"What's Coming Is WORSE Than A Recession" – Ray Dalio's Last WARNING

I've been a global macro investor for over 50 years and one of the things I learned is that some of the things that surprised me with the most were things that never happened in my lifetime but happened many times before. I learned that in 1971 when I was clerking on the floor of the New York Stock Exchange and the United States on August 15th, President Nixon got on the television and he told the rest of the world that the gold that the dollars are supposed to be converted into you won't get and there was a devaluation. I worked on the floor of the New York Stock Exchange and I thought it was going to go down a lot and it went up a lot and I found the same thing happened on March 1933 with Roosevelt doing the same thing and that taught me history repeats but not necessarily in our lifetime. So three things are happening in our lifetimes that never happened before and I saw that a few years ago and I started to need to do that study and those three things are the amount of creation of debt and the printing of money to monetize that debt which is having its effects on inflation, on the value of money, on many things. The second is the amount of internal conflict that we're having. The conflict over wealth and values, the great polarity that has gotten to the point of having irreconcilable differences and threatening our system and the third is the rise of a great power to challenge the existing great power and the existing world order in other words the rise of China. 1945 we created the existing world order that we're in and that is being challenged so that's what prompted me to study those things and in order to do that I had to study the last 500 years of history because these are big cycles. Thinking about the rise and decline of a reserve currency and its empires is a big cycle and it was eye-opening but I want to emphasize that the big cycle it helped me understand what's going on right now with the Ukraine war, with the economy and so on so that's why I did it. I would not have been able to anticipate the 2008 financial crisis if I didn't study the Great Depression. So this is true and this is one of the curses of our existence is that we haven't been through wars before. Our generation has not had experiences before things that happen regularly so experiences and painful experiences have taught me that I needed it. We're going into an environment with this large creation of debt and printing of money which is very much like going from the 1960s to the 1970s. You know what happens is people get used to an environment there's a paradigm and a paradigm is sort of a mindset and so if you look at it they often last about a decade. The 70s was an inflationary decade, the 80s was a disinflationary decade and they start off with surprises because the decades are more opposite than similar to the prior decades. So for example we're coming into the mechanics of you create a lot of money and debt and it's going to devalue it and it's produce inflation but there's not an inflation understanding. So there's a mentality for example that people think well what's safe is to keep my money in cash because it doesn't go up and down and it's safe and they haven't yet learned that it's not safe because you lose buying power and so if the inflation rate is seven percent and you have a zero return you just lost seven percent buying power. So by helping people to understand those things how the environments have changed and the cause-effect relationships and where we are in the middle of it has been very helpful. What makes a country healthy and successful? One of the things I did was use measurements so that you can measure these things and there's a cycle and the cycle starts off with the basics. Usually there's an order. An order means a new system that comes into place. 1945 there's a war the winners of the war get to determine the rules that war can be an external war it could be a civil war but then the new power comes in and there's a new system. New rulers and the basics start off with good quality civility with each other. Education. Education is a leading indicator of everything. If you put education and civility and working together and not having the conflict that period usually after the war is a period of peace and prosperity also because there's a dominant power nobody wants to fight the dominant power and it's also wars are great leveling devices they reduce wealth gaps they wipe out debts and so on and so there's a cycle of that kind of improvement but naturally as things improve and living standards arise wealth gaps widen and also debts increase and it's quite true for countries that have reserved currencies because they're allowed to borrow from the rest of the world because the rest of the world wants to save in that currency and so quite often that cycle produces a lot more debt and larger wealth gaps it also produces great inventiveness but it also enters a new generation who haven't been through war who might become maybe a little bit more decadent and not invest in infrastructure and education and the fundamentals that make things healthy and as a result you get larger wealth gaps and you get angry and you have more debt and so a classic set of ingredients is that level of indebtedness and then losing the fundamentals and of course what happens is other competitors rise so other countries after the war germany japan they recover china and other countries recover and they become viable competitors in that and so the power of that one dominant power ceases to be as dominant and then there become more conflicts so there are fundamentals the fundamentals are basically are you earning more than you're spending are you well educated and civil with each other are you productive are you competitive in the world and so you can go from country to country right now and almost assess that those countries which are earning more than they're spending that people are civil with each other and there's not internal order and there's not a risk of an external conflict are the ones that are best off the ukrainian situation is part of a greater story which is the world being bifurcated and not dominated by a single power and you can see how it's lining up you can see which countries by their actions are lining up which ways in this conflict the united states the nato countries as it pertains to the ukraine but not as it would pertain to asia and you could see china russia and you could see actions by india and so on who is acting in what ways so you're seeing this world polarity begin to line up and you're seeing questions we'll see this is like a test war many cases and most cases in war there's not a good understanding of how the actual war would take place so it's very interesting when there is an actual war to take place to learn things such as learning what the military power is and the possibility of escalating that war by russia if putin loses that war do they go to other escalated