Ray Dalio：美国债务螺旋，如何避免灾难｜The All-In Interview

Ray, good morning.

I’m going to start off by sharing a couple of stats today. The US has $36.4 trillion of federal government debt and GDP of $29.1 trillion, giving a debt-to-GDP ratio of 125%. This ratio has climbed steadily since the pandemic began in 2020, when federal government debt was $20 trillion and GDP was just $21 trillion. Since the pandemic, federal government debt has risen by 80%, while GDP has climbed 38%.

Steady inflation from the large stimulus of money from both central banks and the US government caused the Federal Reserve, which is the US central bank, to raise interest rates, driving up the cost of borrowing. Despite recent efforts to cut interest rates again, markets have traded Treasuries down, causing the long-term interest rates of US debt to spike to levels that we have not felt since just before the 2008 global financial crisis.

To keep the economy growing, the US government is now running a nearly $2 trillion annual deficit, nearly 7% of GDP, while paying over $1 trillion per year in interest alone on the existing outstanding debt. The Congressional Budget Office, the CBO, projected last week that annual budget deficits are expected to be equal to 6.1% of GDP through 2035, which the CBO noted is significantly more than the 3.8% that deficits have averaged over the past 50 years. The national debt is slated to rise by nearly $24 trillion over the next decade, a sum that does not even include the millions of dollars in additional tax cuts that the current administration may put into place.

Is the US headed for bankruptcy? What are the mechanics of the looming crisis ahead, and can we avoid it? To talk about what I consider to be the most important topic in the world at the moment is Ray Dalio, whom I consider to be the preeminent thought leader on this matter.

In 2021, as everyone knows, Ray published The Changing World Order: Why Nations Succeed and Fail. I declared it the book of the year, and I thought it was the most prescient and important thing that everyone should read. Unfortunately, I feel like many in politics and government have largely ignored some of the prescient warnings shared in that book.

This week, Ray is releasing a new book called How Countries Go Broke: The Big Cycle, in which he analyzes and shares his studies on this particular topic. I’m really excited for Ray to join me here today. Ray, thanks for being here.

Thanks for having me here to talk about this important issue.

Let me start by asking why you wrote the book. Why are you putting it out now? Maybe we can talk about the timeliness of all this from your point of view.

Through my roughly 50 years of being a global macro investor, I kept a lot of these things to myself. Now I’m 75, and I want to pass along the things that have helped me. I’ve been involved in the global bond markets all over the world for a long time, and there’s a mechanical process that is not understood about when enough debt is enough, when it matters, and how it works mechanically.

I feel compelled to get that understanding out now. How do the mechanics work for countries, for the United States, and for other reserve-currency countries? I want to make sure that’s understood.

Thanks for doing it. The basis of the analysis is your work at Bridgewater and outside of Bridgewater, right? You’ve gathered quite a bit of material together for this book and shown a lot of historical context. Maybe share a little bit about where the data came from and how you’ve conducted these studies over what period of time.

Bridgewater and I, up until my passing along Bridgewater a little over a year ago, have been indistinguishable—one and the same. Over that period of time, we’ve been involved in the markets. I’ve been involved in the markets and thinking about such things.

The data is largely public data that’s available to anybody. We collect it from all different spots and go back through history. As I did in The Changing World Order, in some cases we were dealing with data from hundreds of years ago, so we would go through archives and pull the data out.

The data is available to everyone, and I think that’s really important because this isn’t just an opinion piece.

You’re writing as an analyst and sharing quite a lot of empirical data that’s publicly available, which anyone can access. You’re taking a look at that data and saying, “This is the pattern. This is the trend that we’ve seen historically. It has repeated over and over again.”

I think you make a really important point at the front of the book: Only about 20% of the 750 currency and debt markets that have existed since 1700 still remain, and all of the ones that still remain have devalued through the mechanistic process you describe in the book.

That’s really important to note. We all think that we have this privileged position in the United States, that the US is different, and that this time is different. But you highlight how so often everyone thinks they’re in a good place, and then the cycle repeats.

The primary premise of this is what you call the big debt cycle. You highlight that big debt cycles typically last about 80 years. They’re more easily forgotten than the short-term debt cycles, which last about 6 years on average, plus or minus 3 years. We’re now 12 and a half cycles into the short-term debt cycle since 1945, so we’ve been in this big debt cycle in the US for about 80 years at this point.

Maybe we could start by talking about what the short-term debt cycles are that make up the long-term debt cycle.

I want to emphasize, based on what you said, that they’re mechanical. You can watch them, and you can do the calculations. If you read the book, you can see the calculations. To me, it’s almost like the circulatory system.

Credit is like blood that brings nutrients to all of the parts of the body, and it passes through a system that is like arteries. Credit creates debt, and the key question, if it’s healthy, is whether the debt creates an income that is more than enough to service the debt. That’s like eating vegetables or something. It’s a health process.

If not, credit begins to build up this debt. It begins to become like plaque in the arteries, and you can measure it just like you could measure plaque in the arteries. You can see how it constricts that circulatory system, because as credit and debt service rise, you see that it eats up more and more consumption. You have to spend that money on debt service.

