Podcast: No Empire lasts forever: How China’s rise could trigger a new world order

TRANSCRIPT: No Empire lasts forever: How China’s rise could trigger a new world order

Ray Dalio:

I'm 72-years old and the America that I remember and grew up with is a different America than it exists today in terms of equal opportunity and the American dream.

Ian Bremmer:

Hello and welcome to the GZERO World Podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremmer, and today we examine whether a new world order is in sight. After 40 years of extraordinary growth, China is on a path to overtake the United States and become the world's largest economy. Though COVID has made predicting exactly when that happens more difficult, current economic indicators point to sometime around the year 2030, real soon. But does China's rise have to mean America's decline? My guest today says, "No empire lasts forever," and warns that, "America's role as a global superpower is at risk if it can't get its own house in order." I'm speaking with Ray Dalio, he's founder of the world's largest hedge fund, Bridgewater Associates and author of the new book Principles for Dealing With the Changing World Order. Let's get to it.

Announcer:

The GZERO World Podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company, understands the value of service, safety and stability in today's uncertain world. Visit firstrepublic.com to learn more. GZERO World would also like to share a message from our friends at Foreign Policy. How can sports change the world for the better? On The Long Game, a co-production of Foreign Policy and Doha Debates, hear stories of courage and conviction both on and off the field, directly from athletes themselves. Ibtihaj Muhammad, Olympic medalist and global change agent, hosts The Long Game, hear new episodes every week on Apple, Spotify, or wherever you get your podcasts.

Ian Bremmer:

Ray Dalio, he's founder of Bridgewater and also author of the latest Principles for Dealing With a Changing World Order. Ray, very good to see you.

Ray Dalio:

Good to see you, Ian.

Ian Bremmer:

This was a big book, not a surprise. And you are looking at the state of the planet and some significant changes that put all together, most of us have not seen in our lifetimes. I want to get through all three of them before we get into detail. Let's start with number one, increasing and, you think, increasingly unsustainable levels of debt.

Ray Dalio:

Yeah, the three things that together got me to do this research of the patterns of the last 500 years, so I can understand it, were the enormous levels of debt creation and debt monetization when you hit zero interest rates and you can't ease through lowering interest rates. So, I needed to study the rises and declines of the value of money and currencies in the cycles. The second was the internal conflict, the risk to democracy. The measures that I used showed that the largest wealth gaps and political gaps since 1900, and that internal conflict. The third is the rise of a great power to challenge the existing great power and the existing world order, the rise of China, and challenging that.

I learned before that many things that surprised me a lot in my life happened not in my lifetime, but before. So I needed to see those cycles and those patterns going back to about 500. The first one, as you're pointing out, the large production of debt and debt monetization is an area that I specialize in, in terms of understanding as a global macro investor, and that produces what we're seeing in a mechanical way, which means that the value of money goes down. In other words, you could look at it very simply that if the quantity of money and credit, which is buying power, increases faster than the quantity of goods and services and financial assets, that the prices of goods, services and financial assets will rise, the value of money will go down. We see that happening now. We're in the part of the cycle for that, in which everybody received a lot of checks and all that money coming in and people's paper net worth then went up, because you got more money, and we're not used to inflation.

But what is happening is then you're in that part of the cycle, where there's that inflation pressure in goods, services and financial assets. What that has to do is then cause reactions. Those reactions are along the lines like people no longer will want to hold cash investments, they will not want to hold bond investments, because those will start to have a negative real return. As that inflation psychology and that investment psychology changes, it changes the movement of money. So, it worsens the supply-demand picture for money.

So, you see, you are seeing the beginning of a supply-demand imbalance. Think of it this way. There's a certain amount of bonds, debt, that has to be sold. The government produces a lot of debt, it's got to be sold. Therefore, who are the buyers of that? And do they want more of it? When it has a negative real return and so many people are holding, particularly international investors, are holding large quantities of it, not only do you have to sell the new debt being produced, but you have to sell... There can be selling of the debt that's owned and that puts the Federal Reserve in a position that they have to print more money. And that's where we are in this cycle and we've seen that cycle happen repeatedly.

