternative is, what the types of clashes are. So I would love people to know those stories about history. Then you have to look at the system.
What you need is both smart and bipartisan people. The only thing that can save us is two things: If it's possible, for bipartisan and smart people to do something like a Manhattan Project, in which they engineer something that both sides agree is smart and will be bipartisan.
And then each of those who were on the left and on the right part of that group then take care of their constituents, too, so that we don't kill each other. That would be good.
The only other alternative, history has shown, sometimes, is a swing power that seeks to produce peace. That might be, for example, a third political party. In other words, it is possible — difficult for the presidency — but not difficult for the House and the Senate, to have a third party of moderates who will come together and end up being swing votes that would put moderation back into it. That might be some sort of a policy.
But we need, more fundamentally, to redefine the American dream. We have to say, "This is what we want." We have to agree on it. We have to have metrics that measure that American dream and how we're doing against those metrics. And people have to believe that that system is fair in order to achieve it. It would be like a legal system.
You have a legal system that allows you to resolve disputes, and it's not perfect, but people buy into it, they follow it. And if you stick that way, you believe in the system, and it's fine, unless we rectify that. And the only way we're going to rectify that when we have such antagonism that they want to kill each other, literally. And in a recent — I think it was a Pew survey; I'm not sure — 15% of the Republicans and 20% of the Democrats wished the other members of the party would die. And we have some high number who don't want their children to marry members of the opposing party.
You're seeing the movement even from blue states to red states, red states to blue states, because of people actually feeling threatened. It's not just a tax thing, but there's a sense that this ideology is more my ideology than the ideology where I've been living, and you're seeing that kind of movement. You're going to see state and federal conflicts. In other words, what is the right of a federal government, the central government, to be able to dictate to state governments? I suspect you're going to see more of that kind of polarity. So that either is dealt with or it's not dealt with.
Have you thought about, or reached out about, working with the Biden-Harris administration to be part of this bipartisan group that you talked about, a group that would help reform capitalism?
That's a question that I'm not going to answer because of privacy reasons.
Capitalism post-pandemic and the future of tech
Do you think the pandemic and the outcry over racial inequity are turning points for capitalism? Or will things go back to normal?
I think we're past the point of reconcilable differences. I fear that. I hope everybody else fears that.
I sort of have a principle. If you worry, you don't have to worry. And if you don't worry, you need to worry. Because if you worry, then you'll deal with that worry. And if you don't worry, you might get in trouble.
That's the type of situation we're in right now. If you look at where we're headed and what's likely, really, and that doesn't scare you — you need to be scared like that to make sure that that doesn't happen. People need to be scared like that to make sure it doesn't happen.
Identifying a problem, or a complaint, is not the same thing as finding an agreed-upon solution.
What advice would you give to business leaders who want to start addressing inequality and the opportunity gap within their ranks?
First, mechanistically, they have to reconcile what they're doing with those that they report to, the shareholders and investors, which I think now everybody's recognizing in a number of ways, like ESG [environmental, social, and governance] and such, that movements in this direction, if they're not made, will be very costly.
Everybody works for somebody, and the CEOs work for those people. And so it's important that they're all clear on the need to move in that direction.
I think the problem is, will that sufficiently change the circumstances so the people who want to kill them or tear them down are going to be satisfied? I'm not even sure that satisfying them — I know it's not the only answer — because they also have to be productive.
So they have to do a major restructuring to be able to be productive. Think about it this way: We're entering an environment in which robotics is going to replace a lot of people. People can be problematic, from their point of view, not just in cost. But, I mean, maybe it's COVID. The robots will keep working and the people may not work, and people get angry and the robots don't get angry, and the robots are cheaper and all that. So that particular dynamic is going to put the CEO in a difficult position.
It's not good enough to have companies in the existing structural system, where profit is a bottom line, to have some go to robotics, let's say, and you not go to robotics, and they have a competitive advantage. So such things need to be dealt with at a higher level. While increasing the productivity, while increasing the benefit of who are the beneficiaries, because you can't redistribute wealth and have that work well for long, because what is wealth? Wealth really is productivity.