You can watch the government do that. You can see how interest and debt service are eating up more and more, and that means there’s less money available for other things.

You can also see how economic heart attacks take place. They’re very much debt heart attacks, and the way they take place is by looking at supply and demand. If you have a lot of debt, then you have a large supply of debt that has to be bought. Somebody has to buy it.

When you get to the point where there are debt risks, there’s not only the new supply that has to be offered, but there’s also the possibility of holders of those debt assets selling them. The supply becomes overwhelming relative to the demand.

The dynamic is the same for the government as it is for an individual or a company, except that the government can print money. When the debt-service burden rises or there’s a big supply-demand imbalance, if the government—most importantly, the central bank—doesn’t print money and buy the debt, then there has to be a rise in the interest rate of the debt to constrict borrowing.

That constricted credit will weaken the economy and cause bad economic conditions. They can let that happen, or they can print money and buy the debt and monetize it. When they do that, it’s inflationary and lowers the value of the debt.

In either case, you don’t want to hold that debt, because either there’s a debt-service problem or there’s depreciation. You get paid back with a greater supply of money and cheaper money. That’s the dynamic and the mechanism.

Because it can be measured, it can be seen in all countries. You can watch it happen. It’s like going to your doctor: You can measure these things, see them, and know what needs to be done.

I want to talk about two things very quickly. One is to provide an analogy for people watching or listening about what it means to have interest levels be so high relative to one’s income.

The United States this year is expected to service its debt with over a billion dollars of interest payments on the outstanding US Treasury bonds, while the government is only going to bring in just under $5 trillion of revenue. Nearly a quarter of every dollar collected by the federal government is going out the door just to pay interest on the existing debt.

In order to fund new programs, the government needs to take on new debt. The people who have to issue that cash to the government eventually say, “Wait, that’s pretty risky. Now I need a higher interest rate.” Over time, that interest rate climbs.

Then there’s this separate entity called the central bank, which comes in and says, “I’ll buy the debt,” ultimately giving the government the ability to continue to operate and the economy the ability to continue to move.

The central bank, when you say the word “monetize,” ends up buying the bonds—the debt that’s being issued in the market. Is that the right way to think about it?

That’s right. They’re essentially making the money up and buying it. In the US, the Federal Reserve and the US government are the two players here. The Federal Reserve ultimately would, in this model—and historically, obviously, during the pandemic and during 2008—go into the market and buy bonds by issuing cash that they’re making up.

Very well described. A good example was COVID. There were two waves. The first wave was the COVID wave, in which the government wanted to, and actually did, deliver a lot more money to people and companies because there was a loss of income.

In the first wave, where did they get the money? They had to borrow it. The central bank then came in and lent them money. That was the primary wave.

Then, when President Biden was elected, there was a second wave after COVID. It was mostly like a universal basic income thing—in other words, hand people money and say, “We’re going to be better off.”

They handed people money by doing that same exercise again. Naturally, all these people got a lot of money, so they deposited it in banks, went out and spent it, and so on. Therefore, it shouldn’t be surprising that we had a big wave of inflation. We also had a lot of banks buy government bonds, which they lost a lot of money on, and that was the banking crisis.

That’s how the mechanics work, right?

Right.

When that money gets printed, it finds its way into the economy and the money supply goes up. The way I think about it—and you’ve got a nice image in your book that I really appreciate—is that there are small expansion and contraction waves as debt comes into the market.

Debt should drive productivity, but at some point you accumulate so much debt that you can’t drive productivity anymore. Then you effectively have to monetize the debt, and everything gets devalued.

As I think about the introduction of money into the economy and the increase in the money supply, I always tell people, “The markets are going up in dollar-denominated value, and there are more dollars.” The nominal value—the actual index—might go up. The Nasdaq might go up, and the Dow might go up. But if you’ve got a lot more dollars, a dollar is worth less.

The real question is whether your purchasing power has gone up. Have you actually increased your net worth as the markets go up?

When you do the studies, it turns out that inflation goes up—the cost of everything goes up—when you pump money into the system. Of course it looks like the markets go up. Of course it looks like asset values go up. But ultimately, if everything is going up, your purchasing power goes down.

It’s almost like I tell people: You have 100 clams, and you use seashells to buy stuff. There are only 5 things to buy. Now, if you have 500 seashells to buy those things, the price of the things you’re trying to buy goes up because everyone has more seashells.

Doesn’t that ultimately describe what happens as the money supply goes up? Inflation drives the purchasing power of everything down, and everyone gets inflated away.

Very well said, Dave. You can’t get richer by making money. The value and purpose of money is purchasing power. What your money is worth and what you can actually buy with it—that’s what matters at the end of the day.

There are 2 purposes of money: It’s a medium of exchange and a store of wealth. Saving is very important, and if you don’t have savers who have money as an effective store of wealth, then you don’t have a viable long-term credit market.

People don’t understand that the bonds become a bad deal. Like any marketplace, you need purchasers and sellers to be able to have an efficient negotiation and achieve a balance without the government coming in, printing a lot of money, and making a big mess.

