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Ray, it’s great to have you back on the show. Welcome.

MR. DALIO: Thank you. I’m happy to be here.

MR. IGNATIUS: So, we’re going to talk about a lot of the deep, structural issues that are facing our economy and political system, but I want to start with something that I sure didn’t see coming this week in the financial markets, and that’s the so-called “Robinhood market,” the way in which GameStop and other stocks were bid up by people who seem to see themselves as stock market populists.

I’ll quote from something that we wrote in The Washington Post yesterday: “People claiming to have purchased GameStop shares have framed their efforts as a financial rebellion, collective payback for the Wall Street giants that place what they view as reckless bets and have long exploited the financial system at the expense of the little person.”

This stuff is complicated, but maybe you could walk our listeners through what’s happened, and also give your opinion about whether this is, in fact, a kind of populist revolt or is it a pyramid scheme.

MR. DALIO: They remind me a lot of me at–you know, at that age. You know, I started investing at an early age and I was rebellious and wanted to do it my way and bring it down. And they’re using the mechanics of the markets. They’re squeezing the shorts.

And then–and rebellion, if it’s not destructive, if it’s not antagonistic, is part of an evolutionary process. Of course, it raises questions about liquidity and information and legal questions, but they’re beginning to understand the mechanics of the market, and those who are being squeezed are beginning to understand the mechanics.

What concerns me more is the general anger, and almost hate, and the view of bringing people down that’s now pervasive in almost all aspects of the country. When we’re dealing with different values of some on the left that are extreme, some on the right on the extreme, and there’s hate–you know, I have an expression: When the cause is–that people are behind–are more important than the system, the system is in jeopardy.

And so, that general desire to hurt each other and the issues that we face that have to be resolved but are not easily resolved more generally is of concern to me.

MR. IGNATIUS: Let me ask you specifically about this market disruption, the sharp increase in prices for some of these stocks. Do you have any concerns about the structural soundness of our financial markets? Did you see anything this week that would give you concerns about liquidity, about underlying vulnerabilities that would make us think back to 2008-2009, the kind of structural problems we saw then?

MR. DALIO: No, liquidity problems, you know, come and go, and then there’s the mechanics. There’s a certain speed of trading, there’s certain algorithms that have trading–that have these effects and can create dislocations. They’ve been with us and, you know, they exist, but it’s part of an evolutionary system in which you find problems and then you rectify them and you deal with them. What I’m really concerned about is that 2008 represented what we have as a worse situation than 2008 now regarding the finances.

So, if you look at history and repeat over periods of time, there is the creation of money and debt to get buying power. But that is being produced by central banks that print that money, because they can’t finance the debt any other way. And that particular dynamic and the extension of it, which is repeated out in time that, if you like, I’ll explain a little bit more of, that is the big concern.

So, there’s a lot of money sloshing around, but if you think about it, the wave of financial assets–and we talk bonds and debt as alike–is believed to be–it gives buying power, but it’s also believed to be that one could sell one’s bonds and assets and buy goods and services with that, but the amount that exists out there that are claims, is far greater than would be allowed to happen. So, there’s a financial situation which is deeply of concern to me. And to some extent, it provides the liquidity for some of these things to happen. But the things that are happening here, other than being reflective of the liquidity are really just part of this bigger problem, I think.

MR. IGNATIUS: We have, Ray, a current debate over what could be the next chapter in your story, but it’s a complicated debate; let me summarize it: The new Biden administration is on Capitol Hill urging a big stimulus package, totaling $1.9 trillion, on the argument that, with interest rates as low as they are, with the country needing to rebound from the pandemic and lockdown, with the need for stimulative spending and investment, this is the time to go ahead and do that, even though it’s an enormous amount of money and debt to be taking on.

What’s your response to that argument, which I’m sure you hear every day, as we all do?

MR. DALIO: It’s not–there’s not enough financial resources and money to go around, and so I understand the needs for that kind of spending, and the actions that have been taken so far in terms of that kind of stimulus. But it is a mistake to believe that the lower interest rates and the debt service payments are the only consideration, because all those bonds that–the debt is converted into a bond and has to be sold, and it has to be sold to buyers who then find it attractive enough to own it. The interest rates are minus 1 percent in inflation-adjusted terms, and about 1 percent, a little over, in actual terms, and they build a pile of those debts that the bondholders believe that they can turn into buying power by selling the bonds and making that purchase.

I don’t mean to sound technical, but what I mean is that when you have a lot of claims of assets, they’re not providing a good return, and you have the world own too many of them, it’s not probably going to be able to be bought by those. That means that they will have to–the Federal Reserve will have to make up a gap, a funding gap. The upshot of this is it is in cycles. This has happened throughout history. You can go back thousands of years and you see the pattern, and that pattern is not a pattern of self–of good finance. It risks the dollar. It risks the possibility that that won’t be a good store hold of wealth, those bonds. And that’s not good, sound finances. So, one should not delude oneself into believing that, because interest rates are low, that that’s not a problem. I think it’ll be a problem.

