Ray Dalio: We're Already in Another Depression

So I was recently listening to a TED talk with Ray Dalio about the current state of the global economy, and I was really surprised that Ray was quite confident in the idea that we are in the start of another depression very similar to what we saw in 1929. This kind of scared me a little bit because when Ray Dalio talks, I definitely listen. He was talking with quite a high level of confidence, and I really respect Ray Dalio when he does talks because he’s not someone that just throws an opinion out there. That's not really the way that Ray Dalio goes about what he does.

His life principles that he's developed throughout his career are really around not believing something just because he hears it. He is very rational; he likes to do the research and learn what is true and what is not to make an informed opinion and make informed decisions. That's something that I really admire about Ray Dalio, and it’s something that I think more people should aim to do: be more objective with their opinions.

But it also kind of scared me when he comes out and speaks with a high level of confidence that the situation we're in around the world at the moment reflects very similarly the Great Depression that we saw start in 1929. So with that said, I wanted to play you guys a couple of clips that I have pulled from that talk that I was listening to—that TED talk with Ray Dalio—and hopefully, just maybe it provides some clarification or explanation along the way.

The first clip I want to play is Ray's explanation of the current situation that we all find ourselves in: “Well, I think you could look at this like a tsunami that's hit—the virus itself, the social distancing—and then what are the consequences in terms of the wreckage? When you look at it, I think you have to think of that as incomes and balance sheets. You know, there was a tremendous income hit, and then the balance sheets are losses. What and who has what savings and so on."

So the first part of this clip is Ray saying that economically this is a problem of revenue and it's a problem of savings. Essentially, the global lockdown has just stopped revenues coming in. So that is the revenues of citizens, it's the revenues of corporations, the revenues of countries. Right. So then this becomes a question of, well, how do you then negotiate the stop of revenue, and how do you tackle the problem that now there are still expenses to be paid?

How do we tackle the problem that companies and people are whittling away their savings in this time where there's no money flowing in? Then how is that dealt with? In order to understand that, you have to realize that there are these holes—these holes in income and the holes in the balance sheets. You also have to realize that there is the production of money and credit. Who produces that money in credit?

Okay, the money and credit comes in different flavors. There’s U.S. dollar money and credit; there’s Europe euro dollar money and credit. So when you look at the world and you're seeing it, you're seeing a situation that is the same as existed really in the 1930 to 1945 period. Now we're seeing the production of a lot of debt—a lot of borrowing by the government. We're seeing zero interest rates—not the traditional kind of monetary policy but the producing of a lot of money and credit.

So the Federal Reserve is buying the Treasury's debt, and the Treasury is getting that money to, mostly, Americans in some imperfect but remarkably large way. So the second part of this clip then describes the complications of having those holes—those revenue holes, those savings holes—and it obviously talks about how the governments and how central banks have to step in to try and fill those holes.

Ray says they're doing this in a large but imperfect way. What's interesting is that through trying to fill the income holes and the balance sheet holes, the actions that are taken there also cause other problems. The Europeans are doing the same in their way; their bank is smaller because the world lives with about 70 percent dollars and only a small percent euro.

They will produce theirs, and there aren’t many banks around the world, so the rest of the world is going to have gaps—holes that won't be filled. So if you think about that and say American printing of money and the borrowing will leave us with a lot of debt and monetization, that's something interesting to talk about, and we need to talk about that. Who will pay these bills and how will that be shared?

That will be something we need to talk about, but you will know that you will get that money and that the Europeans will get their versions of that money. But we are in a new world, and that world is most similar to the 1932-1945 world, and a lot of the world will not get that money in credit. So there'll be a big differentiation as to which entities benefit and which entities don't. There'll be a big collaboration as to how we will deal with that bill and who will end up with what—a big question of wealth distribution and all of that.

So if that's the big thing that's going to be happening, some of the bigger picture problems from having these income holes is, first of all, there are going to be some countries that can't fill in those holes. That's obviously a big issue. Then another issue is, well, what happens in those countries where those holes are filled in? What happens to that massive amount of government debt? How is that repaid? As Ray Dalio says, is it a matter of redistribution of wealth or some other measure?