Ian Bremmer:

So, do you think we've passed the tipping point? Do you think that the role of the dollar as global reserve currency is long-term fundamentally unsustainable because of debt that's already been taken on?

Ray Dalio:

The role of the dollar as a store hold of wealth, there's two purposes, currency, a medium of exchange and a store hold of wealth. Because of the imbalances and the supply demand that is baked in as we now need it and also take the political issues and the types of spending that are being demanded, required, I might say, that means that that imbalance will exist. So, you are, I think, for the foreseeable future, that it will not be an effective store hold of wealth as it is now not an effective store hold of wealth. That drives not just to other currencies, there are other currencies, but other countries are in this type of position, too, to some extent.

So, you see Europe and Japan, which have the three old currencies and so on, in somewhat similar positions. So, you see the poor store hold of wealth being reflected in other items going up, because you measure them in dollars, but it's really the currency is going down. So, we've entered a period of time in which the question will be, what will be the money of the future? What will be the monies of the future? Increasingly, there will be a competition of monies as a store hold of wealth. There'll be competitions for store holds of wealth. Now, that could be your real estate, it could be your stocks, it could be your gold, it could be your Bitcoin, those are the choices. But those assets as a whole will be, you'll see the movement into those, you will, in other currencies, such as China's renminbi, you will see gradually an increase in the usage of those currencies at the same time. But don't just look at it as other currency. Look at it as other store holds of wealth.

Ian Bremmer:

You would argue that some of the explosion of excitement over Bitcoin and cryptocurrencies is just this general desire to move away, to diversify away from the dollar for the reasons you mentioned.

Ray Dalio:

That's right. Because a dollar, a cash, and a bond, which is a promise to receive dollars, are being depreciated. That's right. So, you'll see those as digital gold. You will see other currencies, you'll see probably China's renminbi, which will increasingly be, they'll have a digital renminbi, and there'll be choices. Then there are all sorts of choices.

Ian Bremmer:

Let's move to the second point, that's just the significant and structural divides that we're increasingly seeing inside of democracies and, of course, mostly in the world's most powerful democracy, the United States. Talk about why this is one of the factors that you consider such a big driver for a change in global order.

Ray Dalio:

Well, it started with the populism that became more apparent when Donald Trump first came in. Populism didn't exist much in a developed world and didn't exist in the US, and I needed to study it. Populism of the left and populism of the right. What I meant is, or what I mean by populism is the person of the left or the right, the leader, who will fight for that group in a fight against the other group.

History has shown that populism of the populists of the left and populists of the right then begin to gain power under this set of circumstances, when there's a large wealth gap, and there's the financial part. So, it became very relevant to me, because it changed how the wealth pie was being shifted. For example, when Donald Trump came in, tax changes had a big impact on financial markets and, as a result, you could see it reverberate, and you could also see what was happening between states start to change.

So, I needed to study that conflict and I plotted both the wealth gaps, the income gaps, and I plotted the political gaps. All of those were the greatest since the 1930 to '45 period. In fact, greater than that period, going back to 1900, and we could see it every day, and I needed to see those patterns. What was happening on January 6th was not a surprise, in that, readers of history would see this pattern happen. As we look forward, we can see that threat to democracy and the inclination to have a type of civil war occurring. For example, it's entirely possible that neither party will accept losing on the presidential elections in-

Ian Bremmer:

In '24.

Ray Dalio:

... '24. So, that's amazing, right? Because then you lose rule of law, you lose the constitution as being, you move to a phase where there is power, that it is a matter of power and a matter of fighting to win at all costs. That dynamic is very much related to the financial dynamic. The financial dynamic needs to satisfy the political dynamic. So, they worked together, so I needed to understand it, which is why I did these studies, and I saw it happen over and over again over the last 500 years in these-

Ian Bremmer:

In history. Ray, when you look at the last two years of pandemic and the fact that labor rates, wages have gone up significantly as a response, people talk about the Great Resignation, there's been a significant amount of money that's gone towards redistribution and the rest. Would you say, I mean, I understand that that undermines your first issue of indebtedness, but on the second point, do you think this is just a blip or does it have the potential to be a more structural change that could actually improve the levels of inequality and disenfranchisement that you're describing?

