Ray Dalio on The Big Debt Cycle

Just frame for us your thoughts on debt for a second. How do you think about debt as an absolute construct or a relative construct, especially sovereign debt? You know, there is a US debt, but then there are also every other 182 countries who have a ton of debt. So how do you think about debt? Debt to GDP relatively and in absolute terms for any country.

Quite often, many countries go through the cycle together, as they did in the 30s. What happens is that debt is relative to incomes, and what that means mechanistically is that debt service payments rise relative to incomes. And so, it squeezes out consumption as this compounds.

What happens is there's a realization that they have to print money. So, I think you're going to see in the next downturn another move to print money. There are certain things that are going on now that means that the big risk comes when they don't want to hold those bonds anymore.

Okay, because the supply and demand—think about that. Supply and demand has a deficit. It has to borrow, and so it sells its bonds. Who are the buyers of the bonds? Why do they buy? The buyers of the bonds buy because there's an attractive return. Not only do you have to sell those amounts of bonds, but when they start to realize that they're not getting good returns on those bonds, they can sell those bonds.

They were 31 trillion a bond, what they own instead? They always own tangible things. Those things can also be equities, it could be many other things, it could be gold. Okay, gold has always been accepted as money because it's nobody else's. There's a saying: gold is the only asset you can have that is not somebody else's liability. In other words, you're dependent on getting paid. You can have that at intrinsic value, and for a long period of time, it's been valued.

You can move it between countries, but also different countries prosper. So, you'll see the countries, some of the countries that we mentioned, they will prosper through that. The United States made most of its money because it didn't enter the war; it was before World War II and World War I. The United States became the richest country because of the money it made before it entered the war.

So, those countries will prosper, and in those countries, certain real estate of hard assets—but where you have that is very, very important.