In all trades there is a small group of people, who can be counted on the fingers of one hand, who have marked a before and after in the industry. In investment, without a doubt Ray Dalio is one of them. He has come to be known as the Steve Jobs of investment, and it is not for less: he founded in 1975 what has become the world’s largest hedge fund, Bridgewater Associates, and has popularized some of the practices of professionals of the industry that are most used today.
As an investor, among other things, Dalio is known for having used a macroeconomic approach with enormous success, for example, managing to anticipate the Great Financial Crisis in 2007.
As a writer and disseminator, Dalio has written several well-known books: the most famous, Principios, from 2005, which has been updated several times by the author. Now, Dalio presents his latest work: Principles to confront the New World Order: Why countries succeed and fail (Deusto), an essay in which the famous manager analyzes the rise and fall of the world’s leading countries, explaining geopolitical cycles that have occurred in recent centuries.
Based on the historical analysis of the great empires of the last 500 years, Dalio tries to explain the point at which we find ourselves at the moment, with the United States giving way to China, as a new contender for world leadership.
Why did you decide to write this book?
I did it as a study to understand how to navigate in the current conditions. I have turned it into a book because I considered the information I found so important that I wanted to share it with others. It was also suggested to me by some people, like Henry Kissinger.
Do you consider it the most important book you have ever written?
I consider it as important as Principles for Life and Work, but to this day I believe it is the most important book I have written, considering the circumstances. It explains how the world order is changing, dramatically, and how to deal with it. Three things are happening now that we have never faced in our lifetime, but have happened many times in the past: huge accumulations of debt and money, fighting between countries that threaten democracies, and fighting between great powers that They are going to change the world order.
At what point are we in each of these three factors?
Regarding the debt, we are on the verge of enormous stagflation, due to having accumulated a lot of debt and printed large amounts of money, which have devalued it and created this situation of stagflation. As for internal conflicts in the West, we are at a time when there is such a level of irreconcilable differences that they are threatening democracies and the rule of law as we know them. And about the world power conflict, we are at a point where we could see a world war.
“We are at the gates of a world war, on the edge of the ravine, but it does not mean that we have to fall for it”
I think we are on the edge of the ravine, and it is not an exaggeration to say it, which does not mean that it is our destiny to end up falling down it. Things can be done to back up and avoid the gully, and this is another reason I wrote the book. But I’ve also written it to prepare readers for the possibility of falling off the cliff, and to be able to best manage it.
Globalization has created shared interests, common risks for different countries. Could it be the difference with respect to the past that makes it possible to avoid a new world war?
It is true that if people focus on common interests, and how we are connected, they can work towards a better world. Many efforts have been made in this regard, but they are fading away. The UN, the World Trade Organization, the WHO… are some examples. But, at the same time, there are some differences that have to be fought against. Globalization has created many benefits, but it has also hurt some sectors, and has created large wealth gaps.
“In bad times, people fight more and there is a risk of autocracies”
These gaps are causing a rise in populism and nationalism similar to those of the 1930-1945 period. There is a rise in extremism and populism, and more fighting, more testing of power. We are in a transition from an order based on domination, to an order based on power, with different factions fighting over it. Leaders and the public may be able to focus on mutually beneficial relationships, but history reminds us that fighting for a cause is more compelling than compromising and obeying the law.
But there have been other periods of great polarization in the past. I think of 1968 in the United States, with the Vietnam War.
Economic stress and political polarization are even stronger now than they were at that time. Debt levels are higher, wealth gaps are higher, and the power gap between the United States and its biggest rival, China, is narrowing. The risk is greater and the fight too. That’s not to say that we won’t be able to improve things. It all depends on how we treat each other.
In your book you mention the importance of a country following long-term strategies and not focusing on the short term. Does this mean that Western democracies need to change, or are doomed, in the face of a system like China’s?