They made very severe negative real rates, and we know what happened with those. The government was the big buyer.

The government takes it on and makes negative rates. What happens then is that everybody leverages up.

Yes. Then you’ve got the problem. That’s how it works, and it’s a global issue. It’s not just an American issue.

That’s what I want to get to in a minute, because I want to talk about the relative strength of the United States and how this plays out globally.

First, in your book you describe the big debt cycle as following 5 stages. You call it the sound-money stage, when net debt levels are low, money is sound, and the country is competitive. Then you talk about the debt-bubble stage, where debt and investment growth are greater than can be serviced from the incomes being produced.

Then you call it the top stage: The bubble pops, and credit, debt, and markets contract. Then there’s the deleveraging stage, where the central bank comes in, starts buying all the debt, and issues more cash. Inflation goes up, and the value of money goes down. Finally, the big debt crisis recedes and we start over again.

In the top stage, you talk about a debt crisis. Can you describe what a debt crisis is? How should we think about the mechanics of a debt crisis? Where are we in the United States today with respect to facing one, and what are the red flags you look for?

When there’s a lot of borrowing to service debt, there’s what’s called a death spiral. That’s what we typically refer to when a company has it. The government can have it, too.

That’s the dynamic where there’s too much debt, and you have to borrow to service the debt. Investors know that there’s a problem servicing the debt, so the credit is worse. That means interest rates go up, which is the worst thing that can happen to a heavily indebted entity.

As interest rates rise, you need to borrow more, and so on. The real red flag—the biggest red flag—is when there’s selling of the debt beyond the new supply. In other words, the holders of the debt start selling it.

You can see it in market action. Long-term interest rates rise while short-term interest rates aren’t rising or are going down. That’s the free market losing its desire to hold the debt. You have a balance problem in the free market.

Then you start to see the currency depreciate, particularly relative to gold or Bitcoin or other assets—and sometimes other currencies. Typically, these things happen broadly together, with all currencies going down relative to things like gold, Bitcoin, or tangible values.

That’s the edge. You start to see the dynamic. Either the central bank comes in very quickly and does the buying, or you have a crisis.

Take Japan, for example. If you were a holder of Japanese bonds, you lost about 80% of your money relative to gold and about 60% relative to US bonds, because you received an interest rate that was 3% less than the corresponding interest rate in the United States.

You lost the interest rate, and interest rates in the United States, as you know, were very low relative to inflation for most of that time. Plus, you had depreciation in the currency. You lost a ton of money in the debt that way because the central bank came in and printed the money.

It’s very bad for holders of the debt, and it’s a basic thing. You don’t even have to get too technical. It’s just a supply-and-demand thing.

Are we seeing that in the US today? The Federal Reserve cut interest rates a few months ago. As it has cut interest rates, the market has sold off US bonds rather than buying them, which is what normally happens when rates go down—the price of bonds is supposed to go up.

We’re now seeing rates actually climb in the market relative to where they were while the Fed has been cutting rates. Is that dynamic a red flag for you?

Gold has gone up, and Bitcoin has gone up. That is the kind of market action I’m talking about. You’ve seen it in other countries, too.

The UK is a classic example. The dollar has been a relatively strong currency, but not when measured in gold or Bitcoin. All currencies have gone down, and you’ve had that dynamic.

You see it in sterling. Sterling has gone down while UK bond rates have gone up, and central banks have held rates steady. You see it in the market action.

You also see it in terms of who the buyers are. You’ve seen central banks and sovereign wealth funds shift toward holding lesser amounts of debt and bonds, while accumulating gold or hard assets.

Gold is the third-largest reserve currency, by the way—dollars, euros, gold, and then yen.

You’re seeing that supply-demand shift. It’s partly for all the reasons we’re talking about, and partly because of geopolitical issues. Countries sometimes worry about sanctions. China is worried about holding US bonds.

The Japanese bought a lot of bonds. Even as a percentage of portfolios, US Treasury bonds and US debt have become such a large part of portfolios that, from a portfolio-rebalancing point of view, you don’t want so much concentration.

All of those factors are in play for the supply and demand for bonds. That’s why I emphasize this: You have to look at the supply and demand of bonds.

You’ve got a table in the book where you look at central-government debt levels relative to deficit levels across the major markets: the US, Japan, China, France, Germany, and the UK.

The US is running a deficit of 7% of GDP, so the federal government is spending more than it makes at a level that is about 7% of the total size of the US economy. That’s the highest of these industrialized markets. France is second at 6%, the UK is also at 6%, and China is at 5%.

These countries are all approaching 100% debt to GDP. Japan is obviously at 215%.

From a relative perspective, one point I’ve heard many people make is that everyone has this problem. Everyone has rampant spending, rising debt levels, and increasing debt levels to pay the interest on existing debt and stimulate the economy.

The US has the strongest currency among the group we just showed. Why would anyone trade out of our currency? Where else do people go with their net worth? Where do they transfer their value if it’s not dollars?

Doesn’t it have to be some denominated currency? Isn’t the US ultimately the best? Maybe you can talk about what these alternatives are—gold, Bitcoin, elsewhere. Is it realistic at scale? Is there enough gold or Bitcoin for everyone to transfer their entire net worth into those assets, rather than holding some currency-denominated asset?

