By Ray Dalio
Compiled by: Block unicorn
I gave an interview to the Financial Times. To ensure accuracy, I asked them to submit their questions in writing, and I responded in writing. However, they didn't publish our exchange and instead misrepresented my remarks. For the sake of accuracy, I'm providing the actual questions and answers here for everyone to read. In a world rife with toxic conflict and partisanship, I strive to be accurate. Distortion and sensationalism are a threat to everyone's well-being. Sometimes the media can be helpful, but sometimes they have their own agenda. For me, the choice was either to remain silent and play it safe, or to attempt to speak in an analytical, nonpartisan manner and risk being politicized. For me, the risk of not speaking out was greater. If you're curious about what I was asked and what I said, here's what I said.
Debt, Inflation, and the Federal Reserve
1. For years, you've warned about the United States' excessive debt burden. How do you see Trump's tax and spending promises impacting this trend? Is it more sensitive now than ever?
Yes. The worsening situation stems from years of overconsumption, much like chronic overeating, smoking, and so on. These cumulative effects have led to the current situation, and the overconsumption projected in the new budget is likely to trigger a debt-induced "economic heart attack" in the near future—I estimate three years, maybe a year or two sooner or later.
Let me explain.
The credit cycle, like the human circulatory system, delivers nutrients to every part of the body. If the income generated by credit and debt is sufficient to service the debt, then the system is functioning well and is healthy. However, if debt and debt-service payments grow faster than income, they accumulate like plaque, crowding out other spending. This can easily happen. The US government's debt-service payments currently amount to about $1 trillion in interest annually and are rising rapidly, while at the same time, about $9 trillion is needed to roll over the debt. This squeezes out other spending. The more severe this situation becomes, the closer the country is to a debt-induced economic heart attack. Furthermore, when existing debt is high and new debt created to finance deficit spending is high, the supply of debt to be sold far exceeds the demand. Next year, the federal government will spend about $7 trillion while revenues are only about $5 trillion. Therefore, in addition to the $1 trillion it must sell to cover interest payments and the $9 trillion needed to roll over the debt, it will have to sell about $2 trillion in debt. The situation could get worse as creditors sell debt assets when they worry they are no longer a good storehold of wealth. This is a classic sign of the Great Debt Cycle entering its traumatic final phase. At this stage, the central bank must decide whether to allow interest rates to rise and trigger a debt default crisis, or to print money and buy debt that others won't buy in an attempt to lower real interest rates, which will reduce the value of the currency. Another classic sign that the debt cycle is nearing its end is when the central bank prints and buys debt en masse, then suffers heavy losses on the debt assets it purchased, to the point where both the central bank and the central government need to borrow more. This leads the central bank to print more money to repay the massive debt. By all classic indicators, we are in the late stages of the debt cycle. If policymakers don't change their policies, debt repayment problems and debt supply and demand problems will emerge simultaneously, ultimately leading to a debt-induced "economic heart attack."
2. Trump has threatened to fire Federal Reserve Chairman Jay Powell and recently ousted Fed Governor Lisa Cook. How dangerous would it be if the Fed lost its independence amid soaring debt?
The long-standing tradition of central banks maintaining independence from central government political leaders stems from the widespread belief that politically motivated leaders are inclined to lower interest rates and ease credit, which is detrimental to creditors because it reduces the real interest rate for bondholders. This reduces the value of debt as a storehold of wealth, thereby reducing demand for it and causing problems. Since one person's debt is another person's asset, effective central banks must maintain real interest rates high enough to satisfy creditors but not so high as to harm debtors. If the Federal Reserve's independence were to decline to the point where investors perceive interest rates as being unnaturally low, rendering bonds a poor storehold of wealth, we would see an unhealthy decline in the value of currencies. Currently, international investors holding dollar-denominated bonds are reducing their holdings of US bonds and increasing their gold holdings due to geopolitical concerns. This dynamic is a typical symptom of a major cycle entering its late stages.
3. If a politically weakened Fed lets inflation “overheat,” what does that mean for bonds, the dollar, and the U.S. credit rating?
