Last week at the World Economic Forum meeting in Davos, Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, unveiled a system for scoring the relative power of the world’s top economic superpowers according to 18 determinants of future success, including debt burden, education and military strength. The inaugural “Country Power Score Index,” which is based on research from Dalio’s latest book and animation, “Principles for Dealing With the Changing World Order,” ranks the United States and China as Nos. 1 and 2 — but notes that the U.S.’s power is declining, while China’s is growing.
“If you look at things like where are we in our educational ratings in the rest of the world; where’s our infrastructure; where are we in our financial conditions, levels of indebtedness and money printing; what is our level of internal conflict — those kinds of measures, you can see that there has been a deterioration,” Dalio said about the U.S. in an interview with “Marketplace Morning Report” host David Brancaccio.
That’s in contrast to China’s trajectory since the end of World War II. “Per capita income has increased by 26 times. Life expectancy has increased by 10 years,” he said.
Russia is ranked 10th in the power index — but Dalio said that could change due to fallout from its war in Ukraine and the ramifications of Western sanctions.
“And the real big question now is: To what extent will those sanctions and the war have a big impact on Russia? Because if it has a 10% or 15% contraction in GDP, it’ll of course weaken Russia, but it won’t, probably, change the path of Russia. And so we’re really at a question mark about how big that impact will be,” said Dalio.
Dalio also said the U.S. economy was likely entering a period of stagflation.
“We’re going to be in a period where buying power will be taken away by inflation, and buying power will be taken away by raising interest rates and reducing the amount of credit because they’re trying to balance inflation with growth. And that equals stagflation,” he said.
The following is an edited transcript of the interview.
David Brancaccio: By this ranking, U.S. is most powerful, China No. 2 — not shocking. But you see the U.S. in gradual decline and China on the rise?
Ray Dalio: Well, these are just measures of health. And so if you look at things like where are we in our educational ratings in the rest of the world; where’s our infrastructure; where are we in our financial conditions, levels of indebtedness and money printing; what is our level of internal conflict — those kinds of measures, you can see that there has been a deterioration. We are not the same as where we were when my life started and the new world order began. The world order began in 1945. Then, the United States had 80% of the world’s money, because gold was money then. It was half the world’s GDP. And so you can see in China’s case, per capita income has increased by 26 times. Life expectancy has increased by 10 years. And yes, that’s a reality.
Brancaccio: And you can see the U.S. would get demerits for the political polarization that we have in this country. Education at the lower levels is not going in the right direction. On the other hand, we have one of the greatest higher education systems in the world, although it puts people in debt.
Dalio: Right, and the indices give all those measures in an objective way. Because I think we get attached to images; self-images and so on. And we may not have that feedback.
Brancaccio: Looking at the top 10 in descending order: USA, China, Eurozone, Germany, Japan, South Korea, India, U.K., France and Russia at number 10 in the world. Is Russia likely to maybe fall out of the top 10 given economic sanctions and everything else right now?
Dalio: This is one of the really big questions. Russia is very strong in military and it’s very strong in natural resources, but it has problems. And the picture shows corruption; it has other of those problems. And the real big question now is: To what extent will those sanctions and the war have a big impact on Russia? Because if it has a 10% or 15% contraction in GDP, it’ll of course weaken Russia, but it won’t, probably, change the path of Russia. And so we’re really at a question mark about how big that impact will be. The issue, of course, is that the bigger the impact, we also may have other escalation in the war and such things. But it’s reflected in those stats.
Brancaccio: Now, I know you not to be just a man of spreadsheets and numbers. You’ve been trying to help people better understand your view on how the world is coming apart using animation?
Dalio: Yes, while I wrote an extensive study that’s a 550-page book called “The Changing World Order,” I also did an animation that’s about a 40-minute animation that’s very entertaining. I put it out five weeks or six weeks ago or something; it’s got something like 14 million views and people like it. So it goes through history. It brings them through the experiences over the last 500 years. You get 500 years of history and those experiences and the lessons from history in 40 minutes. So yes, it’s been very effective.
Brancaccio: You and I have talked before, and you’ve indicated that you worry when three things happen at the same time: When great powers come into conflict — think China-U.S., but now we have Russia and a lot of the rest of the world. When economic inequality widens — which it generally is doing, although pandemic, perversely, eased that just a tad. And also the third part that you worry about as part of the mix is when interest rates are super low. Now, since we last talked, inflation has roared, interest rates are going up. How does that change your calculation about how close we’re getting to really bad things happening?
