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Ray Dalio and David Friedman – “All In” Podcast 

Bullet Point Summary Notes: 

First, why the debt has reached a tipping point: 

• U.S. government debt is over $36 billion. Nearly a quarter of every tax revenue dollar is going to pay the interest on the debt.  

• ~ $5 trillion in annual tax revenue. The interest on the debt is ~ $1.2 trillion annually.  

• The Congressional Budget Office (CBO) projected that the national debt will rise by nearly $24 trillion over the next decade. 

• Additionally, the discussion highlighted a particularly striking statistic about the debt-to-government revenue ratio. The CBO projection shows the US government’s debt expanding to 700% of its annual revenue. This means the government would have a debt level seven times the income it generates each year. 

• Dalio emphasizes this point as a critical indicator of the potential debt crisis, comparing it to “plaque in the arteries” of the economic system. The rapid growth of debt relative to revenue is one of the key warning signs you’ve reached the end of a long-term debt accumulation cycle. 

A Non-linear Problem: 

• Debt growth is a non-linear, compounding problem. He calls this an “arithmetic debt spiral” where the longer you wait to address the debt, the more dramatic the cuts must be. 

Here’s a key quote that illustrates this concept: 

• “Ultimately, this is the arithmetic depth spiral that you get into the longer we wait, the more you have to cut in the future to get out of the hole. It’s not linear. It’s a non-linear cutting that’s needed to get so the faster you do it, the less you have to cut.” 

In simple terms: “The faster you cut, the less you have to cut.” 

The exponential nature comes from: 

1. Accumulated interest on existing debt 

1. Need to borrow more to pay existing debt 

1. Higher interest rates on new debt 

1. The compounding effect of these factors 

Dalio describes the debt problem as a medical condition: “Just as plaque builds up in arteries, debt accumulates and “constricts the circulatory system” of the economy. The longer you wait to address it, the more dramatic the intervention must be.” 

The key takeaway is that debt growth is not a simple, linear process but an exponential one that becomes increasingly difficult to manage the longer it’s ignored. 

• Countries reach a point when there are not enough buyers of their debt.  

• So, the central bank jumps in and becomes the buyer. The central bank (the Fed) prints more money to buy the Treasury debt.  

• Printing more money is inflationary. The money that gets printed finds its way into the economy, and the increase in the new money means there is more money in the system to buy things.  

• We’ve all heard that too much money chasing too few goods is inflationary. Money printing is inflationary. And this destroys the value of a currency. 

SB here: Last week, I wrote about how inflation and rising interest rates have done to bond investors over the last five years. We are in the middle of the storm, and conditions have worsened. Few legislators understand the problem and, worse, are unwilling to act.  

Money is used as a medium of exchange and a store of value. Money printing destroys value. We will print more money. That’s the highest probability here. It is the path most major civilizations have made in the past.  

Where are we in the US in terms of the debt crisis? Here are the Red Flags to watch: 

• The biggest red flag is when the selling of the debt (holders of the Treasury bonds begin to sell it). That is happening.  

• Another red flag is when Long-term interest rates rise when short-term interest rates go down (i.e., this is what’s happened since last September 2024 when the Fed began cutting interest rates).

Source: Zerohedge

• Typically, this happens together when all currencies decrease relative to gold, etc. That too is happening. 

• Then you see the central bank come in quickly and buy the bonds. Then, you see the decline in the currency fairly quickly. This has started to happen and likely continues to the point when we all see that the Fed is the last resort buyer of Treasury securities.  

• This is simply a supply-demand thing, and it is easy to see.  

So, are we now seeing this today? Yes. 

• Gold and bitcoin have gone up  

• All currencies have gone down relative to gold 

• Sterling has gone down while interest rates have gone up 

• Gold is the third-largest reserve currency. Dollar, Yen, Gold, then Euro 

• Yes – we are seeing this supply-demand shift 

We are also seeing this due to geopolitical shifts. Countries are buying a lot of gold… China is selling Treasury’s and buying gold.  

Dalio emphasized that you have to look at the supply and demand of bonds. And we are seeing this happen now (more supply, less demand). 

Where do people put their money/net worth if it is not in dollars?  

• Bonds and debt are bad assets. So, store it in assets that benefit and do not suffer from inflation and rising interest rates. 

• You want international, mobile, private, and relatively secure assets. 

• In history, there has always been some form of confiscation of assets (taxes are captured in some form). Taxes and confiscations are one and the same. In debt restructurings, assets are seized in some form (loss of value) and/or taxed in some way. 

• Dalio spoke favorably about Gold, and Bitcoin. He owns much more gold than bitcoin. 

• Commodities: you want those commodities that do well if the economy does not do well. You do not want to own economically sensitive commodities. 

• You want those things that can’t be devalued. 

• You want productivity-producing assets that can’t be taxed and can be moved around. Certain equities will benefit from inflation. 

• In general, equities go up in price with inflation, but you have to measure it in terms of real return (after the inflation depreciation is factored in). SB here: The objective is to beat inflation. If we are right, we are in better shape, if we are wrong, we are not in bad shape anyway.  