I think one of the most important things to consider, too, is, is that money that’s going to be expended also going to be productive in terms of producing goods and services and so on in its way. I don’t think we’re paying enough attention to productivity, either. So, I would–I’m just a mechanic looking at how the machine works, and my definition of the machine is that it’s very concerning.

MR. IGNATIUS: You’re point, though, we need to look at precisely how this enormous amount of money is going to be spent and whether it will be spent productively to really stimulate growth is an important one.

I want to just pause a minute and ask you to share your thoughts about Janet Yellen, our new Treasury Secretary. Janet Yellen has deep experience as a central banker. She’s got an extraordinary resume, but not everything she has done as a central banker, I would guess, you would endorse. What’s your evaluation of her, and if you could share what you’re hearing from friends in the financial markets on Wall Street, what does Wall Street think of her?

MR. DALIO: Well, I think–as you say, I think she’s skilled, experienced, has a broad perspective, and also understands the social issues and the political issues well.

I do think that she might overemphasize the business cycle part of it–in other words, when she tightened monetary policy, I think she was thinking that the traditional economy would have a higher level of inflation and I–and then, there was a readjustment in that thinking, which was appropriate.

I worry that–about the understanding of total balance of payments position. I think the United States has gotten used to being the world’s reserve currency, which meant that they think that whatever we can sell the rest of the world, the world will buy and we’re not subject to constraints or that dynamic. So, that concerns me a bit. But I think you have, all things considered, you know, a capable and openminded person who is in a very difficult situation.

I think sometimes we think that if we get a good leader, president of the United States or Treasury secretary and so on, that they can deal with the issues and bring about good results. There are sometimes circumstances that they find themselves in, which the United States is largely in, which is it spends more than it earns, and it finances it with debt by a lot and it has to sell those bonds, and there are no easy answers to that. And so, the position that she’s in and the president, are very difficult circumstances. So, when one goes through the mechanics, you could have a very good person in the job and that doesn’t necessarily lead to, you know, great results because the circumstances–the maneuverability is different.

And so, I give that example. They had to put out–they had to send the checks. If they didn’t send the checks–let’s look back. If they didn’t send those checks and the Federal Reserve did not provide the support, we would have had a rebellion. We would have had people who needed the money not get it. You have a class warfare issue. And you would have had companies fail, so they had to do that. But as that–circumstances meant that they had to produce debt and they had to produce money, so there’s a mechanics to that.

Now, that set of circumstances will exist and they will–the world, Republicans and Democrats, will debate 500 billion here or there or something, but the big picture is that situation is ahead of us, and it’s politically challenging. It’s, you know–so, we bring in the politics.

As I say, there are three big things, we’re talking about the finances. There are three big factors, and then we throw in the virus. The three big factors are this financial dynamic that we’re talking about. The second is the polarity that exists in wealth, values, and politics, which is extreme, the class warfare, the actual willingness and eagerness, almost, to inflict harm on the other side in the absence of reasonableness is at its greatest extreme. I looked at statistics and I go back and you would have to go back to 1900 to find something like this. And then, we have the rising of a great power, China, to challenge an existing great power.

Those three factors, the financial factor, the wealth gap and political factor, and the rise of a great power, the last time those things happened were in the 1930s. And if you look at history, going back over periods of time before that, hundreds of years–I’ve made a point of studying the last 500 years. If people are interested, it’s on LinkedIn, it’s called, “The Changing World Order.” You can see these patterns in history. Those are the circumstances that we’re facing. And so, the issue really, I think, is can we face those things in a skillful way and a bipartisan way so that we don’t do ourselves even more harm than the circumstances have brought us as a challenge.

MR. IGNATIUS: So, Ray, let’s look together at the images that are seared in all of our minds from several weeks ago, the storming of the U.S. Capitol, something I think most of us could never have imagined seeing.

You have just outlined your view that we’re in a crisis like the 1930s, in which political violence became the norm across Europe and so many countries with catastrophic results.

And I want to ask you what went on in your mind as you watched those images of the Capitol being stormed; how would you explain that phenomenon? And then, more to the point, what do you think we should do about it to try to keep this country from blowing up again and again in ways that will just provide recurring crises. What did you think when you saw the Capitol being stormed?

MR. DALIO: I honestly wasn’t surprised. Chapters eight and nine in that book, which are called “Internal Order and Disorder Through History” gave the circumstances. I think one only has to see history to understand–one needs to see the history. What’s happened here is repeated repeatedly through history. There are irreconcilable differences, lines that people almost can’t compromise. And survey results, something like–I think the statistics are 15 percent of the Republican surveys and 20 percent of Democrat surveys wish members of the other party would die. You have–they don’t want to–a large percentage would not want their son or daughter to marry a member of the other party. There are irreconcilable differences. And when they come down, like I said before–if the causes that people are behind are more important than the system, the system is in jeopardy. So, it’s deep-seated and there’s not a good resolution.

So, I would say now to carry it to the next, I applaud President Biden’s desire to be president of the United States, and that includes members of the Republican–or let’s say, those of red states and those of blue states. Because history has shown if you cross the line too much in their values and so on, you’re going to have a civil war of sorts. However, I think it’s very difficult.