So Ray's overarching message here is that while this problem is actually pretty simple—it’s a pretty basic problem; it’s just a stop in the flow of revenue—that’s the problem. But when you zoom out even to a global level, you can start to see how this becomes a much bigger economic problem. When you do zoom out to that global level, you can see that things start to get complicated very quickly.

That’s what Ray talks about in this next clip: “We are at a defining moment in history where we are about to see how this complicated issue is going to be resolved. We're now at one of those defining moments that I've seen repeatedly—the 1930-1945 period. If you go back in history, there's nothing new to this. It’s a defining moment in terms of how people are with each other. So when you look at it, will people come together or, when it comes down to it, really will there be a taking care of oneself? And what does that define, and how will that go? That'll be, I think, a defining moment.”

I look at these histories—if I can take a minute, I'd like to just paint a template for you that takes us, you know, over the last thousand years—the things that have happened over and over again. There was one pattern that I'd like to convey.

Now, just quickly before Ray goes on to talk about that repeated pattern of history, in this last clip, Ray's talking quite politically here. What he means is that he believes that this issue is an economic issue so large that he reckons it is going to take the cooperation of countries around the world to help us really successfully solve the issue that we're facing.

The defining moment he refers to is how or if we could collectively come together and implement the best solution to the problem to help us all get back on our feet, or whether the solution to the problem ends up being something that causes more suffering or conflict.

Anyway, back to the video—this is Ray explaining the four factors of the economic machine. "There are four things that are the driving forces of our economy and our lifestyle and wealth. The first and most powerful is productivity, which comes from people learning and inventing and doing things. Well, just as Marco described, okay? It grows slowly, you know, one, two, or three percent a year. It grows slowly, and it's not volatile because knowledge is non-volatile, but it grows, and that raises our living standards over a period of time.

So productivity is what we call the real economy—it’s real people going out there and making things or providing services or inventing new stuff. On the flip side, also consuming other people's products and services, us doing that more and more is what we call productivity growth or the growth in the real economy. Then there's a short-term debt cycle.

The short-term debt cycle is, you know, recessions and expansions and booms and recessions that last about eight to ten years. Then laid on top of that, you have these short-term debt cycles where you enable an increase in cash flow into the real economy to try and get it to grow faster. But of course, that flows through cycles, and it eventually breaks down when taking on more and more borrowed money does not lead to an increase in economic output.

Then there's a long-term debt cycle. That long-term debt cycle, which goes on about once every 50 to 75 years, is when you begin a new type of money and a new type of credit. That began in 1945 with the new world order at the end of World War II. With the Bretton Woods monetary system, we created a new monetary system in 1945—a new money.

So they wiped out pretty much the old money or they largely disposed of it, and they began anew, and that's the new world order—which was the American world order. We have seen it, and still, 70 percent of the money and credit that exists in the economy is run by dollars. What you have traditionally is the breakdown, then the third influence on the economy is the long-term debt cycle, which when it ends usually causes a big change in the economy.

Just with monetary policy, now the example that Ray uses here is the Bretton Woods monetary system, which was put in place in 1944, where it basically linked currencies to the U.S. dollar and the U.S. dollar was linked to gold. It was also a time when things like the IMF and the World Bank were founded. But eventually, of course, as the world evolves, then that particular monetary structure, I guess, loses its effectiveness, and then that comes to an end. As Ray says, there is a new world order that is the end of the long-term debt cycle, where the whole monetary system can be changed or altered or tweaked; things get reorganized, and we come out with a new and improved system.

Then the fourth influence is politics, and politics is largely how we deal with each other. There’s internal politics and there’s external politics. The internal politics is how do you deal with the wealth gap? How do you deal with the values gap? Do you have a common mission? Do we have an American dream that we can agree on and that we're pursuing together, or do you fight over wealth and so on? And so when you look at history, that's what revolutions are in their various ways.