How do I make the decision about where to store my value? Where do I store my net worth?

First of all, the United States and countries like China and Japan are all experiencing that particular dynamic. The bonds—the debt—are bad assets. So where do you store value? You store it in those assets that benefit from, rather than suffer from, the reduced value of money and the buying of debt.

You look at money and ask what is an international form of money. That’s why gold is in the conversation. Then there’s the question of Bitcoin and other assets, which we can digress into.

Ideally, the asset is international, mobile, and relatively private, so it’s relatively secure. In history, there’s the value aspect and then there’s the confiscation aspect. That confiscation can easily take the form of taxation on holding it.

For example, one of the problems with real estate, besides the fact that it doesn’t move and you can’t use it internationally, is that it’s a readily taxable asset. It’s there, and therefore they’re going to get you. They won’t take it, but they can tax it.

We have to understand that taxes and confiscations are one and the same because during a debt crisis, assets can be seized or taxed.

I want to get to this in a minute. You talk about 4 actions that can be taken: taxation, austerity, where governments cut spending, restructuring, where the debt gets restructured, and central-bank buying of the debt.

Obviously, taxation has always played a critical role during these moments. Assets are seized or taxed in different ways and transferred away.

What about commodities? How do commodity markets do? Is there a difference between commodities—hard, soft, and so on?

I’ve studied history and been through a bunch of these periods, like the 1970s commodity period. Ideally, you want commodities that might do well if the economy doesn’t do well, because you’re also dealing with an inflationary environment.

You don’t want economically sensitive commodities as much, unless the economy is going to do pretty well. Usually, it doesn’t.

In the Weimar Republic, for example, rocks were used as a store of wealth. That sounds really funny, but they were considered a building ingredient. In other words, rocks were used to build things, so people stored their money in rocks.

Any asset can be affected by technological change. I should go store a bunch of GPU chips in my garage—H100s from Nvidia.

Technology devalues them. New technology devalues them.

That’s the question: What is it that can’t be devalued?

Commodities, by the way, have all declined in real terms over long periods of time. Every single commodity has declined in real terms because of productivity.

You would like productivity-producing assets that cannot be taxed and can move around from place to place. Equities of a certain type tend to do that.

That’s why currency depreciations are associated with the combination of currency depreciation, lowering interest rates, and producing money. Those forces cause equity assets to go up—not necessarily in real terms. In the 1970s, equities didn’t go up in real terms; they went down in real terms.

But it is those kinds of stores of wealth that can’t be taxed as easily that benefit from inflation.

The purest play is gold, because gold can be transferred between countries and is used by central banks as a reserve. Central banks will go to it, and they are going to it. Gold can also be private, more so than crypto.

Crypto is very easily taxed. The government knows where it is, who’s doing what, and so on. It’s also an effective asset to tax, but it has benefits, too.

It was interesting when we had negative rates. I was with a group of central bankers in a discussion about how negative they could make rates. They described that they could have negative rates only to the extent that there wasn’t enough capacity for paper money to be stored.

They estimated that, over a short period of time, they could have up to 400 basis points of negative rates. That’s crazy. They calculated how much vault storage space there was, and then calculated that they would produce more vault-storage space because it would be profitable to do so.

The good thing, they said, is that they could tax it.

If you have a digital currency, you can tax it.

Do you own Bitcoin?

I have some, not nearly as much as gold. That’s my diversifier. I try to find what the uncorrelated assets are. I have to have some, but I’m a gold guy much more than I am a Bitcoin guy.

I’m a productive-asset guy. I like owning businesses that make things.

In this environment, what do I own that’s a productive asset—a business that can still see its revenue and income grow as this inflationary effect and devaluation occur? As we get through a debt crisis like this, what would be the best kind of productive asset? Is it a mining business? Is it a commodity-trading business?

What’s the right place to look?

I’m with you. The chart we showed in the beginning has this line of productivity going up. We’re in a period where it tends to compound on itself, and I think that’s where AI is fantastic.

But it depends on what you mean by AI. I think the hyperscalers in this world have risks. You think of the hyperscalers or Nvidia.

The technology war and certainly productivity are important, but there’s going to be great disruption. The disruptors and the disrupted are not necessarily the people producing the vehicles. They’re the people implementing and changing things as a result of having a big impact.

I think the technology war—the AI war—is actually more important. It’s a war that no country can lose. If China or the US really loses this war, it’s more important than profits. You have to play that war that way.

It could be electric vehicles, or more specifically Chinese electric vehicles. You can produce them, so I don’t think the profit motive is all that matters. There are such enormous expectations.

I think we’re going to see applications. The Chinese are a bit behind in chips, but they’re ahead in applications.

Did you see the DeepSeek announcement this weekend? Obviously, it had been known for a little while.

Yes. I think you’re going to see the Chinese play be inexpensive chips embedded into manufactured goods. You’ll see robotics.

The Chinese are unbelievably good at making things inexpensively. They own 33% of all manufactured goods in the world, which is more than the combined US, German, and Japanese manufactured goods. China produces more.