You don't make wealth by making more debt, and printing more money to buy it. That doesn't make more wealth. It makes the assets go up in value because there's more money chasing them, but it doesn't make more wealth, real wealth. And so in order to make more real wealth, you have to be productive, and you have to distribute it well, so that it works for most people. That requires an engineering exercise. So just the normal stuff of let's say, OK, go with more green programs or go and do more this or that, I don't think will actually satisfy a lot of people. It puts them still in difficult situations. So there needs to be deep thought and engineering as to how this is going to work.
Currently reading ...
You're a student yourself, a lifelong learner. Have any books inspired you lately or helped you make sense of this moment?
Oh, I can give you just so many books that I've been reading over the last two years or so in doing research. I'm very, very lucky that I can speak with almost anybody in the world about any of these topics. But in terms of books, they come in different types. There are history books, and there's perspective.
Henry Kissinger's books are great. There are a number of Kissinger's books, there are economic-history books, and so on. I also go back to the original newspapers and data. I'm very fortunate in that I've got a great research team to do that kind of examination.
What about Kissinger's works do you find so interesting?
Henry Kissinger is a man who both understands history in depth, because you could just read his books and you know it. He's a very clear thinker, and he puts himself in the positions. He's not ideological as much as he's empathetic. So he describes the characters and he sees the world as it is, without an ideological overlay on it.
Let's say, for example, in the United States now, there will be the human-rights issue related to China, and for the Biden administration that will be a big issue. In China, that's a sovereignty issue. In other words, for the Chinese, they would say, and he would understand, that since the treaty of Westphalia, after the Thirty Years' War, there was a definition of what a country is and the sovereignty of a country.
And so there's a history and what, who controls what goes on in each other's borders. And so he would describe the Chinese perspective as being a sovereignty issue. We don't meddle in your business, you don't meddle in our internal business. And he would understand that, therefore, let's say the Biden administration and the Chinese have different views of how that should be done in a non-judgmental way and a non-ideological way.
And he's a practitioner. He himself has sat in those shoes for all of those years. He's not being theoretical. He's not one of those studies of history. He actually had to be in the middle of it. And he had, since he was a professor and got into those positions, known the people and heard what it's like to be in their shoes. And so you don't get a person who really knows history, and really has lived history as a practical decision maker and is clear and articulate, you don't get many of those.
Dalio's views on the asset bubble and stakeholder capitalism
Economists I've talked to about inequality have said the US needs a sort of "New New Deal," where we go back to FDR-era policies, where there's massive investment. What's your take?
My take on the idea is that's a good path. I'm in favor of any path which works to raise productivity. I think we do need a restructuring of some form, and that can be done on a bipartisan basis.
If you take the 1930s, and you take Roosevelt and that period, and you look at what happened to different countries, the US path ended up being like the British path, one that had revolutionary changes, radical changes in tax rates, radical changes in so many different things — outlawing gold, devaluing the dollar, doing all sorts of radical changes — and not having a revolution related to that. We then went into a war.
Now, if you look at what happened in the 1930s for democracies, that was the good story, the United States story and the British story was the good story. But on the other hand, four democracies chose their parliaments to become autocratic governments, because things got out of control. That's Germany, Italy, Japan, and Spain.
So when we look at the United States' position now, the real question is, can this restructuring of some form be done in a way that's productive and satisfies most of the people? Again, I don't really care what way we do it, just as long as we do it together. And we do it productively.
Switching gears a bit, you've said that easy lending conditions have inflated asset prices and thrown off the distribution of wealth. How do you see that playing out? What is the end game?
Well again, history and mechanics are the things that I turn to to describe it.
There's real wealth, and there's financial wealth. What I mean by real wealth is the things you buy. You might buy a house, you might buy a car, or you might buy a video-streaming service. That's the real stuff you buy. Then there's financial wealth, which is you own your stocks and bonds and those types of things, which one believes that you can sell in order to get cash to buy the things you want to buy.
Throughout history, there's been a cycle of producing a lot of financial wealth relative to real wealth. It can be measured, for example, in the total value of financial assets relative to production — GDP, for example. And that's what really largely constitutes a bubble. Give people money and debt. But there's a problem with that, which means, if those people really want to turn it in and spend it, they won't be able to, because the claims are much greater than the stuff to buy.