And there's always a revolution in one of these; sometimes those are peaceful revolutions, and sometimes they're disruptive in intent, but it's a wealth shift, and that needs to take place. In nineteen… what, the Roosevelt shifted policies and tax changes and so on in that way. And then in other countries, there was that turning over democracy. Hitler came to power because of that gap.

So how people deal with each other internally—so here Ray says the fourth economic pillar is politics. But politics, more in a sense of policies and agreements as to how we deal with each other. Internal politics, as he describes, is how a country goes about its own citizens, and as Ray is about to describe, external politics talks more about how countries deal with each other.

There's also external politics, which means between countries. You have a situation when there's a rising power challenging existing power. There is competition, and there is a risk of war, and so how they deal with each other—whether there's a greater good or whether they are fighting with each other—is the defining moment there.

There are always stress tests—these big stress tests that come along about once every 75 years, and when they happen—and this is a stress test. I think that what you're going to see is how we deal with each other. There's enough wealth to go around, but what do you do when you're outside the ring of support?

Now, let's say that of the U.S. dollar—and what is that going to be like for those entities? Or if you're within the ring of support, how will that bill be divided, and how will we be with each other? I think we're going to have to reconsider who has what—what is it about education and so on? That's what we're in, I think.

So there we go—Ray reinforces that the major issues that we'll have to negotiate throughout this defining moment in our history is, first of all, how do we help out those countries that lie outside that ring of support? Then also, for the countries that are within that ring of support, how do we deal with the debt that has now been taken on in order to help plug the holes?

So that's how Ray views the economic situation that we're in. But the next thing he goes on to talk about in this talk is how he actually thinks that what we're in right now is a very comparable period to what we saw during the Great Depression.

From a practical level, do you think that we're headed into a global depression? Yes, but I want to be careful about how I use the word. You know, like to be work; though the word is an evocative word, it’d be scary and so on. So what do you mean by a depression?

Okay, something like what happened in the 1930s. So just to repeat now, 1829 to 1932, there was a fall in the economy and very double-digit unemployment rates—a magnitude, a fall in the economy, of about 10 percent. Do I think we're in that? Yes. How was that dealt with in 1933? What they did is they printed a lot of money then, and the government came out with the same type of programs that we're having now. Yes, okay, same thing—zero interest rates hit zero, same thing, okay, same dynamics.

Then, that money causes an expansion from that point. How long does it take for the stock market to exceed its highs, or how long does it take for the economy to exceed its former highs? A long time. Okay. Do I think that's what we're in? Yes, that's what we're in. We've seen that happen repeatedly in history. You saw it many, many times; it's just the most recent one, and there's a structure to that.

So yes, this is not a recession; this is a breakdown, and an operation that I'm just describing in terms of how it's dealt with the production of money and credit and all of that—that's what we're in. So Ray's pretty certain that we're in this depression-like environment because if you look at the factors, like unemployment, for example, if you look at the dynamics, they're pretty much identical.

One of the things that Ray also talks about in this talk is that we've also come a long way since the 1930s in terms of monetary policy, economic policy, and international relations. This time around, we really could implement a much better solution than what was implemented back then. That's really Ray's point throughout this whole talk: the dynamics are the same, but this is a defining moment because the solution could be better.

But as he states, it's going to come down to whether we can all collectively—all of us—work cooperatively or whether people take more of an exploitative or combative stance. Unfortunately, his perspective that he notes in this interview is that he's probably still more pessimistic on this issue than optimistic.

But with that said, let's get a little bit more specific and let's hear Ray talk about the ways that he actually believes that this issue will be negotiated by the United States. As he says in the past, he believes that there are four key pillars to recovery from depression-like times. He obviously thinks that there’s going to be the printing of new money, he thinks there’s going to be cutting spending, debt restructuring, and also redistribution of wealth.