You’re going to see that type of competition. It may be like solar panels or something. Profit doesn’t matter.

You have to go where there’s productivity and innovation, and be essentially long those who benefit through usage or who are creating applications that have a big effect. That’s certainly one thing.

You also have to look at different countries, places, and things. Most importantly, you have to look at price.

A lot of investors make the mistake of thinking, “I want to buy good things. That’s a great company.” But a great company that gets expensive is much worse than a bad company that’s really cheap.

Totally.

You have to look at pricing. This is all part of the cycle. Everybody says, “That’s great, and it’s going to be great for the future.” Like the internet and the dot-com companies—it was great.

But the price has to be paid attention to. I’m particularly concerned about those companies at a time when we’re in a situation with interest rates operating as they are.

This looks quite a lot like 1998 or 1999, where the assets of the new hot thing—the productivity drivers—are hot, and the prices are high. You have a rising-interest-rate environment, and that’s a classic issue.

We have to pay attention to interest rates and the pricing of those assets. You have to think about where the next opportunity is.

The other thing is that diversification is very important. Everybody is leveraged long. Everybody thinks, “I’m going to buy assets that are going to go up, and if they’re good, I’m going to do that in a leveraged way.”

The world is so leveraged long that you have to pay at least as much attention to correlation. When I look at something like gold or other uncorrelated assets, it’s interesting that as you add them to a portfolio, they reduce the risk of the portfolio.

You have to pay attention to uncorrelated assets in that kind of environment. Those could be geographic assets or other types of assets. That’s part of portfolio construction.

There’s no simple answer for the audience about what to buy. But from a portfolio point of view, in the book you talk about having 10 to 15 uncorrelated bets at any given time.

I would imagine you mean truly uncorrelated, whereas most people buy US equities and think they’re in different sectors. Obviously, there’s a great degree of correlation when you’re buying a bunch of US equities.

Keep in mind that many times equity prices, in inflation-adjusted terms and therefore in purchasing-power terms, have declined 60% or 70%.

That’s an incredible fact for people to take in. When you adjust for the value of your dollar, equity prices have really taken a hit, even though the market has gone up.

From 1966 until 1984, you had a negative real return. I think this is super important, Ray. A lot of people talk about markets going up without taking into account the denomination in which those markets are measured—in this case, US dollars.

When you look at the value of your US dollar and look at the market going up, even if you bought equities, what you can now turn that dollar into has not actually gotten much stronger. People have really taken a hit.

I’m glad you’re bringing it up. I think it’s super important, too.

You have to look at your returns in real dollars. What can you buy? It’s funny, because I watch the value go up and down—even the currency go up and down—and it creates a distorted perspective.

It’s like being on a boat that’s going up and down and judging the land to be volatile.

Absolutely.

I want to come back to the United States and talk about your point of view on the measures the United States is going to have to take, or should take, going forward to avoid a more cataclysmic debt crisis.

You use the term “beautiful deleveraging” for what’s possible when there’s a great deal of debt and a country faces a debt crisis. Several actions can be taken together to resolve a debt crisis in a way that’s least harmful.

First, I want to talk about the measure you call your risk gauge. You show a risk gauge for US long-term government debt and a risk gauge for the short-term.

On the short term, you say US government debt has a 0% risk gauge—there’s no risk in the near term, and the economy seems fairly balanced. But over the long term, your risk gauge is 100%.

You follow that with an analysis of the central bank. The central bank has a 0% short-term risk gauge and a 46% long-term risk gauge, nearly the highest you’ve seen ever.

Can you explain the composition of these risk gauges and what they tell us? Then we can come back to the actions.

To be clear, 100% does not mean a 100% probability of it happening. It means that it’s at 100% of the maximum—it’s the highest it has ever been.

The longer-term risk gauge takes the existing amounts and projects the two things I described before: supply and demand, and debt service creating the squeeze.

Think of it as going to your doctor and having them give you your test results—how much plaque is in there, what it looks like, how you did on your stress test, what your arteries look like, and what your condition is. That’s what the first measure is.

The second measure is that you’re in a seizure. In other words, the debt is exhibiting the problem. It’s now happening.

“Happening” means things like seeing selling, seeing spreads widen—the interest rates rising on the long end without the short end rising—and seeing the central bank put into the position of having to make the difficult choice of coming in and monetizing everything.

You’re seeing credit problems and debt monetization because you’re in the middle of it. That’s what the measure on the right means.

If I’m speaking to government policymakers, your condition is very bad.

Right.

You’re not in the middle of it now. We’re not seeing that particular dynamic transpire. But you have to change your diet, change your behavior, and maybe have a stent put in.

Let me pull up this chart for you, Ray. This is US government debt as a percentage of US government revenue, which you indicate in your book is more important than debt to GDP. You have to look at the actual revenue being generated by the government and how much debt it has.

The CBO highlights this expansion to 700%, meaning that the government will have a debt level that is 7 times the income it makes every year over the next 10 years.

You propose a series of actions that can keep it flat over the next 10 years, which is the basis of the book. There’s a series of recommendations.