Ray Dalio:

No, they go together. That's right. In other words, I do believe that the opportunity gaps, the education gaps, it's part of this cycle. Capitalism in its cycles creates great resource allocation, empowers people who don't have money, they get the money as they're good investments and so on, and it raises incomes, raises living standards, and it raises wealth gaps. When it raises the wealth gap, because it's self-perpetuating, because people who earn the money, earn more money, can educate their children better and so on, and there are education gaps and so on. Naturally, those gaps widen and occur and they are a problem. So, I understand those problems. I can see those problems. So, the need to build infrastructure, the need to build better education and greater equality in education has to, by the way, also accompany greater productivity if you want to raise living standards.

Ian Bremmer:

Now, we'll get to the most challenging piece of all of this in some ways, which is the fact that this is not happening in a bubble. It's happening while another country is on track with a very different political system, a very different economic system, and going to, in all likelihood, be the largest economy in the world by the end of the decade. Of course, you and I are talking about China. How does suddenly the fact that China is a piece of this changing global order change your overall analysis?

Ray Dalio:

As I say, I view these three things, plus two others, which we maybe have time for, as being all interrelated. So, think of when there's a rising power challenging in his existing power, there are competitions, a big competitor in the world, and we call those competitions are wars. There are five types of them. There is a trade war, a technology war, a geopolitical influence war, a capital war, and could be a military war, certainly preparations for a military competition. There are certainly those things. That's the power of a country, those are the measures of the power, how competitive, how strong-

Ian Bremmer:

They are on those different axes, yes.

Ray Dalio:

That's right. So, it's economic. So, we see it in the trade war, we see it in the technology war, we see it in the capital war, how money flows from one place to another, or are there sanctions? And the like. They're seeing it in the geopolitical influence, because money and influence go together. So, that dynamic is happening and we have to understand it. The real concerns that I have about that is the lack of understanding of that. There's more like internally, there's not really much of a willingness on either of the sides. Maybe we're beyond understandings, we're maybe beyond the point. Like domestically, are we beyond the point, domestically, of being able to understand eachother, these two political sides, and not fight? Are we so hellbent on fighting that we're going to fight? So, that's the question both domestically and in dealing externally with that power.

Ian Bremmer:

Are you someone who, looking at a medium- to long-term projection would be betting, I mean, all of the things equal, let's leave aside that you're an American citizen, all the rest, just as a capitalist, would you be betting more on the Chinese system than the American system or even the Western system writ large long-term at this point?

Ray Dalio:

Well, I can say the following, it's not so simple. I think if the United States was at its best, it's a hell of a system, but they've got us outnumbered. There are four times, more than four times as many Chinese as there are Americans. That means if per capita income goes to half what it is in the United States, China will be twice as large. And China's growing at a faster rate than the United States is. So, most of those things say what you have is a big effective competitor. I started to go to China, I know China very well since 1984, I started to go. When I first went there, I would bring $10 calculators to people and they never saw anything like that. Leaders of companies and government officials, and they thought they were miracle devices. Now, in quantum computing and AI and so on, they're competitors.

Since I started going there, per capita income has increased by 26 times. The life expectancy has increased by 10 years. The poverty rate has gone from 88% to less than 1%. It's certainly a powerful competitor. In that regard, and it's a bigger country, and bigger means more powerful, too. So, that's a tough competitor. I don't know that we, the United States, is doing its best in terms of being an effective competitor in its various ways. In many ways, yes. But in many ways, no, because we're also at each other's throats and we have these financial issues. So, at the end of the day, it will be just simply a matter of who is most powerful. Most powerful will really be primarily determined on how we are with ourselves.

Ian Bremmer:

If labor is no longer as important going forward, and increasingly we're looking at technology, that would imply that whether you have 1.4 billion or 400 million, the big thing that both the Americans and the Chinese have going for them is that they dominate all the technologies and nobody else does.