This is what Ray thinks will happen this time around, but how would you think about balancing these tools right now? Those are the tools through, since eternity, basically since recorded history, those are the ones that operate it. I think what you're going to see is a combination—you’re seeing printing money and redistribution. I think it'll last. These things happen pretty quickly; they last maybe a couple of three years in terms of that process.

Then you have a rebuilding, and they're dealt with creatively. The greatest force through time is inventiveness—human inventiveness, adaptability. So you're going to see these restructurings happen, and you're going to see the kind of inventiveness that you just saw from Marco. Okay? It's the power of that adaptation that is the greatest power. I did a study, which is on LinkedIn, if anyone wants to see it.

It goes back 500 years and shows real GDP—in other words, what economic activity—going back there. There’s a line, and you don’t see these depressions, as we're calling them, even on that line—they barely wiggle. When you go into it, and you look at that piece, that's what it looks like: GDP falls, ten percent unemployment goes up—it passes.

Because the greatest force is the force of adaptation and inventiveness if we can operate well together. So that's what I think it's going to look like over this period of time. It'll pass; the world will be very different. There'll be a new world order, but it will pass and will be invented because what we're dealing with now is just money and credit.

Money and credit is just digital. I mean, there are real goods and services—you know those are real—but everything else is just accounting. So when you change the digits and you work those things out, you work yourself through it. That takes, you know, a couple of years at most, kind of, and then you come back into a restructured environment.

It could be said that it is really healthy in many ways because it is a stress test. If you look at history, people have gotten—sometimes they get weaker, or they're not prepared for it—in many ways, weaker in terms of maybe they don't build enough savings, and they operate that, or maybe they emphasize luxuries over necessities. It’s a reorienting type of experience that, in many ways, makes us healthy, even appreciating the basics of life.

We see something like 20 trillion dollars of losses. So there, if you work that through and say you don't have money and you don't have credit, your business can fail. You know, this. We see this all around us. So there can be failures when there can't be payments, and so the question is who gets what check to make those payments and get past it?

But we're going to have a giant restructuring of the IOUs, and we're going to work out when hospitals are broke—can go broke—because this is terribly costly for hospitals, and they will not fully recover their losses. Hospitals will go broke even though we know that we need them. So when you go, you have to go entity by entity through this, and then you’ll go through the process of who will pay.

This is not, you know, some people mistake this as there is a virus, and the virus may come and go. Okay, maybe we never see it again. I don't think that's likely, but the people who tell me say not—who knows? If it never came back again, there will be those who are broke and who will have lost some income.

We're going to change how we operate. In a way, the supply lines are going to change. In other words, with self-sufficiency, what is self-sufficiency now going to mean? Do we have enough of this and that? We're going to restructure our economy and restructure the financial system in ways that we mean we are not going to go back to the way it was.

So overall, this is a big economic issue, as Ray describes. There are definitely similarities in the dynamics as he talks about during the time period of the Great Depression. It will be really interesting to see what happens even at a global level to help us all get through this.

I’d love to hear your perspective. I’d love to hear, you know, what are your thoughts on the four pillars of economic recovery that Ray Dalio talks about? What do you think we'll see this time around? Do you think we'll see big changes to the system? Who pays for the debt? How does that all work itself out?

I’d love to hear your perspective, so drop that stuff down in the comment section below. Of course, leave a like in the video if you did enjoy it or if you found it useful. Definitely check out the original video; this is just scraping the surface on what Ray talked about in that TED talk. I’ll leave it linked down in the description below.

If you’ve got 45 minutes to an hour, then go have a look—watch through the whole video because, man, Ray just knows so much about all of this stuff. It’s really good to listen to him talk. So I’ll leave that stuff down in the description of this video. Of course, if you’re interested in learning how to start investing, make sure you check out Profit Fool; links to Profit Fool in the description. I’d super appreciate it if you wanted to get started with investing, and you’re not sure how—check out those courses that will help you out heaps.

But that’ll do me for today, guys. Thanks very much for watching, and I’ll see you guys in the next video. [Music]