This would cause the value of bonds and the dollar to decline, which, if not corrected, would make them ineffective stores of wealth and lead to the collapse of the monetary order as we know it.
Trump's interventionism on business
4. Trump acquired a $10 billion stake in Intel at "zero cost," took a cut of Nvidia and AMD's China revenue, and imposed a golden stock system on U.S. Steel. Do you think these are early signs of state capitalism with American characteristics?
Yes. As is typical of big cycles, widening disparities in wealth and values lead to the rise of right-wing and left-wing populism, as well as irreconcilable contradictions between the two that cannot be resolved through democratic processes. During such periods, democracy weakens and authoritarian leadership increases, as large segments of the population expect government leaders to control the system to keep it running smoothly—for example, "keep the trains running on time." Furthermore, in a world characterized by major conflicts and even wars between nations, governments will increasingly control the operations of businesses. For example, whichever country wins the technological and economic wars will prevail in more significant geopolitical and even military wars. Consequently, governments are now increasingly controlling businesses and the economy. The phase of the big cycle we are in is most similar to the period from 1928 to 1938.
5. Some call it authoritarianism, others say it's akin to socialism. How would you describe Trump's economic model?
I'm hesitant to label it because labels can easily trigger an emotional response that can lead to adverse reactions. I'd rather explain the mechanics of what's happening in a less emotional way, and that's what I'm doing.
6. How have these interventions affected the United States’ reputation as the safest place in the world to invest capital?
No response
Market and global position
7. Will Trump’s actions undermine global confidence in U.S. Treasuries, the dollar, and the sustainability of U.S. debt?
Yes, but I wouldn’t attribute this solely to Trump’s actions. As I mentioned earlier, the dynamic I’m describing has been going on for a long time under presidents of both parties, though it has intensified since 2008 and accelerated since 2020.
8. Will this interventionism accelerate the transformation of the United States’ status as the world’s financial safe haven?
No response
Cryptocurrency and the US dollar
9. Do you think deregulation will threaten the dollar’s reserve currency status?
No, but I do think the distressed debt situation of the dollar and other reserve currency governments poses a threat to its attractiveness as a reserve currency and storehold of wealth, which is what is causing the price of gold and cryptocurrencies to rise.
10. Does stablecoin exposure to U.S. Treasuries pose a potential systemic risk?
I don't think so. However, I do think the decline in the real purchasing power of U.S. Treasuries is a real risk. If stablecoins are well-regulated, this shouldn't pose any systemic risk.
11. Can cryptocurrencies truly replace the US dollar, or do they pose entirely different risks?
Cryptocurrency is currently a supply-constrained alternative currency, so, all else being equal, if the supply of the US dollar increases and/or demand for it declines, this could make cryptocurrencies an attractive alternative. I believe that most fiat currencies, especially those with significant debt, will struggle to be effective stores of wealth and will depreciate relative to hard currencies. This happened between 1930 and 1940 and again between 1970 and 1980.
Elite Silence and Selective Outrage
12. When New York City mayoral candidate Zohran Mamdani proposed socialist ideas, CEOs and billionaires reacted strongly. Why do you think they remained silent while Trump undermined free enterprise?
I think the political and social situation right now is similar to what happened globally between 1930 and 1940, because just like in 1930 and 1940, the gaps in wealth, values, and policy views have become more extreme, and the willingness to compromise, accept defeat due to election results, and trust in the system has decreased. I think most people remain silent because they fear retaliation if they speak out.
13. Does the real threat to American capitalism come from the far left or from Trump’s interventionism?
The threats stem from the five forces that have always driven major cyclical changes. These are: 1) a severe debt cycle that could lead to serious debt problems, which would threaten the existing monetary order; 2) major political problems within countries, which would threaten the existing political order; 3) major geopolitical problems between countries, which would threaten the existing global geopolitical order; 4) major natural disasters such as droughts, floods, and epidemics (most importantly, climate change); and 5) the massive impact created by humans through new technologies, especially artificial intelligence. The interaction of these five forces will trigger massive and unimaginable changes over the next five years.