You highlight 4 actions. One is increased taxes, so citizens lose assets and income. There’s a loss to citizens when this happens. The second is cutting spending, or austerity, which means a loss of services provided by the government to citizens.

The third is the central bank buying the debt, which typically increases inflation because more money comes into the market and everything costs more. That’s another form of taxation, where the value of your dollar and your assets goes down.

Then there’s restructuring the debt, where again the currency gets devalued and everyone loses something. Could you walk us through that?

Think about that chart as being your plaque, so to speak, in the arteries, and the debt service. You can calculate all those numbers, and you know what the picture looks like. That’s a stability issue.

Number 1 is what I call my 3% solution. The solution is that you must cut the deficit. The equivalent of bonds selling down to 3% of GDP is needed, and it’s expected to be 7.5%.

Different people have different views about how to cut it. I don’t really care. You need a unified agreement. Everybody in Congress, the president, and so on should pledge to do that. Then the question is how to do it.

That’s roughly $900 billion a year.

Yes, roughly. With the continuing tax cuts, that will be 7.5%, and you want to get it down to 3%.

It sounds draconian, but we made that kind of change from 1991 to 1997. There are 3 keys: Do it soon, do it fast, and do it when the time is good—when the economy is good. In other words, do it now.

The temptation will be to say, “We’re going to ease into this. We’ll be there and do it 3 years from now.” But if you have a bad economy, you cannot do it. That’s the worst time.

We have the best economy now. The sooner you do it, the more you can do it. So it’s the 3% solution: Do it now, and recognize that you have to deliver it.

If you’re cutting costs in government, you have to own the number. Everybody has to pledge to 3%. The arguments can be about how to get there, but you have to own the number.

You should say, “If it’s not 3%, throw me out of office, because I have to deliver that number.”

The arguments are about whether government expense-cutting is a $2 trillion number, a $1 trillion number, or a half-trillion-dollar number. You have to own the number and get to 3%, and you can’t make it just one thing.

You also have to realize that if you make those moves, the bond market will benefit you. Interest rates will go down, and lower interest rates will reduce interest expense. That’s the most important thing. If you spread it out, nothing’s going to be that big, so nothing’s going to be insurmountable. The main thing is to take the things you can cut from or build from. Roughly 70% of government expenditures can’t be cut, so it comes down to a small percentage that you can cut. You have to find out how much you can cut.

When the president gives an interview and says, “We need to get them to cut interest rates by 1%,” speaking about the central bank, he’s effectively trying to force or coerce the central bank to take rate action.

If the federal government were to cut spending significantly and quickly, the market would naturally react with lower rates.

That’s right.

That’s important for everyone to hear. He’s right: If you look at my calculations, a 100-basis-point cut in rates is equivalent to a significant cut in spending.

He’s right, but if you do that without the other parts, you’re going to take money away and make it less desirable to own these bonds. That’s going to be a problem.

If you do these things together, they can support each other. In other words, fine, cut spending.

The longer we wait, the more interest accumulates because the debt is at a higher rate, and the more the debt accumulates. Ultimately, this is the arithmetic death spiral. The longer we wait, the more we have to cut in the future to get out of the hole.

It’s not linear. It’s nonlinear cutting that’s needed to get out.

The faster you do it, the less you have to cut.

I want to say that again: For anyone in government listening, the faster you cut, the less you have to cut.

Yes. You can do it in a manageable way—a bit here and a bit there. Those bits add up. If you don’t, you’re going to have this arc of compounding.

Let’s talk politics for a second. Is DOGE and the concept of DOGE enough, or do we need legislative action? Then I want to talk about the politics of the legislative action needed, given the election cycles.

There’s a combination of things. It’s not just DOGE. It’s less regulation and productivity changes that might come from AI, which then translate to profits. Those might be capital-gains profits or profits from other sources.

It looks very tough. Revenue also comes from tariffs, but people don’t think of tariffs as inflation. Tariffs are inflation because they cost you more.

The real question, as you play with the numbers, is how much will come from productivity and profit increases from the efficiency gained by AI and new technologies? How much will come from this or that? We honestly don’t know.

The important thing is not to make it a crapshoot. We’re at the edge. The number must be 3%, and there should be a clear path to that 3% number, not a series of Hail Mary passes.

Are we better off with Trump as president than if Biden had won, in this context?

Yes, I do believe we are, in the financial context. In terms of profitability and the likelihood of cutting, I think the Republicans are probably more likely to make these moves than the Democrats.

But you also have to take into consideration the social impacts and the other impacts that are going to come from this. We’re at a civil war internally and an international war simultaneously.

I’m worried about the gap. If the profits from AI kick in, we lose a lot of jobs. Suppose 1.5 million to 3.5 million people become unemployed—people who work in call centers, on automotive lines, and so on.

Before the productivity from AI kicks in and creates new markets and new parts of the economy, we could have a lot of unemployed people. Government representatives and politicians will raise their hands and say, “We have to support these people. We have to introduce stimulus. We have to introduce new support programs.”

Isn’t it likely that, with AI coming online, we’re going to see significant demand for public support during this transition?