• Gold is such an asset because it can be moved around, it is an asset that is a store hold of wealth. Central banks own it. 

• You want to invest in productivity-producing assets. You want the disruptors, not the disrupted. 

SB here: Seek floating interest rate investments tied SOFR (a base lending rate that floats with the Fed Funds rate) where yields increase with rising inflation and interest rates. Find unique, niche credit strategies with a definable edge. Understand the collateral behind what you own. Seek first lien, senior secure collateral. Short-term risk exposure over long-duration exposure. Avoid long-duration fixed-income bonds and bond funds in general. If you must own bonds, short-term duration is better than long duration (a better chance to keep pace with inflation). Global-macro long/short multi-strategy funds designed to produce absolute returns. Select real estate (low leverage). And overall low-leveraged companies/investments in general. Sports franchises. Select private equity and venture capital. AI. Gene editing – longevity health. Find disruptors and size your portfolio bets carefully so that no one thing blows up your ship. 

Back to my bullet point notes: 

Dalio said, AI is a war that no country can lose. US vs China, this war is more important than profits. 

• Chinese are behind in the chips but not in the adaption/use. They may be ahead of the US in terms of embedded chips in robotics, and most things. 

• Own companies that are using the technology vs. those that are producing it.  

• Find the best users of the technology. 

Dalio said that today’s overvalued stock market conditions look so much like 1998 and 1999. 

• Prices are high, and you have a rising interest rate environment 

• Diversification is very important. You must pay attention to the correlations and find uncorrelated assets in your portfolio construction. 

• Everyone is leveraged long. The world is so leveraged long. 

• In Ray’s book, he talks about always having 10-15 uncorrelated assets at any time.  

When you adjust for the value of the dollar, from 1966 to 1984, you had a negative real return on stocks. 

• Investors have taken a hit on their stock gains vs the dollar. You have to look at your assets in real terms – net after the depreciation due to inflation. Friedberg remarked that most people see their stock account higher but in real after inflation returns they are not up that much.  

Ray talked about his “beautiful deleveraging” concept: 

• It’s about a combination of actions that can be taken together that are least harmful to the economy, investors, and people in general 

• See risk gauge for U.S. long-term gov’t debt 

• He says we can act quickly; all hope is not lost. For you and me, it is in watching the signposts. 

SB here: I have little faith in our elected officials to come together and act. I pray they cut spending and promote economic growth. My view is inflation, and more money printing is the likely outcome I’m positioning in assets that will perform better in that environment. If I’m wrong, I’m still happy with my floating rate CORE income producing investments regardless. I don’t see 4.44% Treasury Notes helping me much. And if I’m right, they will continue to get destroyed just has happened over the last five years. Inflation in the high single digits to mid double digits can’t be ruled out if the knuckleheads in Washington don’t get the memo and immediately act.  

• Gold, Bitcoin, Uranium, strategic minerals and mineral miners, will play an important role if I’m right on continued lack of action from our legislators.  

• Good businesses will survive. I don’t think they let the economy fall apart. Which is code for saying, I think they will save our citizens with more helicopter money. Sad but it’s a probability too high to ignore.  

Dalio added we can measure this – it’s like doing a stress test with your doctor and measuring how well you are doing. You can measure your current state of health. Right now, it’s not good. 

• Heart attack is the extreme outcome—end game! 

• Currently, our condition is very bad, but we are not yet at a heart attack. Maybe we will change our diet and put a stent in. There are things we can do, and we must do something. 

Here is what Dalio recommended: 

• Number 1 is the 3% solution. Cut the deficit to 3% of GDP. Right now, it is 7%. People have different views on how to cut it. But we have to cut! 

• We need to get the deficit to about $830 billion per year vs the current $2 trillion a year.  

• Every politician should get on board and pledge to leave if they don’t deliver. And state, if it is not 3%, throw me out of the office. 

• Do it soon, fast, when the economy is good. Do it now. If you have a bad economy, you cannot do it. 

• Importantly, interest rates will come down when you start doing this. The market will respond. Ray says you need to get rates down by 1%, now. Think of a yield on the 10-year Treasury and shorter duration Treasury’s below 3.5%. Currently 4.44%. 

• The longer we wait, the more debt accumulates and the higher the interest rates will go.  

• The faster you do it, the less you have to do it. The quicker you cut spending, the less you have to cut over time. 

Dalio added: 

• It’s not just cuts, it’s a change in regulations, its taxes, capital gains tax changes, tariffs. 

• On the growth benefits from AI. Dalio said it is very difficult to know how much profits and efficiency is gained by AI and technology.  

• The important thing to know is we are at the cliff edge, and we have to get to 3%. 

• Not to get political, Ray says we are better off with the Republicans in place as they are more likely to make the cuts than are the democrats. The real goal is to get to 3% immediately.  

• Ray doesn’t think the positive productivity impact of AI is near enough to make a positive enough impact on the economy just yet. And lots of jobs are going to be lost to AI. We’ll have to deal with that. 

• Finding agreement on all of this is not going to be easy. Ray sees considerable fragmentation between the states and between right and left. 

