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Dec. 18, 2021, 10:18 a.m. EST

Ray Dalio warns Fed’s hands are tied and higher U.S. inflation is sticking around. Democracy, maybe not.

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By Jonathan Burton

As an investor, Ray Dalio eyes the rearview mirror to see what’s ahead. If this paradox makes sense, then you likely agree with the view of history that those who cannot remember the past are condemned to repeat it.

Put another way, it’s hard to know where you’re going if you don’t know where you’ve been. In his latest book, “ Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail ,” Dalio, the founder and co-chairman of hedge fund Bridgewater Associates, shows investors their future by taking them back in time to study the rise and fall of great countries and powerful currencies. Because one question you never want to ask about either your money or your situation in life is: “How did I get here?”

In almost 600 pages of narrative and charts, the book paints Dalio’s interpretation of the tectonic shifts now reshaping global politics and financial markets in ways that loudly echo the past but are yet to be determined — namely the competitive, complex relationship between the U.S. and China.

See: Ray Dalio says his China human-rights comments were misunderstood

How the world’s two most-formidable nations coexist — or not — is affecting and will continue to impact not only your wealth and opportunities in the 21st century but your children’s and their children’s as well. Says Dalio: “[Americans] have to do three things: We have to earn more than we spend by being productive and get our finances in order; we have to work well together economically and politically, and we have to avoid war with China.”

In this interview, which has been edited for clarity and length, Dalio offers insights about the similarities between the current economic and political cycle and previous ones, the disturbing external and internal threats to American democracy and influence, and how to and what to hold in your investment portfolio, including bitcoin, as history unfolds.

MarketWatch: Your new book is the latest in a series where you share your fundamental principles for investing in and living with the world as it is — essentially ways to accept and play the hand you’re dealt. What conditions and circumstances concern the United States right now that you want investors to understand, and why look to the past for answers?

Dalio: In my investing, I learned a lesson that many things that surprised me hadn’t happened in my lifetime but had happened before. The first time that happened was in August 1971 when the U.S. broke its promise to exchange dollars for gold so that it could print a lot of money, which led to the devaluation of the U.S. dollar. I was working on the floor of the New York Stock Exchange. I was surprised that the stock market rose a lot, so I looked into history and I found that same thing happened in March 1933. And I learned why.

As a result of that, I always study what drove major economic and market movements in history. My study of the Great Depression is the reason we anticipated the 2008 financial crisis.

Many people are interested in the news of the day, but they’re not interested in the history and lessons of the past. But you won’t understand what’s going on if you just react to the news of the day. My approach has always been like [that of] a doctor, that if I haven’t seen many cases of it before I want to go back and study all the cases in history so I can make decisions today. 

There are three things happening now that I needed to study:

  1. Zero interest rates with the creation of a lot of debt and a lot of money printing to finance that debt.

  2. The internal conflict between left and right, rich and poor, Democrats and Republicans, which is producing a level of conflict in the U.S. that is the highest since 1900. This also has tax implications. There is an anti-capitalist swing under way that will affect U.S. tax policy, where people live, and how they are with each other.

  3. The rise of a great power to challenge an existing great power and the existing world order. The existing world order began in 1945, and it was the American world order. Now China is rising to challenge the United States.

These things are big. Almost every day we’re going to be talking about these three things and what’s happening with them. The last time that happened was in the 1930-1945 period. They happened many times in history basically for the same reasons in the same way. 

MarketWatch:  The political and social divisions in the U.S. affect so much of what Americans take for granted, and maybe it’s because they’re taken for granted that they confront us now. Can this country move forward together?

Dalio: The fundamentals are clear. We have to do three things: We have to earn more than we spend by being productive and get our finances in order, we have to work well together economically and politically, and we have to avoid war with China. When I look at different countries, I judge them based on whether they have good finances, internal order and external peace.  

We have the ability to do these things, but I worry about us being our own worst enemy. History has shown that if the causes people are behind are more important to them than the system, the system is in jeopardy. I worry that’s where the U.S. is now. 

There is a great polarity, a fight-and-win-at-all-costs mentality. Looking ahead, in the 2022 elections we will see the primary battle between the extremists and the moderates in both political parties and probably see moves to greater extremism. In the general election, there is a good chance that neither side will accept being the loser.

This type of fight-to-the-death mentality could lead to some form of “civil war.” What I mean by civil war is a series of battles not resolved by the law or the Constitution, in which power is used instead — including the failure of our democracy to work. 

Barron’s on MarketWatch: Ray Dalio on the possibility of U.S. civil war

Also, as I look ahead economically for the U.S., I see a worsening of the situation. Because of all the money that has been pumped out we’re now on a sugar high, but we are beginning to see that inflation will pick up, and the stimulus checks that came in won’t come in at the same rate, causing conditions to worsen. 

It all comes down to a couple of basics. To be successful we have to be financially strong and be good with each other. That’s it.  

MarketWatch: Easier said than done. There doesn’t seem to be much political will right now in Washington or among the U.S. states to work together.

Dalio: I know. In these cases — the French Revolution, the Russian Revolution, the Chinese Revolution, for example — the divides became greater and greater. And then you have to pick a side and fight for that side. We are starting to see this in the U.S. by the movement of Americans to different states. It’s not just a tax issue. It’s a values issue.

Most likely you’re going to see disagreements between the federal government and state governments on the matter of what is states’ rights that probably won’t be all settled legally, so they will be settled through tests of power. There will be places that people won’t want to be because it’ll be threatening. People will want to be with their own kind.

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