That’s right, but there are 2 dimensions. The near term is what the profit impact will be. I don’t think the profit impact and the financial impact of productivity are going to be nearly enough, nearly soon enough, to deal with the supply-demand issue we now have.

Let’s say we’re at risk of a heart attack. Is it this year? Is it next year? Imagine that you’re at risk of a heart attack and I say, “Someday we’ll have the productivity converted to profits that will cover the budget deficit.” It may be out there, but it’s not as immediate as it needs to be.

Then we have the other aspect: How is that pie divided? That’s going to be very political, because the disruptive effects will be enormous. We’re all guessing about how those disruptive effects will play out.

You’re absolutely right. Lots of jobs are going to be lost, and lots of change is going to happen in terms of turbulence. How do we have a plan? How can we even agree on a plan for dealing with that?

I don’t think we’re in a time—maybe in the rest of our lifetimes—when agreement is going to be easy. I think we’re going to see fragmentation of the states from the central government, and big fragmentation in the world—not just in the United States—because of the failure to agree on most things.

I’m worried about the timeline. Think of the timeline this way: We’re in the first 100 days, a honeymoon period. I’ve been through this a long time, and I know what the honeymoon is like.

Right afterward, there are 100 days in which you can change legislation. You move quickly, and everybody is there. Then the next important time horizon is 2 years, up to the midterm elections. You get about a year and a half after the election, and not everything goes as anyone expects.

You could have the supply-demand situation, and think of our cycle. I mentioned that the average cycle is about 6 years, give or take 3 years. We’re going to be later into the cycle, and we have this supply-demand situation.

Are things going to stay good into the midterm elections? There could be a lot of fighting in the midterm elections.

Let me ask you 2 questions. First, if we make significant cuts, there will be a lot of job loss. If AI is successful and moves quickly, there will be significant job loss. Does that not fuel the rise of socialism in the United States?

I think we can cut and make the adjustments in a few percentages to do this without great trauma. When I talk about the 3% solution, I think we can get to that limitation without great trauma, and it will be supported by interest-rate moves.

First, we can get this thing done. We must get that thing done. If we don’t, then of course we’re going to have great conflict in the United States.

This is not a run to Nirvana. You’re going to have legal challenges, one state against another, the Democratic states and the Republican states. Within the states, you’re going to have a lot of disruption and dissatisfaction.

It’s going to be about money and power. Like you say, there will be the socialists, the left, and the right. That’s why you’re going to have this type of civil war or internal conflict. This is not a straight race to Nirvana and prosperity.

You have that at the same time as the other elements. There are 5 big forces. There’s the debt and money that we talked about. There’s the internal conflict, which is going to test the legal system.

Internationally, might is right. You’re going to have conflict. You’re no longer going to have even an attempt at a cooperative world order. Institutions like the World Health Organization and the World Trade Organization are obsolete.

We’re going to have might is right again, and a period of greater conflict. You’re going to have a technology war, and increased military spending in this kind of environment. That creates a budget issue.

Climate will also be an economic issue as well as an environmental issue. Those expenses are going to go up. All of those forces are coming together.

So yes, the left, the right, and conflict will be ahead of us.

Is this a hot civil war? Do people take to the streets? How does this resolve? We have historical context for social uprisings, but what happens in the United States over the next 10 years?

There are 2 important aspects. Does the legal system work well? You asked me about the independence of the central bank. Does the Supreme Court work? Does the law work?

There are going to be a lot of challenges. I’m not saying it doesn’t work; I’m saying that’s the question. It will be very much state by state.

You’re going to see conflicts between the states and the central government. How does that decision-making system hold up? Is it might is right? Think about sanctuary-city issues and such. How is that all going to work?

That’s the most important thing. In a time of great stress and challenge, when things get worse—right now things are good. This is pretty good—but they’re going to get worse.

At the same time, you have international conflict going on. Within countries, we have the same kind of conflict. You’re seeing it happen in Europe. You’re seeing the same dynamic.

We talk about the problems the United States is having regarding debt and so on. Europe has the same problem. You’re seeing greater polarity between left and right, and economic problems causing more confrontation.

You’re seeing this around the world. You’re coming into an environment that is likely to have greater conflict over a period of time—not immediately.

When you talk about 10 years, there’s going to be a period in that 10-year period where it’s going to be hellacious. Coordination in dealing with our problems will be worse, and cooperation in dealing with problems will be less.

On that point, talk about the role you’ve seen external conflict play in resolving fiscal challenges internally. In your prior book, *The Changing World Order: Why Nations Succeed and Fail*, you talk about the historical relationship between external conflict and the financial cycle.

Given the condition in the US today, do we have a higher propensity for conflict? When things are difficult at home, people tend to go to war. War is stimulatory. Is that a driver here?

What’s going to happen functionally with China over the next decade, do you think?

There’s a cycle that has to do with changes in money and all of these things. When you don’t have enough money, you need money to support international conflict. You need money to make domestic people happy. Then there’s no power and no system for making judgments internationally.

The United Nations doesn’t work. The World Health Organization doesn’t work. There’s no system. So you come into this power struggle.