• Are things going to stay good into the mid-term elections? Likely worse as there is going to be a lot of fighting. 

• So, the time to act is now. 

Ray thinks we can get to the 3% solution without significant trauma. Adding, “We can get it done, and we must get it done.” 

• We are on a path to great conflict in the U.S. Blue states vs red states. It’s about money and power. 

• And you have this at the same time as the five major forces. We have external conflicts – where might is right. A period global power conflict. And with this comes increased military funding which creates more significant expenses. 

As a quick aside. Here are the 5 major forces. 

In Principles for Dealing with the Changing World Order, Ray Dalio describes five major forces that drive the rise and fall of nations and economies. These forces shape long-term cycles in history. They are: 

1. Money & Credit Cycles – The long-term debt cycle drives economic booms and busts. When debt levels become unsustainable, economies contract, leading to deleveraging and often financial crises. 

1. Internal Order & Disorder – The strength or weakness of a nation’s internal cohesion, including political stability, social harmony, and income inequality, determines how well it can handle challenges. 

1. External Order & Disorder – The global balance of power shifts over time, affecting trade, military conflicts, and diplomatic relations between rising and declining nations. 

1. Acts of Nature – Natural disasters, pandemics, and climate-related events can significantly disrupt economies and societies, influencing long-term cycles. 

1. Technology & Innovation – The development and adoption of new technologies drive productivity growth and give nations a competitive edge, influencing their rise or decline. 

Dalio uses historical case studies to show how these forces interact over time, particularly in the rise and fall of great powers like the Dutch, British, and American empires.  

Back to my bullet point notes: 

What happens to the US over the next ten years: 

• Does the legal system work well? Does law work? That’s the question. This will also be examined state by state, and by the central government. How does our system hold up? Does it work well? 

• The economy. Right now, it’s ok. How/when is it not well? 

• More broadly – Most developed countries are in the same debt end game. 

• So, over the next ten years, we will coordinate in dealing with the problems internally and externally with our partners and enemies. (SB here: Thus, my focus on the Scott Bessent quote about “a grand global economic reordering.” 

China vs US: 

• There is a cycle where you don’t have enough money. Money is needed to support defense—the UN and WHO don’t work. You have polarity worldwide and you have it within your country. 

• Leads to a might-is-right power situation. It’s a path towards war—a risky situation. 

• This is where we are… in a world where it is difficult to get all the parties to cooperate. 

• Ray can’t say if we will go to a kinetic war. If you look at history, we are in a very difficult position. 

The Art of War 

• China believes that if they go to a kinetic war, per their vision of victory, they have already, in some way, lost. The will feel they weren’t smart enough to win without physical conflict. 

• They fight with manipulation and do things to weaken their enemy without kinetic warfare (here is a link to an excellent Ed D’Agostino interview about what China is doing trying to weaken our country). This is about how “China has weaponized fentanyl against the United States. You might think of Mexican kingpins as the top of the drug food chain, but everybody works for somebody. And that somebody is often a gangster in China, made “respectable” by his other legitimate business operations and a position within the Chinese Communist Party.”  

• They also believe that a lesser power should give tribute to a greater power, and in this pecking order, this works. We are in a fight for this. 

Conclusion: 

I’ve hit you with a lot. Short is best. I hope you found my notes helpful. It helped me. You can now see why the extra shot of caffeine was not needed. 

Next, stop what you are doing, put your sneakers on, and head out to hit your 10,000 steps. With your prep for the conversation now behind you, listen to Dalio and Friedberg. Click on the image. The end of the debt super cycle is the big elephant in the room and the most important issue of our time! 

Source: All In Podcast

Following are some additional resources:

• The U.S. Government is At Risk of Going Broke
• New book, How Countries Go Broke: Principals for Navigating the Big Debt Cycle, Where We are Headed, and What You Can Do About it

And share this cartoon animation of How The Economic Machine Works with your children and grandchildren. It is a simple template of how the system works. Click on the image to watch.

 

About Ray:

A global macro investor for more than 50 years, Ray Dalio founded Bridgewater Associates out of his two-bedroom apartment in NYC and ran it for most of its 47 years, building it into the largest hedge fund in the world. Ray remains an investor and mentor at Bridgewater and serves on its board. He is also the #1 New York Times bestselling author of Principles: Life and Work, Principles for Dealing with the Changing World Order, and Principles for Navigating Big Debt Crises. He graduated with a B.S. in Finance from C.W. Post College in 1971 and received an MBA degree from Harvard Business School in 1973. He has been married to his wife, Barbara, for more than 40 years and has three grown sons and five grandchildren. He is an active philanthropist with special interests in ocean exploration and helping to rectify the absence of equal opportunity in education, healthcare, and finance.

**Please note that Ray only communicates via his official social channels and does not communicate through Whatsapp or other direct messaging platforms. If you receive a message or response on any of his content leading you to Whatsapp or any other platform in order to contact him, it is someone impersonating his likeness.**

This is not a recommendation to buy or sell any security.The information is for discussion purposes only.