Ray Dalio:

That's right. But when you look at it, the Chinese are turning about eight times as many engineers out as we are in the United States. The population is bigger. It's certainly a competitor, and we certainly have to do everything we can to be strong. That's why, when I think about it, I'm 72-years old and the America that I remember and grew up with is a different America than it exists today in terms of equal opportunity and the American dream, and us working, in a sense, together and doing amazing things like the space program and so on, those types of things. I'm not saying we're not doing terrific things. But it's more in pockets. So, we see the technology, some of the technologies, or the best American universities are the best universities in the world, and there's a handful of those. But if you take the population as a whole and you look at the educational levels and those types of things, we have the problems we're talking about.

Ian Bremmer:

When you see the politics out there, the level of the increase in nationalism, the increase in polarization and the difficulty that you and I have both seen in every political corner that we want to make sure that we're speaking patriotically. That, I think, is a growing challenge that people need to be aware what the consequences of that are going to be, not only for themselves but for the global economy.

Ray Dalio:

Yeah. The two other things that I saw in studying the history, which were interesting, powerful forces, and I didn't really pay enough attention to them, was the impact of acts of nature, that's number four in the list, and the impact of inventiveness and technology. What I saw, and you can see it there, is that acts of nature, which come along once in a hundred years, which are like pandemics, droughts, and floods, these are the main causes, have actually killed more people, caused more empires to fall, and so on, than the things we've just mentioned. I didn't really see that, and as we're now in an environment where global warming, and so on, is changing that picture, that's made me more attuned to it. The once-in-a-hundred-year storm or the once-in-a-hundred-year pandemic, that they -

Ian Bremmer:

We now see constantly.

Ray Dalio:

We see. Then, the fifth was, and which is a really good one and is the most powerful one, is the inventiveness of man, mankind. You see these charts and you see depressions and wars and all this in the charts, and they're really shocking. Then when you look at the whole chart of measures of wellbeing, something like a life expectancy, per capita GDP, measures of that, and you see that plotted, you barely see all of these other things we're talking about have a... They're blips on the chart. That's because they last for three, five, 10 years, something like that. They're bad for three, five, 10 years, and they're big deals.

I think that's a reason for optimism. Another reason for optimism, if we can tap these things, is that the amount of resources that we have are greater than we've ever had before. The amount of wealth, real wealth, is greater than we've ever had before. So, the capacity of man, if man can work together rather than fight and rise above it, and is fearful of the things we're talking about, then there's a greater chance that we can have a better outcome. I have a principle, if you worry, you don't have to worry. And if you don't worry, you need to worry.

Ian Bremmer:

Or maybe at least the rope we're hanging ourselves with in debt, we have a little bit more rope than we thought.

Ray Dalio:

Well, I think if we take each one of those things and we think about, are they real worries or not? And I think we agree they are, and then we say, what do we do about it? What we do about it, I think, really means let's not damage ourselves, hurt each other so much. Let's try to work together like bipartisan. I mean, one of the dynamics you see is that the polarity becomes greater and greater, and those in the middle are forced to choose, because you have to fight, pick a side and fight for it. Those in the middle historically get hung, guillotined, imprisoned, shot and so on.

Ian Bremmer:

This is very bad news for me, Ray. I hate to say that.

Ray Dalio:

Me, too.

Ian Bremmer:

But leaving that aside, the book is Principles for Dealing with the Changing World Order. The Man is Ray Dalio, and I want to thank you for joining me on GZERO World.

Ray Dalio:

Thank you, Ian.

Ian Bremmer:

That's it for today's edition of the GZERO World podcast, like what you've heard? Come check us out gzeromedia.com and sign up for our newsletter Signal.

Announcer:

The GZERO World podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company understands the value of service, safety and stability in today's uncertain world. Visit firstrepublic.com to learn more. GZERO World would also like to share a message from our friends at Foreign Policy. How can sports change the world for the better? On The Long Game, a co-production of Foreign Policy and Doha Debates, hear stories of courage and conviction both on and off the field, directly from athletes themselves. Ibtihaj Muhammad, Olympic medalist and global change agent, hosts The Long Game, hear new episodes every week on Apple, Spotify, or wherever you get your podcasts.

Subscribe to the GZERO World Podcast on Apple Podcasts, Spotify, Stitcher, or your preferred podcast platform to receive new episodes as soon as they're published.