Throughout history, and I go back to Plato writing The Republic, it is true that democracies have worked better in good times. People start fighting over many issues when hard times come and democracies break down, giving rise to autocracies. This is what happened in the period 1930-1945. Spain knows this story very well, as it manifested itself in the events that led to the Civil War. Difficult times call for strong leadership. The question is: can democracies function well? That will depend on whether the masses are capable of solving their problems or not.
According to Ortega y Gasset, this is very complicated…
I am a practical man. I look at everything looking for cause-effect relationships, like a machine. And studying the current indicators and comparing them with those of 1930-1945, I can confidently say that the circumstances are similar. Throughout history it has been shown that the masses cannot work together in a cohesive and intelligent way during difficult periods, when there are large wealth gaps like the current ones.
Since the Financial Crisis we have seen dynamics such as low inflation, historical stimuli from central banks, and now they are changing. What will the ‘new normal’ be?
The most important thing is what has happened to money and credit. These things come and go. The central banks made borrowing free, and there was a huge increase in debt. One person’s debts are another’s assets, and central banks have created so much of both that they have made it very difficult to balance the scales.
“One person’s debts are another’s assets, and central banks have created so much of both that it’s hard to balance the scales.”
Central banks and investors now hold huge amounts of these debt assets, which will never offset inflation, and as a result, we are seeing a sell-off as governments borrow to finance their deficits. Central banks are selling, which is reducing people’s purchasing power at a time when inflation is reducing it. They want to control inflation by removing purchasing power, which, in periods of high inflation, is very painful.
People need to understand that when you have accumulated a lot of debt and a lot of financial assets at the same time, it is almost impossible to set an interest rate high enough to offset inflation without crushing the markets and the economy.
Do you think the dollar is going to lose ground against other assets, currencies, or even cryptocurrencies?
I think all fiat currencies are going to lose value, as they are now. This is encouraging for alternative currencies. A currency has two purposes: to be a medium of exchange and a way to protect wealth. Some of these currencies will probably hold up well as a medium of exchange, but the ones that are backed by governments will fail as stores of wealth. In the end, you want a currency to be accepted as a method of payment throughout the world, free from government control of supply and price, and safe from government tracking and scrutiny. prohibitions.
“I still think that gold is the best alternative to currencies”
I think gold meets these criteria better than most currencies, and I include cryptocurrencies, which can be easily monitored and banned by a government. And gold is also less vulnerable to cyber risks. In the end, I still think that gold is the better alternative.
China is 20% of the world economy but the yuan is only used in 2% of global transactions. Is it because of government intervention?
I believe that this data and the low levels of reserves of central banks in yuan are due to the fact that the Chinese government has never wanted to disrupt the monetary system by invoicing or lending in its currency. Having the world’s reserve currency is the greatest American power, and the only genuine American power. It allows for sanctions and gives the US exorbitant financial privileges to borrow and control global economic conditions. To threaten that is to threaten the US, and China has intentionally never wanted to threaten it. But now the circumstances are changing.
“China has never wanted to threaten the hegemony of the dollar, but that is changing”
I expect that we will see more and more yuan-denominated trade and more yuan lending. It is going to be a more important currency, but it remains true that it does not have most of the qualities that I have mentioned before for an attractive currency.
In his book he emphasizes the importance of monitoring what central banks do in order to invest. With the monetary policy tightening process kicking off, are there still years of pain left for the stock markets?
As always, the pendulum swings back and forth. The huge creation of debt and money has led to inflation, and the tightening will be bad for the stock market. As interest rates are going to continue to be ridiculous compared to inflation, I think money is going to move from debt assets to other assets, especially those that hedge against inflation. We are in a phase of stagflation similar to that of the 70s.
In his book he raises the idea that when empires grow, people get used to living better and in the end this ends up being a curse when bad times come. Do you think China is now such a strong competitor for working harder than the US?
Yes, it is true that this is part of the process. There are many factors that contribute to…
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