When we’re talking about the financial problems we covered, recognize that they’re worldwide. You have polarity worldwide, which has to do with differences in wealth and values. You have that problem within populations, and you have no rule system internationally.

It’s a might-is-right series of conflicts. Then you have technological disruptions. We talked about how you can’t lose the technology war, because you’ll lose the military war.

All of that stress and shortage of what is perceived to be needed is incendiary. It’s a risky situation.

Productivity helps, but you have to understand and put it in its place. The 1920s, leading up to the stock-market bubble, were a decade when we had the greatest number of inventions, patents, innovations, and productivity increases. At the same time, we had big debt increases and wealth gaps and value differences.

You don’t get away from that. This is going to create a lot of tension in a world where it’s difficult to get all the parties to cooperate.

If you look at history, there are military wars and less-than-military wars. I can’t tell you that we’re going to go into military wars. I think that, like the Soviet Union and the United States, because of the risk of mass destruction, countries may be able to avoid them.

But historically, it’s going to be a very difficult period.

You describe in the book the difference between how the United States goes to war and how China goes to war. Correct me if I’m wrong, but you say the US goes to war through head-to-head, open confrontation, whereas China is more like Sun Tzu’s *The Art of War* style—more careful and more indirect. They never let you know what they’re going to do.

Is that a fair characterization?

The general belief of the Chinese, based on *The Art of War*—and this has existed throughout history and exists today—is that if you’re going into a fighting war, you must not have been smart enough to win without a fighting war.

You win through deception and manipulation, because fighting wars are going to damage you a lot. You don’t want to be damaged. You want to get to your objective. That’s how they fight wars.

That sounds like a smart way to fight wars.

International relations also have what’s called the tribute system. Your power determines where you are in the hierarchy. If you have more power, you have more status in the hierarchy; you’re higher in the hierarchy.

It’s related to Confucianism. Everybody should know what each other’s power is, and the lesser power should give tribute to the greater power. This is international.

The greater power should respect that, and the countries should work together and have harmony rather than conflict, because it’s all about getting what you want. Harmony and prosperity are what you want, whereas fighting destroys things.

A great historian of China, a man named Wan, described it to me this way: There’s the Mediterranean approach.

The Mediterranean approach really began with families, where there were no borders. We didn’t have countries with borders or the idea that you don’t cross borders until the Peace of Westphalia in the mid-17th century.

They had the 30 Years’ War, and everybody would fight. They were fighting experts, and that was the norm. After 30 years of war, they decided, “Let’s draw a boundary around it and try to make what goes on inside it our own business.” That’s how it came about.

That’s one of the reasons the Chinese and Japanese lost. They had what they called their Century of Humiliation, when the foreign powers came in during the late 1830s. They had the Opium Wars and so on.

The Western powers were strong at fighting because they were practiced at it. Then there was the Century of Humiliation in China, when the foreign powers came in.

I’m giving you too much history, but I’m saying that there’s a whole different attitude about how to play that game.

When we come back to the chips war and look at today’s news, there we are.

I always tell people about the kid who stands up in the middle school and says, “I’m going to make the vending machines free,” when he’s running for president of the middle school.

Unfortunately, in a democratic system, the election process follows a similar pattern. It’s very hard. I watched the hearings this week and was deeply frustrated when I heard senators say, “I got this money for my constituents. I got them this.”

Their intention is to stand up and say, “I’m going to get you this.” They go into Congress and get people that money. Over time, government spending swells, and there’s no incentive to reduce it.

We now find ourselves on the precipice of a really difficult crisis. I hope politicians find within themselves the leadership to stand up and say, “We need to do difficult things, because 10 or 20 years from now, if we don’t, things are going to be very bad for all of us.”

I hope they can convey that to people. I hope your message gets to them and that their leadership allows them to stand up and say, “We need to make these really difficult changes, deeply and quickly, in order to preserve the Union.”

I hope they can make those changes and we can move forward and continue to build our lives. I really appreciate you taking the time to write this book and share it with us. I hope it’s heard. I think it’s so important, so thank you very much, Ray.

We can do this. If we don’t do this, the power of the United States is going to be greatly diminished. It’s domestic and international.

I appreciate you, Dave, that we can have this kind of conversation. Just have people behave logically.

That’s too much to ask.

Let’s not give away the vending machines for a couple of years. Let’s think about keeping the school open for the next generation.

That was great. Thanks, Ray. You know your stuff, and this is really invaluable. Thank you for doing that.

For your listeners, I think it’s so important too, Ray, and I spent a lot of time thinking about it and worrying about it. Your message is so clear and important. I think you present it well and write it well. I read your whole book this weekend. I appreciate you putting it all out there. I really do hope that the folks that listen to our show in DC listen to this. I cannot tell you how disappointed I was after I spent the weekend at the inauguration. I met a lot of members of Congress. I met most of the members of the new cabinet, and it’s just not there. I’m just frustrated, and I’m just heartened by it. Anyway, I think it’s important to keep harping on it. We’re not going to stop, and I’ll keep talking about it and appreciate your efforts here too.

We just have to do our best.

That’s right. Really appreciate it, Ray. Thank you.

Thank you, Dave.