Excerpts of the interview with the co-chairman of Bridgewater Associates (the world's largest hedge fund), Ray Dalio have been edited for brevity and clarity.
Q: How do you view the coronavirus pandemic from a historical
perspective?
A: The
virus triggered a surprise economic downturn, but a downturn would have
inevitably come for some reason because they always do, and there was great
vulnerability before the virus. Central banks had run out of power to continue
the normal debt cycle in countries with a lot of debt and enormous wealth
gaps.
This period is most similar to between 1930 and 1945. Like then, central banks and governments are desperately trying to fill the income and balance sheet holes with newly created money. Individuals, companies and countries that don't have much savings are going bankrupt. For basically the same reasons as existed in the 1930-45 period, this will change the global geopolitical balance of power and the world order.
This period is most similar to between 1930 and 1945. Like then, central banks and governments are desperately trying to fill the income and balance sheet holes with newly created money. Individuals, companies and countries that don't have much savings are going bankrupt. For basically the same reasons as existed in the 1930-45 period, this will change the global geopolitical balance of power and the world order.
There
will be clashes over wealth and power. Within countries, there will be more
questioning of the merits of capitalism versus socialism. Between countries --
especially between the U.S. and China -- we will see more conflict over wealth
and power.
Q: How will the U.S. fare from this shift in global power?
A: In
the short run, the U.S. has the great power of being able to create the
world's currency -- dollars, which are desperately needed. When there is great
demand for the currency because of the large amount of dollar-denominated debts
that needs to be serviced, that gives the U.S. great power, as is the case
now.
Once
these debts are wiped out through defaults or the printing of dollars in a few
years, then we will see the fall in the value of the dollar as a reserve
currency. That would greatly weaken U.S. economic power. History has shown
that all empires rise and decline with their debts and their currencies. This
is very similar to the experience of the British and Dutch empires and their
reserve currencies.
Q: After the U.S. declines as an empire, do you think China will be the
next empire and the yuan will become the world reserve currency?
A:
Yes, but this is happening in an evolutionary rather than a revolutionary way.
While China will likely be the most important world economy in not too many
years, the U.S. will likely be a rival power for quite some time. How the U.S.
and China deal with that rivalry will be hugely important for the world.
As
for a reserve currency, that will evolve slowly because reserve currencies have
significant lag times in their powers. And in order to have a world reserve
currency, one has to have open capital markets. China will evolve into being
more important over the next 10 years or so.
Q: How have you stress-tested your investment strategy over the events
of the recent past?
A: I
have found that everything happens over and over again, and that reality works
like a machine driven by understandable cause-effect relationships. What is
happening now has happened many times before for essentially the same reasons,
though never exactly.
For
that reason, we have timeless and universal investment principles that we have
tested going back to 1800. That doesn't mean we catch everything, because we
don't. We didn't catch the pandemic's impact, but we have caught most big
things.
Q: Do
these stress tests include historical events like the Spanish flu pandemic?
A: I
missed the Spanish flu pandemic because it happened in 1918 at the same time as
a sharp fall in economic activity right at the end of World War I. I mistakenly
assumed that downturn was exclusively a postwar adjustment. Until I saw this
coronavirus pandemic, I hadn't seen the economic impact of a pandemic
happening. I'm kicking myself for missing that.
Q:
Could this coronavirus be an event that you will use to observe the economy and
markets in the future?
A:
Yes. We're going back and building various acts of nature and climate change
into our decision-making system including pandemics, droughts and floods.
I've
found the importance of acts of nature in breaking economic and political
systems. They have been the cause of many stresses and many mighty crises. If
you have an over-indebted economy, large wealth gaps and an act of nature --
those three things are a most devastating combination.
Q: If
there wasn't so much debt before the pandemic, would the economy have suffered
lighter damage?
A:
Much lighter. If you look at what differentiates countries and people and
companies, it almost entirely depends on how much savings they have versus how
much debt they have. Those with strong balance sheets will be the winners.
Those with savings will win, and those with debt will be the most hurt.
Q:
What do you think of the economic stimulus efforts in response to the pandemic?
Are they sufficient?
A:
Governments have done a lot to create money and credit, which were needed and
will have their own problems. Governments and central banks will need to do
more to create the money and credit to fill holes in balance sheets and income
statements. At the same time, that will diminish the value of money and debt
assets.
Q: Do
they need to do more?
A:
There are different circumstances. Emerging markets with poor balance sheets
that cannot print the hard money will experience credit problems and inflation
because they will print local currencies. They will need enormous financial
help, or they will collapse. Everyone needs strong balance sheets and reserve
currencies to survive this, because that's what is widely accepted.
Q: Do
you expect the world order will be transformed after the pandemic subsides?
What will happen to capitalism?
A: I
believe we will see a changed world order. We will go through a period of
fighting over the merits of capitalism and socialism, and there will be a
significant redistribution of wealth. I worry that this will be similar to what
happened in the 1930s, with modern-day versions of communism and fascism.
The
struggle to restructure the world order will last probably about five years.
Then the winners and losers in the new system will be clearer, and we will move
in a more orderly way. Still, these restructurings are temporary adjustments.
The big picture is that human adaptability and inventiveness are the greatest
force, so better times will follow this restructuring.
Q: Do
you think that new order will be something very beneficial to the U.S.?
A:
Both the absolute and relative position of the United States will depend on
whether it can take care of the fundamentals that make countries strong. In the
short term, there will be a big debt restructuring, but that will pass. In the
long run, the quality of education and civility of its people, inventiveness,
work ethic, respect for law and other such things will matter most.
Chances
are that living standards will rise, but more slowly than that of China's. What
happens depends largely on how the U.S. and China approach their disagreements.
If they approach them badly, both will suffer.
We
are seeing classic conflicts over wealth and power, both within countries and
between countries. History has shown us that the outcomes depend largely on
whether the parties involved handle them peacefully or violently.
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