Billionaire investor Ray Dalio on capitalism’s crisis: The world is going to change ‘in shocking ways’ in the next five years

MarketWatch | Jonathan Burton | Sep 18, 2020

Ray Dalio at world economic forum - Billionaire investor Ray Dalio on capitalism’s crisis: The world is going to change ‘in shocking ways’ in the next five yearsVeteran hedge-fund manager says capitalists don’t divide the economic pie well, so the system isn’t working effectively for all

Ray Dalio certainly is no radical idealist, but in his frequent writings and media appearances the veteran investor consistently calls for Americans to rewrite their longstanding contract with capitalism so that it is fairer and more generous to more people.

Otherwise, he predicts, life in the U.S. could become more difficult: mountainous debt that stunts economic growth; fewer opportunities for ordinary citizens to get ahead financially; and a worldwide lack of trust in the U.S. dollar that diminishes Americans’ purchasing power and could lower their standard of living.

Dalio is the founder of Bridgewater Associates, the world’s largest hedge-fund firm, which has made him a billionaire. So it’s not surprising that he champions capitalism as a proven way to expand economic growth and living standards.

“Capitalism and capitalists are good at increasing and producing productivity to increase the size of the economic pie,” he says.

Then Dalio stands this tenet on its head. Capitalists don’t divide the economic pie very well, he says, and so today the capitalist system, the foundation of the U.S. economy, is not working efficiently and effectively enough for all.

“Capitalism also produces large wealth gaps that produce opportunity gaps, which threaten the system,” Dalio says — a system that has been and still is key to the health and success of U.S. business, workers, government and investors alike.

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Unless the U.S. takes steps to make systemic repairs designed to provide greater opportunity for more Americans to achieve personal growth and financial security, the consequences likely will be painful for the country, as Dalio explains in this recent telephone interview.

Select Highlights

MarketWatch: You have written and spoken about three big domestic and international problems facing the U.S. over the next five to 10 years and how a failure to address these challenges could threaten America’s standing in the world. What are these three pressing problems?

Dalio: There is a money and credit cycle problem, a wealth and values gap problem, and an emerging great power challenging the existing dominant power problem. What’s going on is an economic downturn together with a large wealth gap and the rising power of China challenging the existing power of the United States.

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But we haven’t lost all of our competitive advantages. For example in innovation and technology, the United States is still the strongest, but China is coming on very strong and at existing rates will surpass the United States. Militarily, the U.S. is stronger but China also has come on very strong and is probably stronger in the waters close to China that include Taiwan and other disputed areas. Finances for both countries are challenging, but for the U.S. more so. The U.S. is in the late stages of a debt cycle and money cycle in which we’re producing a lot of debt and printing a lot of money. That’s a problem. As a reserve currency status, the U.S. dollar is still dominant though its being threatened by its central bank printing of money and increasing the debt production problem.

MarketWatch: Let’s put it bluntly: Is capitalism broken?

Dalio: I wouldn’t say broken as much as I’d say it has problems that have to be fixed.

The capitalist system is based on profit-seeking being the resource allocation system, which generally works well but doesn’t always.  We now have too much emphasis on distributing wealth and getting it from producing debt and printing money, and not enough from increasing productivity. Wealth cannot be created by creating debt and money. We have to be in this together. The system needs to be reengineered to do this. But if we don’t do this engineering well, we’re going to spend in an unlimited way and deal with that by creating debt that won’t ever be paid back, and we will risk losing the reserve currency status of the dollar.

‘Within the next five years you could see a situation in which foreigners who have been lending money to the United States won’t want to.’

The United States doesn’t have a good income statement and balance sheet in dealing with the rest of the world. It is running a deficit to the rest of the world that is financed by borrowing money so that we are producing liabilities. Our living standards are based on our spending, not on our income statement or balance sheet. If the U.S. loses that ability and it doesn’t force itself to be more productive, one day it will lose that ability to borrow and then will have to cut spending, which is painful.

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MarketWatch: What steps do politicians and business leaders need to take now to create and implement reforms that will fortify the U.S. balance sheet and the dollar’s status?

Dalio: In brief, productivity and equal opportunity are most needed. If we could at least agree that we must have these things, that would be great. What we have now is a situation in which we’re fighting each other, we are not providing equal opportunity, and we are losing our productivity gains.

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