Through history you see that happen. What's happening is there's a production of a lot of — we have to send out checks to people. I don't argue that you need to send out checks to people, because you'll have a revolution if you don't send out the checks to people, and also their conditions could be intolerable, and you have a temporary situation, you have to send out the checks.
But what we have is a chronic situation now that will go on way beyond that. And we will have to send out the checks, the government will. So when the government sends out the checks, where do they get the money from? They could either get the money from taxing it and taking it away from some people, and they will, or they can print the money and buy it, and they will, and they will do those two things.
What we saw on — I think it was on April 8 of this last year — was the same thing as we've seen repeatedly happen before in terms of creating a lot of debt. Like in the TARP program and the Fed did monetization in 2008; or Mario Draghi did it in 2011 and 2012; or if you go back to August 15, 1971, when Nixon did it; or you go back to March 15, 1933; all of those were to create a lot of debt, buy a lot of money, and buy financial assets. So that is what you're seeing, you're seeing the reflation — like, "I don't want to hold the debt."
Debt is a promise to receive currency that somebody's going to print, that they have the power to print. And so it gives a very low interest rate, a negative 1% real interest rate, a little about a 1% nominal interest rate in the United States, and less in Europe, and less in Japan.
That means it takes a hundred years or so to get back what you gave. In other words, imagine that trade. I'm going to have a hundred dollars of buying power. I'm going to give it to you. And how many years will it take for me to get that money back to break even? Well, it depends on the country, but I might have to wait 75 years to get my buying power back. So what we have is a situation in which there's a tremendous number of claims on goods and services that people, if they sold, they can't sell to actually get that. That's a problem, in terms of these cycles. And you have that. Those returns are going to be, you know, kind of low returns.
How did low returns end up being high returns? In other words, how did you get stocks and bonds to have high returns while you had such low returns like in bonds? The way you did it is to put more money and to lower the interest rate or the expected return. In other words, when you buy things, that means it bids up the price, but it lowers the future expected returns. That's the dynamic that is going on now. And it went on in history. History has shown that when that money goes to go get goods and services, it's a problem. And that's where we are in the cycle.
There's been a movement over the past 50 years from Milton Friedman's shareholder primacy, where the purpose of a corporation is to serve its shareholders, to stakeholder capitalism, where the purpose is to serve all communities. Do you subscribe to the idea of stakeholder capitalism?
I think it's confusing for people who are sitting in that situation of what does that mean and how do they enable it? There's a lot of wiggle room; there are not clear rules and laws. You say, "I'm going to be a stakeholder capitalist." What does that mean?
In Europe that might mean something different. It might mean that the labor-union representatives have seats on the board. That's how they do it. Now, whether those are pros or cons, that's a different question. But there is actual engineering of how that comes about and so on. I'm confident right now that we haven't engineered that kind of thing.
We say, "Oh, we should," but what does that actually mean in terms of actual behaviors and so on?
Basically, we have a choice. It's either you're on one side or you're on the other. And you're in a war, or you find a way to be productive and harmonious together. And so whatever's going to get us to be productive and harmonious is going to be better than that war. And still major changes are going to have to be made. Otherwise we're going to have a problem of not only productivity, but we're going to problem that being at each other's throats.
Was there anything you wanted to add?
I'll conclude with the following. I mentioned that there are three big forces, in addition to the virus, and then of course there are other things like global warming and so on, but the three main forces are: The first is the money credit, financial and economic force, printing money, and financing it back.
The second one is this polarity in wealth, opportunity, values, and politics. And the third is the rising of China, a great power, to challenge the United States in that competition, which historically has shown to be a problem.
When you have all three together, it's an especially risky situation. I'm not trying to scare people. I'm not trying to deal with histrionics. I'm just trying to make them aware of history and how it works, and get them to look that way, so that they can understand where we are and hopefully then make the choice of whether we're going to want to fight about it, or whether we're going to find a way to work together in order to find a well-engineered solution.
SEE ALSO: World Economic Forum chief Klaus Schwab: What Biden means for capitalism, how the pandemic has changed the CEO job, and what the workforce of the future will look like
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