forms of conflict such as nuclear and also it's a test of american sanctions the greatest weapon the united states has the only really unique weapon anymore is the power of its economic sanctions so the world is getting to see will those sanctions work will they change the outcome for example what will be the economic consequences to russia of those will that be a 10 or 12 percent decrease in gdp which would mean not a very tolerable set of circumstances and so we're learning three things i think we're learning at the moment first will putin and russia win this war and i'll define win the war as being able to have control of the southeastern part of ukraine and gain territory number two the impact on russia is less than intolerable in other words it's tolerable number three that he remains in power if those things exist then he would have a win in other words the cost of it would have been worth it so there's that question the second question is what will this mean for sanctions the power of sanctions and also the cost of sanctions because we have a cost in the form of holders of dollar denominated assets in many countries are now nervous that they could be sanctioned you know will the chinese will the indians will the middle easterns who would might be sanctions and that's having an effect on capital so what we'll learn what will that effect be and then we will learn of how the sides line up and that is really a lot of learning for what the next episode is going to look like it's so interesting if you were to watch these things happen on world war ii you'd see almost identical in other words you would see that japan was sanctioned series of sanctions the oil was embargoed the assets were frozen and they were trapped in a sense economically and then they responded with pearl harbor and you could see always economic warfare intense like that cut them off is something that happens before there's a military conflict it's almost like it reads the same it's true that over time the world has become more interconnected it's interesting with the first world war i mean think about it if you go back a few hundred years it took a day in a day you could travel 25 miles today in a day you can be on the other side of the world there's instant communications so the first world war was the first world war and the second world war brought us together and it was the second world war and so then we are all connected and that brings us in that position history has shown interestingly that connections did not minimize the chances of in fact for example in world war ii in order to minimize the chances of wars which was then run by royalties they intermarried and there was nothing closer than to be intermarried and yet they went into world war ii and so on so i think the connectivity and it also brings up other issues like literally cyber connectivity and so on and it creates a dynamic it means that there are less safe places in this world war so it makes it i think very important that we don't get into a war today how we are with each other is scaringly different and it's measured in the statistics and the charts that are shown in my book there is the greatest political polarity since 1900 and there's a real question of whether in the next election either side will accept losing there is a question about the acceptance of the rules there is a moving to different states not just for tax reasons but for values differences great great great differences and there's much more fighting between the rich and the poor and there are great differences greater differences it becomes always more and more intense until there is a war we are in the early stages of a type of civil war you know that's what goes on and of course once you cross a line then there's a fight when the causes that people are behind are more important to them than the system the system is in jeopardy and that's what we have an economy is not a complicated thing it just has a lot of moving parts but the basic is there's a transaction and that transaction means somebody makes a purchase they make a purchase of a good a service or a financial assets that purchase can be made with money or credit if money when you make a purchase with money you end the transaction you don't know anything when you make it with credit then there's a liability you have to come up with the money because a credit that debt is an obligation to deliver money so there's a basic transaction there's spending in other words the total amount of money and credit spent on a good or service and then there's the item that you're buying a stock a bond a car a bushel of wheat there's that transaction demand is best measured in terms of spending you know I think in traditional economics it's a mistake to measure it in terms of the quantity of goods what is given up in a purchase is money or credit what we go through is we go through a cycle we go through a credit cycle credit can be created it's not created through the velocity as is commonly believed it can be created out of thin air if I go into a store you know or I have somebody paint my house and I say I'm going to pay you later I've created credit that'll count in GDP it'll be an item of production so what we have is a credit cycle if there's not much debt if you don't have much debt then you have the ability to borrow money let's say you earn a hundred thousand dollars a year and you don't have any debt you can then borrow $10,000 a year you therefore can spend $110,000 you're spending of $110,000 is somebody else's income of $110,000 so it has a positive effect and you go through a cycle and through that cycle you spend $110,000 they earn $110,000 and the cycle becomes self-reinforcing through that cycle debt rises faster than income debt rises faster than income. Debt can't rise faster than income forever. So as debt rises faster than income, you have a debt cycle. What causes it to stop? Well, traditionally as you lower interest rates, it creates, debt has three positive effects. If interest rates are too high, then you lower interest rates. Lowering interest rates has the effect of making it easier to service the debt. It has the effect of making items cheaper to buy on credit because the monthly payments are less. It has a present value effect on assets. So if you lower interest rates and you have something that has a cash flow, let's say a piece of real estate or something, they have a present value effect that causes those assets to go up. That produces wealth and that allows more borrowing. And so when you get to a situation where you can't lower interest rates anymore, let's say you hit zero, that part of the cycle ends. So then you go to a deleveraging. Deleveraging means that you can't raise debt relative to income anymore. When you can't raise debt relative to income anymore, the cycle begins to work in reverse. I think the people, if they don't do a very good job of calculating incrementally what the effects are on demand, but let's say you're having debt growth at something like 