And so, when you ask the question of, you know, what should be done, I think members of both parties have got to–if I was president, I would want to bring in to my tent representatives of the other side to try to deal with the management of the whole.

I personally don’t care what solutions are reached, ideologically, as long as they’re done in a bipartisan way that the majority of Americans support and that if they’re done smartly so that they don’t stupidly create a policy of spending or a tax or a social policy that becomes damaging. The problem we have is to agree on that. And you know, I–so, what to do? I would say you have to have–if I was president of the United States, and this I don’t think is going to happen–but if I was president of the United States, I would have a bipartisan Manhattan Project-type of exercise in which I would have both brought in, and over a number of months, almost–and skills–and to work it through. Because there are structural issues, important, big structural issues that there are not easy answers to. and so, they have to–

MR. IGNATIUS: I assume here–I assume here, Ray, you’re talking about some kind of national commission that would seek to look at the issues that we’re so divided over, and that’s a proposal that many people have made.

Let me ask you about the proposal that’s on the table, which is the impeachment of President Trump. There is a question now about whether it’s wise to follow through in the Senate with a trial in which it’s pretty much certain that President Trump will not be convicted.

What effect do you think that would have on the political situation of the country, and let me also ask what effect would it have on the financial markets?

MR. IGNATIUS: I don’t think it would have much of an effect on the financial markets. That’s some–a domain that I feel comfortable to speak about.

Regarding the politics and what should happen and the legal issues and all of that, I’m not prepared to comment about. I do–I am more broadly worried about this conflict, but I can’t be the–I don’t consider myself the expert on commenting on whether that should proceed or not.

MR. IGNATIUS: Fair enough. Let me return to something you said earlier, which is fascinating, which is in a lot of your recent writing, and that is a concern that the dollar may be losing its status as the world’s reserve currency, the currency in which people do their deals, finance their transactions. How serious a problem do you think that is, and do you think the Chinese are prepared to make their currency, the yuan, over time more of a store of value, a reserve currency for the world?

MR. DALIO: It’s a major issue. Debt is money. When you produce debt, you–it’s an obligation, you’re holding a bond, to deliver money and you have to produce money. And we’re producing a lot of it, and if you look at the holdings in the world of bonds and who is holding them, there’s less–they’re overweighted in bonds and therefore overweighted in dollars and dollar assets, and there’s–and we’re going to try to sell a lot more, and that has created a risk for the dollar. The dollar is down about 12 percent since the actions have taken place. It’s an issue. It’s important because if you lose your reserve currency status, you lose your exorbitant privilege, really, to get money and borrow it when you need it. And so, it’s a risk.

That money can go into an alternative currency or it can go into alternative assets. Traditionally, all devaluations drive money into stocks, gold, other assets. And so, you’re–you don’t have to just go to another currency in order to escape the bonds. You see devaluations of the dollar in relationship to all financial assets.

But it’s also coming at a time when China is also opening up its financial markets and the world is underweighted in its financial markets. It’s a viable economic alternative; it’s a viable economic competitor. It’s developing more capital markets. It’s the second-most important capital market. They are opening up. And because the world is overweight in U.S. dollars, the flow into that to rebalance is strengthening the renminbi. And the Chinese have intentionally not developed it because it’s somewhat–the internationalization of the renminbi, but now there is the internationalization of the renminbi.

So, to put it in perspective, China is now the largest country in trade, in world trade. Exports, imports, it’s larger than the United States; it’s the largest in the world. And yet, virtually none of its transactions are done in its currency, about 2 percent. So, there will naturally increasingly be that–the internationalization and it will represent an alternative. And that’s why, then, we have the issues of capital wars, with–traditionally, this has happened through cycles: the Dutch and the Dutch guilder; the British and the British pound; the American cycle; and now, the Chinese. And as a result of that, we’re going to see more of that kind of movement.

MR. IGNATIUS: So, Ray, we have about two minutes left. I want to just close with a question. This is the week that the Davos World Economic Forum normally would take place in Switzerland. I gather there was a virtual Davos, and I’d be surprised if you hadn’t been one of the participants. What’s the buzz among the Davos crowd as they look at developments in the United States, they look at the global economy? What do you hear from major financial players?

MR. DALIO: I don’t know that I had an adequate survey, but I can say to the people just generally I speak to, they share a lot my thinking. And you know, there’s a concern about, you know, even really talking about some of these things.

And then, I think, you know, there’s a growing worry, too, about the implications of COVID and the rate at which, around the world, it will be resolved.

MR. IGNATIUS: So, we’ve had a wonderful chance to talk through some big issues with Ray Dalio. I heard some careful phrasing of support for both President Biden and his Treasury secretary, but also noting just how serious those problems are.

Ray, thank you so much for joining us, again. We really enjoyed the conversation.

MR. DALIO: It’s my pleasure. Thank you for having me.

MR. IGNATIUS: So, I’ll be back next week on Tuesday at 1:30 talking with Dr. Anthony Fauci about COVID-19 and vaccination and where we’re going in dealing with this terrible pandemic. Please join us. Have a great weekend. Thanks for watching Washington Post Live.

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