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WALTER ISAACSON: Thank you Bianna. And Ray Dalio, welcome back to the show.
RAY DALIO: Oh, it’s so good to be back.
ISAACSON: The big beautiful bill, as Trump calls it, has passed the House. The Senate is now wrestling with it. It seems like it would add maybe $2.4 trillion to the deficit, and, by the last estimates. Is that a really bad thing? Should we worry about that bill adding too much to the deficit?
DALIO: Yeah. I think that if there’s one thing I can give people, and I’m compelled to give people now, it’s an understanding of the mechanics and the supply demand so that people will understand how to answer that question, which is why as a global investor for 50 years who’s been through many of these, I wanted to pass along, you know, my book, my description of the mechanics. So in answering your question I want to say why it’s a compelling moment, and that if they do not bring it down to 3% of GDP from where it’ll be about 7% of GDP, they have to bring it down by 4% of GDP, that there is very high likelihood of real problems.
ISAACSON: Yeah. Okay. Now you say you gotta bring it down by the, by more than half, the amount of the deficit. Can that be done with spending cuts alone, or do you think they should let some of the tax cuts expire?
DALIO: It has, it has to be done by three things. There is, and it has to be spread out among these three things. Because any one of those three things would be too painful. And those three things are tax revenue, spending cuts and interest rates. Although Congress and the, you know, the president and the, and the process does not deal directly with the third of those, right now, a trillion dollars, half of our deficit, is interest payments. And not only do we have a trillion-dollar interest payments. In the next year, we have $9 trillion of debt maturing that has to be either rolled over or sold.
ISAACSON: Well, wait, doesn’t that mean interest rates are gonna not go down if we’re adding more to the deficit and they have all this expiring?
DALIO: That’s right. So there’s, so I, there is what I call my 3%, three-part solution, which was very similar to 1990 to 90 excuse me, 1991 to 98. It was cut by 5% of GDP, the budget deficit. In those years was cut by 5% of GDP by spreading it around. So the three things are needed. So if there’s a mantra that about 4%, – here’s the magnitude of it. About 4%, if it came from tax revenue – doesn’t mean tax rates, but it could be tax revenue – 4% was cut from the budget deficit, that would naturally change the supply demand picture to bring down interest rates by 1 to 1.5%, which would itself reduce the deficit by another 2% or so.
ISAACSON: But, well, let me push on that question of how are you gonna raise more revenues? You say it is not just by allowing tax cuts to expire. But don’t some of those tax cuts have to expire if your 333 solution is gonna work?
DALIO: Where it comes is a political question. In other words, yes, you can let the tax expire or you – so many different ways, you can do so many different ways.
ISAACSON: Well, lemme ask, what would you do? You’re one of the wealthiest people. The tax cuts help you. Would you, what would you do in terms of those tax cuts that are for the wealthy?
DALIO: I would, I would allow important tax increases in a way that also – my own view would be improve education, improve productivity in a way that raises productivity for most people and so on. But this is not my, this is not my political, okay. I want to say, whether you turn left or you turn right, it, what’s, what I’m seeing when I go down there and I speak to both sides of Congress, who are the people who are responsible for this, nobody disagrees with the need to go to 3% of GDP in that number. And there, and what I’m seeing in politics is that there is, whether they, it’s like being on a ship that’s headed to rocks, and there are those who wanna turn right and those who wanna turn left. And they’re so hell bent on arguing of whether they turn right or left that they will not get past, they’re gonna hit the rocks.
ISAACSON: President Trump seems to be trying to jawbone the Fed Chairman J Powell into cutting interest rates. Does that make any sense to try to jawbone that and would the bond market permit that?
DALIO: If interest rates are unnaturally cut by the central bank printing money or pushing down interest rates unnaturally, the bond market will not want to own that. Think about when you are owning a bond, what you’re getting is interest rates. So the dollar will go down, the value of money will go down, and it’s discouraging.
ISAACSON: On Sunday, Treasury Secretary Scott Bessent said that tariffs would help bring in enough money that we wouldn’t end up having as big of a deficit. Does that ring true to you?
DALIO: De – we’re now in a world geopolitical situation that relates to many things such as self-sufficiency and so on. It can bring in a lot of money. It also creates a less efficient world economy. Well, so how the deficits are, how the tariffs are put into place, what amounts how, has to be done scientifically to get away with that tax revenue. So tax revenue can come from that, but that is a matter of surgery and it has to be done carefully, and it has to be done moderately so as to not disrupt that. I’m concerned about that. But that is not going to be enough.
ISAACSON: You had in your book, by the way, you are in favor of some tariffs moderately applied in a scientific way that’s not just helter skelter. Explain why you’re in favor of that and why you think the way Trump is doing it may not be effective.
DALIO: We have a giant imbalance. The world, the United States is the largest consumer in the world, and it’s largely because the US government gets in debt and distributes the money, and it’s a consumer. As we have cor, we correctly, we’ve lost our ability to manufacture. China’s the largest manufacturer in the world and is in the other side of that. They lend us the money to borrow, to buy their goods. And now we have a big imbalance. We have a capital imbalance, and we have a trade imbalance between that. In a world that there’s a risk of going to war. And so as we deal with self-sufficiency, increasingly we have to become more self-sufficient, it’s a reality in this, and we have to become more balanced in that one way or another. So if that’s done economically, we have a population that is not productive in manufacturing. We now have a great polarity of wealth. 60% of Americans have below a sixth grade reading level and there, and there’s a productivity problem and there’s an economic problem. So if that is dealt with in a scientific and a balanced way, that could have some benefits. It’s not a black and white situation. But it has to be done with that kind of thoroughness. And so on one way or another, the imbalances will go away. The debt imbalances, the trade imbalances, the capital imbalances, because they cannot be sustained in the world that now exists, that, it’s coming to an end.