10% and you go to a 5% debt growth instead. That has a negative effect on growth. It's the marginal change from that level produces a negative effect on growth. So traditionally in deleveraging, that negative effect that happens on, for let's say Europe is a very classic case. The Spanish banking system is a very classic case. The European banking system. As the banks leverage up at a certain rate and they can't leverage up more than that rate and they lessen the rate at which they're leveraging it up, it has the effect of beginning a deleveraging. Deleveraging means then the income, the spending all produces sort of a negative cycle. That produces the beginning of a depression. A depression is the phase of a deleveraging in which there's a combination of austerity and debt restructuring. Because if you have, it's a basic thing, if you have too much debt to service, you've got to do something about it. And when you have too much debt to service and you do something about it, there are a limited number of things that you can do. You can either transfer the debt, but you can transfer resources from the rich to the poor. So you can have it transferred from example, from Germany to Spain. That's one way of dealing with it. The other way is to, you have a combination of austerity and debt restructuring. A debt restructuring means that you lower the debt in one fashion or another. You lower the debt burden to something that you can afford to service because of the income that you produce. Restructurings can take one of three ways. You can actually write down the debt. You write down the debt, let's say write it down in half, because you could service half. If you service half, but the problem is one man's debts are another man's assets. So when you write it down in half, you have a big negative wealth effect. So you have a negative wealth effect. You can't borrow money. It has that problem. So a restructuring becomes a problem. You could restructure it either in the form of writing it down or in one way or another, you can lengthen the payments or you can forcibly lower the interest rate. But some way or another, you've got to get the payments in line for what the cash flows are producing so that you can service that kind of a debt. That's a very painful process. So a depression is the phase of the deleveraging when there's a combination of austerity and writing down debts. So classic depression, 1930 to 1932, March of 1933, we print money. Or the third way that you can deal with it is you can print money. Essentially what we call print money. The printing of money means that essentially a central bank, debt is a commitment to deliver money. So if a central bank slips into the system, a certain amount of money each year, it can make that easier. Think about the debt write down that something maybe is a debt and you say, I'm going to write it down to a level that could be sustainable. And you write it down by 50%. That has a big negative wealth effect. Big deal. Bad. If it's 10 year debt, maybe that's equivalent to 5% a year for 10 years. If you slip in 5% a year instead to that person who then can pay that debt, they can service the debt. It's 5% a year. It's not that big a deal. And so in all deleveragings, in the end they print money. It's part of the mix. Now the best deleveragings are ones in which you have a balance of those things. Ultimately you have to bring down the debt to income ratio. Ultimately you'll have a balance of those three things. Those three things again, you're going to have a certain amount of transfer of wealth. You're going to have a certain amount, let's call them four things, a certain amount of austerity, a certain amount of debt writes downs, and a certain amount of printing of money. The debt write downs and the austerity are deflationary. The printing of money is inflationary. If you can get the balance right of those things, then you have what I call a beautiful deleveraging. When you look at the deleveraging, the debt to income ratios, if you look at the debt to income ratios and say how have they come down over time, England after World War II or the United States in the Great Depression. In all of these cases where the debt to income ratios came down, they came down. How did they come down? They came down with relatively good conditions by trying to get, by that mix. There's a certain, the number one reason is that there's enough of a printing of money that the nominal growth rate in GDP has to exceed the nominal interest rate. Because think about it, you have a certain amount of debt and there's a certain debt service cost. And if that interest rate on the debt is higher than the nominal GDP rate, then that means that it's going to compound unless you keep cutting. And that produces a negative consequence. So the most important thing is in these deleveragings, as the United States is now doing, is that you have enough of a printing of money to produce a nominal growth rate that's above the nominal interest rate over a period of time. I'm oversimplifying, but that's the most important single thing. So now when we then take 2007, and that's just describing a little bit the template. These templates have happened repeatedly. You know the IMF restructurings, you can go back and study them all. They're all deleveragings and they're all classic cases and they're all pretty simple. So 2007, 2007 and also in the European case, what we had was rates of debt growth that were unsustainable rates of debt growth. Now the mistake of monetary policy, I think the most common mistake of monetary policy, is that it's targeting inflation and growth. And while inflation and growth are important, it really what it does is it produces debt. And what it has to pay attention to is debt growth relative to income growth, relative to sustainability. And so what happens is lots of times you have a lot of debt growth that goes into the purchase of financial assets. And that's a classic bubble. That's worse than, that's a riskier situation than inflation. So you take 2007 or such periods, and you see that there's a lot of debt growth which is accumulating for the purchase of financial assets. And then you look at the financial assets and you say, they will not be able to service that debt. And so that produces a bubble. That's what produced the 1929 bubble. That's what produced in Japan, the 1989 bubble, 1990 bubble. That's what produced the 2007 bubble. Happiness, by and large, is how things transpire relative to our expectations, not the absolute level of our conditions. Somebody who doesn't have much money and they get $10,000, they're elated. Somebody's got billions and they lose a hundred million or something and they're still very rich, they're depressed. So happiness is, I think, how that developed relative to our expectations. It creates a dilemma because we become very attached to our expectations. And distinct from letting that go and just experiencing the journey, which I think produces more joy than being attached to our expectations.