Interview with Dalio: Global debt crisis is likely to be Recession is foreseen in 2024 and beyond
This issue is planned as the 026th issue of "Economic Everyone Says"
Ray Dalio, founder of Bridgewater Fund
Tencent Finance Zhu Yuting/Hao Boyang
"There are five main drivers that cannot be ignored, including debt problems, internal politics, external geopolitics, natural behavior, technological change." Dalio, founder of Bridgewater Fund, pointed out at the 2023 Tsinghua Wudaokou Global Financial Forum: "In 5 years, this world will be a completely different world. ”
In response to the risk problem of some small and medium-sized banks in the United States, Dalio also said at the forum: This is not just a regional bank problem, it will affect some institutions with bad balance sheet mismatch, which is a balance sheet type problem. "Central banks need to have a policy that balances interest rates and monetary tightening so that interest rates are high enough to compensate for inflation and pay creditors the shortfall. Otherwise, they will sell bonds, because interest rates are too low relative to inflation, and they will sell bonds. On the other hand, interest rates can be so high relative to debtors that it is difficult for debtors to repay their debts and face a serious supply-demand imbalance. ”
Dalio also admitted that for 25 years, when doing investment methods, he would think about the criteria for making decisions, write them down, translate them into algorithms, and use them to build a system of thinking and communication. "Now, along this line, when we get into the 'generative AI environment,' this new type of intelligence, every dimension will involve almost everyone who will be working with almost every decision." Dalio added: "Of course, for our decision-making, I will chat with it and I will give instructions in this way. But everyone will do it in their own way. This change is a fundamental one. ”
After the meeting, Dalio was interviewed by Tencent Finance on topics such as the five main drivers, potential balance sheet mismatches and supply and demand issues caused by global bond purchases and financings, and the use of generative AI to make investment decisions.
Dalio told Tencent Finance: "We can foresee a period of Great Depression, especially in 2024 and beyond. He suggested that major structural changes are needed in all important areas. For example, debt restructuring and monetization in a balanced manner is what he calls "beautiful deleveraging."
In the face of balance sheet mismatch and supply and demand problems, he told Tencent Finance frankly: a global debt crisis is possible, but it will not be private debt, it will be related to government debt and a large amount of money printing. "In the case of large deficits, the supply of bonds may be too much relative to demand, so central banks around the world, including the most important Federal Reserve, will have to print money to buy bonds to make up for the lack of purchase demand."
On the convergence of AI and investment principles, he said: "Experimenting." Dalio was amazed at the performance of generative artificial intelligence (GAI) to see if it could be a decision-making partner at work.
The following is the transcript of the conversation between Tencent Finance and Dalio:
Tencent Finance: In your conversation with Zhu Min, you pointed out that "the world will be a completely different world in five years." You identified five main drivers: debt problems, internal politics, external geopolitics, natural behavior, and technological change. Which of these do you find the most challenging or uncertain? How should governments, enterprises and individuals respond in the next five years?
Dalio: We don't need to pay more attention to one of the five forces, each of them is complementary, driving the environment in a good or bad direction, and big change will only happen under the combined effect of the five forces.
When all five forces become destructive (i.e., happening now) and are likely to continue to deteriorate for years to come, we can foresee a period of Great Depression, especially in 2024 and beyond.
As for what governments should do, history tells us that effective governments must first fail to tolerate the germination of extremism, and secondly exercise extreme restraint, while also pushing for major structural reforms. Debt restructuring and monetization in a balanced manner, as I describe in my book Principles for Coping with the Great Debt Crisis, what I call "beautiful deleveraging," is an example of structural reform.
In addition to this, major structural changes are needed in all important areas.
Tencent Finance: You discussed global bond purchases and financing behaviors and the potential balance sheet mismatches and supply and demand issues that these actions may cause. What do you think governments and central banks should do to address these issues? Is there a possibility of a global debt crisis?
Dalio: Most people who buy government bonds, especially those who borrow money to buy them, lose a lot of money.
Most of these bond losses are not recognized through market circulation, which means they are only floating losses, but if interest rates remain as high as they are now, they will have a slow, devastating financial impact on these bondholders, causing these bondholders to not buy more government bonds.
This means that in the case of large deficits, the supply of bonds may be too much relative to demand, so central banks around the world, including the most important Federal Reserve, will have to print money to buy bonds to make up for the lack of buying demand.
Therefore, I answer your question in the affirmative: a global debt crisis is possible, but it will not be private debt, it will be related to government debt and a lot of money printing.
Tencent Finance: According to you, for 25 years, you have been writing down almost all investment methods and turning them into algorithms. When we enter the Generative AI environment, how do you communicate with it about decision making? Have you ever encountered decisions and recommendations from generative AI that challenge your consistent principles? Can you give an example? How to better combine the two? Is it really more profitable to trade with AI?
Dalio: You're right, my life's practice of writing down my investment principles, and algorithms, machine decision-making, and generative AI, are merging in a symbiotic way.
I've been amazed at how generative artificial intelligence (GAI) performs, and I'm experimenting to see if it can be a decision-making partner in my work.
Tencent Finance:In your dialogue with Zhu Min, you pointed out that “the world will be a completely different world in five years.” You identified five main driving forces: debt problems, internal politics, external geopolitics, natural behavior, and technological change. Which one of these do you consider to be the most challenging or uncertain? How should governments, enterprises, and individuals respectively respond in the next five years?
Dalio:None of these five forces that should be given more attention than the others because it is in their combined weight that big changes happen, and they reinforce each other in creating movements toward either the improvement or worsening of conditions. When they are all becoming more disruptive, as they are now doing, and are likely to become increasingly so over the next few years, we should expect a period of great disruption, especially in 2024 and beyond. Regarding what governments should do, history shows that very strong leadership that doesn’t tolerate extremism while exhibiting great restraint in managing conflict while making big structural changes is required. Big structural changes such as restructuring and monetizing debt in the balanced way that I call a “beautiful deleveraging" which I described in my book “Principles for Navigating Big Debt Crises” is an example. Big structural changes are needed in all the important areas.
Tencent Finance:You discussed the global bond buying and financing behavior as well as the potential balance sheet mismatch and supply and demand problems that may result from these actions. What measures do you think governments and central banks should adopt to address these issues? Is there a possibility of a global debt crisis?
Dalio:Most everyone who bought government bonds, especially if these bond purchases were financed with short term borrowings, lost a lot of money. Most of these bond losses are not marked to market, meaning they don't have to be recognized but if interest rates stay where they are, they will have slow crushing financial effects on these bond holders and these bond holders won’t want to buy more government bonds. That means that with the large deficit, there is likely to be too much supply of bonds relative to the demand so central banks, most importantly the Fed, will have to make up for any lack of buying by printing money and using it to buy debt. For that reason, my answer to your question is yes, there is a possibility of a global debt crisis but it won't be with private debt; it will be with government debt and a lot of printing of money
Tencent Finance:You stated that you have been writing down and transforming into algorithms almost all of your investment methods for 25 years. As we enter a “generative artificial intelligence environment”, how do you communicate with it about decision-making? Have you ever encountered generative AI’s decisions and suggestions that challenged your consistent principles? Could you give an example? How can you better integrate the two? Is trading with AI really more profitable?
Dalio:You are right about there now being a symbiotic convergence between my life-long path practice of writing down my principles and turning them into algorithms and decision-making machines and generative AI. I am very impressed with generative AI (GAI) and am experimenting with it to see how it can work as a decision-making partner.