ISAACSON: Wait, when you say the one way or the other, they’ll go away, that’s sort of the other sounds pretty ominous to me. What are you worried about?
DALIO: I’m worried about all of – I’m, let’s go back to the debt. I’m worried about, that the demand for those bonds will not be equal to the supply. And I’m worried that as the debt now is at this point where it starts to, you have to acquire debt to service debt, you have to borrow money to service it, $10 trillion a year in debt service. That if, that, when you have that kind of condition, that you will have an unsustainable situation so that the central bank, the Federal Reserve, will be put into a position of either being seeing interest rates rise a lot because of that problem, crowding out other spending and costing it money because it, they own a lot of bonds and letting that happen. Or then having to print money and buy those bonds, which depreciates the value, very similar to the 1970s.
ISAACSON: Do you think then there’s a chance or a likelihood of a recession?
DALIO: We’re certainly going to have, we always have recessions. Now, just imagine what happens if you have a recession. On average since 1945 when the new world order began, we’ve had 12 and a half cycles of which there had always been recessions. You’re always going to have a recession. I am very worried that this set of circumstances will assuredly we will have a recession. And then the deficits go up. And then it’s very difficult at that time because people are at each other’s throats. So there’s gonna be an internal fight. The important thing is to deal with this now, okay. Before you have a lot more debt, before you have a lot more compounding of the debt before you have a recession.
ISAACSON: Let me read you a sentence from the book, your book that kind of made me snap my head. It says, quote “The policies President Trump is using to quote, make America great again, are remarkably like the policies that those of the hard right countries in the 1930s used.” Tell me what you mean by that.
DALIO: What I mean by that is, the 1930s was a period that had a debt crisis, local go – the governments were for, dysfunctional and four democracies chose to go to more autocratic policies for somebody to get control of the situation in order to fix the situation. So that you have, you had a debt problem. What Germany did, and number of countries, is that they essentially defaulted on the debt. They didn’t pay the debt. And then you have that central that more autocratic type of policy because the people want somebody to get control of this situation. And then you have the classic conflict between the left and the right. Okay, this has happened repeatedly, the left and the right. And then you have a fight between the left and the right. This has happened repeatedly. I’m referring to the thirties, but this has happened repeatedly throughout history.
ISAACSON: And do you think that it’s happening now in the United States that we’re slipping towards an autocracy?
DALIO: Yes. I do because somebody, the people want people, somebody to get control of this thing. And so what you see it yourself, we’re now questioning, there’s a challenge. How does the legal system work? Who has what rights? The possibility of, if there was a not accepting an election result. These things are very real today.
ISAACSON: When you talk about, perhaps we’re moving into an autocracy, there’s another sentence in your book that struck me, which is, “As shown in history, the transfer of power from democracy to autocracy was more often than not orderly within the democracy ’cause people were sick and tired of the system failing to work and wanted to give power to a leader who would take control of the mass and make it work well.” Do you think it’s partly the, a desire of people in the United States to move to a more autocratic system?
DALIO: There is a very clear, strong desire for somebody to get control of this and a willingness to have that more autocratic type of to deliver those results. Yes, I think so.
ISAACSON: When you talk about the potential of getting more revenues, I think in your book you even talk about maybe having a 2% increase in the income tax. Would you make that part of your 333 solution package?
DALIO: Sure.
ISAACSON: And what about –
DALIO: I think, I think what’s required is a little bit from everybody and everything.
ISAACSON: And what about the expenditure cuts? Would you cut the military?
DALIO: I think as you go down that prioritization, you know this, these are questions that are, political questions that have now, because our debt service being so high, we have very little room to cut anything that we don’t think is essential. So now you’re having the representatives in Congress having to make that choice, but they better make the choice as to what, whether it’s the military or whether it is something else or something else and something else, I don’t really care. Cut it, get to something like a 4% cut. And that’s not easy. So where that happens, because if we lose our economic wellbeing, if we lose our health economically and our power economically, if we lose the dollar as a world preserve currency, it’s, it reverberates through not only American power around the world, it reverberates through the world because the dollar, the US bond market, the treasury market is the backbone of all markets. And so, that could produce that kind of trauma. So how they get there in the particular trade-offs are for those experts and those representatives in Washington to weigh those considerations. It’s not for me to weigh those considerations.
ISAACSON: Well, if you’re going to have something that’s a 333 solution that would seem to require a grand bargain. One of those things where Democrats and Republicans meet and do the trade offs. Those used to be done in the days of Tip O’Neill and Ronald Reagan, for example. Our politics seems suited to that now. Do you think a grand bargain is possible?
DALIO: I don’t think it’s likely that we’re going to have any grand bargain until after the 2026 midterm elections. I think that this is what’s going to happen. The budget will pass. It’ll be this situation that I’m describing. And then what my hope would be is that there’s a mandatory bipartisan solution. That they create the equivalent of, you know, a Manhattan projects and so on, and create a mandatory bipartisan way of dealing with that. Do I think that’s likely? I don’t think it’s likely. I think that, but if we don’t achieve a bipartisan situation, we’re gonna have a financial crisis and be fighting with each other. So we, hopefully the compelling nature of this, before we have a recession, which will make that situation worse.
ISAACSON: Ray Dalio, thank you so much for joining us.
DALIO: Thank you, Walter.
About This Episode EXPAND
Fmr. Assistant Defense Secretary for Indo-Pacific Affairs Ely Ratner offers his take on how the US should navigate growing tensions with China. Ibram X. Kendi discusses his new biography of Malcolm X, designed for young readers. Financier Ray Dalio looks at the way nations handle debt and offers advice for avoiding a fiscal crisis in his book “How Countries Go Broke.”
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