Dalio: Well, let me change the wording because you didn’t get it exactly right, so let me clarify. The three things I’m worried about is when there’s a lot of debt creation and a lot of printing of money, because that has a big effect on the value of money, and that has effect on savings and it has an effect on inflation. The second thing I’m worried about is the internal conflict between populace of the right and populace of the left; values difference, which are brought about by a large wealth gap and values gap. And the third thing is the great power conflict that we’re operating. And I think that we’re seeing all of these things progress in that way. So the production of a lot of debt and the creation of a lot of money makes the value of money less, and it changes financial flows as well as economic flows. For example, holders of bonds and debt instruments and assets that have returns that are much lower than inflation will sell those assets, and that causes a spiral. Or the internal conflict that we’re seeing may lead to elections that neither side accepts losing. And then, of course, No. 3, you’re seeing the sides align in the big power conflict. In other words, in Europe, you’re seeing the United States and then the European countries. And then on the other part of the world, you see Russia and China. But you also see how other countries are choosing: how does India choose? How does Saudi Arabia choose? I think we’re in a period where those three things are progressing in ways that are concerning to me. And I think over the next few months, we’re going to see whether there’s more of a resolution of the war and the issues in the Ukraine and with Russia, or if there’s a stepping up of that war, in which there’s secondary sanctions. We’re now in an economy, in a world, where assets are no longer allocated based on economic conditions. In the world that we’re used to, if it was cheaper to produce something someplace capital and resources would go there; they’d get employed and living standards would change. We’re now having that more politically and ideologically determined. And we’re seeing that happen and within our country, as people move to different states not just because of taxes, but also because of differences in values, and you’re seeing that polarity, and that protectionism. So that is just progressing pretty much the way it has progressed repeatedly in history. Sanctions, for example, have always existed. Economic warfare before there’s a military warfare. Economic warfare becomes accelerated when those conflicts arise, because economics is a weapon too.
Brancaccio: You used the word that’s for polite company about your overall takeaway from these conditions, which is that it’s “concerning.” I mean, people listening are gonna get outright nervous hearing your analysis.
Dalio: Well, I have a principle: If you worry, you don’t have to worry. And if you don’t worry, you need to worry. And what I mean by that is that the question is: Is this true? And if it is true, and you worry, then maybe we can do the things that would make us worry less. For example, the smart, middle, bipartisan type of behavior — can we minimize the extremes and the internal conflict? Or even, can we find ways to not go that extra war that you’re going to cross the line into irreparable damage that we could put internationally that countries together work on the notion of, “How do they draw the lines and the protections that they don’t cross, that history has shown us to be terrible?” Throughout history, there’s always been wars. Throughout history, there’s always been economic problems, and so on. I think that knowing how they transpired and got to happen is important. And we just don’t live a long enough life to have those in experiences — all of these are the first time for us, but they’ve happened many times in history. So I think that that’s a good thing that we might be informed and worry about those things.
Brancaccio: Now, where are you on if a recession is coming early next year? Or is it a fool’s errand to try to predict those things?
Dalio: No, it’s just mechanics. I think we’re entering a period of stagflation. We can go through the reasons: The most important is: if the amount of money and credit created to give to people to spend increases by more than the amount of goods and services produced, you will have price rises. And the way that governments and central banks attempt to get rid of inflation is to take money and credit away from people. So you’ve got this inflation taking place, but now they’re going to reduce the amount of money and credit you have to deal with inflation. So I think we’ve entered an extensive period of stagflation that is not only brought about by the money and credit things that we’re talking about, but also by the inefficiencies that are being created by this different type of economic allocation. The way, in the past, that resources were allocated was primarily economics: Where’s the cheapest place to produce it cost effectively? Now we’re seeing, for self-protection reasons, countries want to be self-sufficient so they’ll produce it. That means that the quantity of goods and services being produced is also adversely affected, and that produces more inflation. So yeah, we’re going to be in a period where buying power will be taken away by inflation, and buying power will be taken away by raising interest rates and reducing the amount of credit because they’re trying to balance inflation with growth. And that equals stagflation.
Brancaccio: So you think it’ll grind to a halt, growth by, I don’t know, early 2023? What’s the timing, you think?
Dalio: Yes, the Federal Reserve is going to have to look at all the sellers; supply demand of credit. And we see that we’re going to have to sell a lot of bonds to finance the deficit. And the Federal Reserve is going to sell $1.1 trillion of bonds. And that individuals are selling a lot of bonds and foreign countries are selling bonds, because their returns are very low; the interest rates are very low in relation to the inflation rates. All of those means that there’s a contraction in credit. And so what has to happen is private credit contracts, and that means we’ll see our buying power shrink, and that’s likely to produce that contraction in economic activity.
Brancaccio: I mean, maybe the inflation we’re seeing right now is of a different kind — that China reopens after its COVID lockdowns; that they fix the microchip shortage soon enough and we can finally buy those cars — and it eases the supply backlogs that has driving some of this.
Dalio: Yes, there are some temporary things, but they’re really being and given exaggerated importance. We have other things that are bigger — partially this money and credit thing, and partially this geopolitical thing. Like, for example, right now you could see the effect of the war. Well, now imagine that that is carried through with secondary sanctions to China. The United States imports 22% of its manufactured goods imports from China — now imagine that there are sanctions and that there’s more of a conflict in those things. The implications of the geopolitical situation; the need for companies who worry about such possibilities having to pick alternative places to produce so that they don’t get trapped, means that it’s not the most efficient ways to produce. That lack of efficiency — together with the fact that we do have very large deficits, and we have to fund those and we have very low real returns which causes the selling of debt instruments and the buying of inflation, hedge assets — I think those are more important influences than the ones that you’re mentioning.