Introduction:
Ray Dalio Commentary:
Theory Of Human Organisation:
Issues With The US:
Debt Crisis & Money Printing:
Introduction:
Ray Dalio has been vocal regarding his commentary on the Chinese & US divide, but in recent days has expressed this view more aggressively.
The following article will highlight the main points Ray Dalio mentioned, whilst also providing a unique take and twist on his commentary and thoughts.
Ray Dalio Commentary:
Ray Dalio has clearly noted that within the past few years, there have been clear indications that China is becoming the leading world power. There are other important powers in terms of military, but China is the only power in which has both military and economic. History has shown that if you do not have economic power, but solely military power, you will not succeed as a leading world power holistically.
For example, Russia is often labelled as a leading military power, but the economical situation within Russia is far inferior to that of the US. Recent data shows that for the US, the nation has a whopping GDP of $23T – coming in as the largest economy in the world. Whereas, Russian nominal GDP is at solely $1.7T.
Thus, according to Ray Dalio, Russia does not have a chance at becoming a leading world power, despite their military advantage, because of their lagging economical situation.
Within the case of China however, the nation ranked 2nd with a $13.6T GDP figure.
Interestingly, Ray Dalio does not believe that Russia, or other nations will surpass the US. But, he clearly does state that China is the best competitor. This is in consideration of their military advantage, and also the economical progress China is making as the second largest economy in the world.
Dalio pointed towards the 18 measures of health, and notes that the US is currently on a relative basis, and absolute basis decline.
“China has been the leading competitor. Statistics such as per capita income has increased by over 16 times”, said Dalio.
Dalio also mentioned and spoke towards his concerns of US national debt. Ray Dalio has stated that the level of money printing, and debt nationally has never occurred within our life time.
The only time this did occur was during the 1940 – 55 post war period.
Also, the rise in international conflicts. Since 1945 – the US has always been a leading world power. The last time this competition from world powers occurred was back in 1930 – 45.
Theory Of Human Organisation:
For me, this highlights a key point that many investors often overlook. This is, the idea of human organisation. World revolutionary companies are usually a function of one specific speciality. This speciality is human organisation.
A company is purely the organisation of humans towards one main objective. Thus, the ways in which these humans are organised, and the methods of culture and structure can enable these humans to produce outstanding results. Through good human organisation, one has the ability to enable the flow of ideas throughout the company, regardless of rank or status.
Also, through good human organisation, this is a way to correctly align incentives for success.
For example, start-ups are usually a good place to look when it comes to good incentive structures, and human organisation.
Why? Well because, the incentive structures are aligned for success.
In other words, if everyone works hard, takes risks, and creates breakthroughs, everyone within the company will become multimillionaires. If they don’t, then the company will fail, everyone will become homeless, and nobody will have a job. Therefore, the incentive structures are aligned for success.
But, within larger organisations, often this is not the case. Sometimes, incentive structures are aligned to gossip, internal politics, and focus solely on status, instead of innovation. This, is often why many large companies stagnate, or fail.
The same applies to nations.
How can the flow of good ideas occur within a dictatorship? It can’t. People are more focused on rank and status, rather than taking true risk. If you can’t speak up, or question narratives, how in the world can you innovate? You can’t.
Fundamentally, a radical dictatorship halts the flow of dialogue, and discussion. This will become the main failure for the East. Alex Karp seemed to reiterate this view within his commentary.
Also present is the issue of talent. Why would one work within China, or Russia, with full knowledge that the technologies will be taken by the Governments once they start bearing their fruits.
Talent is a vital intangible factor that enables success of companies and nations. Without the best talent, the odds are against you. Failure will prevail.
Within the realm of technology, the best of the best of the best are those that produce all the value. However, it turns out that the best of the best of the best do not want to work for radical dictatorships. Why would you want to work for a nation in whom will take away your software, or your technologies once that software starts functioning and producing value?
Issues With The US:
But, there are clear issues with the US.
Some of these pressing issues include:
- Internal conflicts
- Governmental partisans divide
- Civil war possibility
- Stagnation of universities
Governmental partisans
There is currently a disastrous issue within the US, namely the inability for policy makers to truly make viable decisions, and therefore come to a bipartisan agreement. Unfortunately, the incentive structures within the Governmental scene are extremely skewed, thus leading to poor policy making decisions, and a strive for social status, rather than true policy decision making.
This is a large issue that the US is currently facing: the fact that the incentive structures within Governments are centred towards zero-sum games, such as status, rather than the making and collaboration on proper policy decisions that have tangible benefits for the nation.
The solve this pressing issue, the structure of the Government must be reformed. Namely, the way in which the humans within the Government are organised must change, in order to properly align incentives. But, this idea seems utterly too radical within the current date.
As a bottom-line Governments have become increasingly inefficient, and utterly unproductive within almost all domains.
Cultural wars:
Furthermore, touching upon the idea of internal conflict again, one can recognise that the US and West has experienced very vicious cultural wars within the modern date. These cultural wars have put both parts of the political spectrum at opposition with one another, thus feeding into the inability to make bipartisan decisions.
The cultural wars have focused on trivial debates, namely:
- What is a women?
- Child transgenderism
It seems that, we are currently at a peak of the cultural wars within the West, specifically in the US. And, perhaps Ray Dalio is concerned regarding the potential for this hatred to spread over into a more vicious physical civil war, in which history has told us is always a possibility.
These cultural wars are becoming increasingly mainstream, thus resulting in the overall inefficiency of society.
At a holistic level, there are a range of issues within the US. These issues include the trivial cultural wars, in which are at the root of much conflict today, as well as the absurdity and inefficacy of Governments.
Debt Crisis & Money Printing:
There are looming issues that will hugely impact financial markets. But, in consideration of the fact that the US has just quietly surpassed $32T in national debt over the past week, I want to focus on national debt, what this means for financial markets, and the commentary from Ray Dalio to help us understand what is going on.
There are clearly issues when it comes to high national debt, specifically as within the words of Morgan Stanley, “when this national debt is being accumulated at fast paces.”
The question is: will the debt of today, outpace the growth of tomorrow?
Stanley Druckenmiller recently brought up one major point of concern:
“I will be stunned if we don’t have a recession in ‘23. I don’t know the timing but certainly by the end of ‘23. I will not be surprised if it’s not larger than the so-called average garden variety,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit on Wednesday. “I don’t rule out something really bad.”
“We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.”
There are a few main reasons as to why we should be concerned regarding national debt accumulation:
- Raises the probability of a default.
- Stark implications for US leadership and national security.
- Governmental spending also in recent times has stoked inflation to historic highs, therefore threatening to make inflation far more than a transitory phenomenon.
- Raises the probability of a default:
Though sovereign debt defaults are relatively infrequent, countries can and periodically do default on their sovereign debt. This happens when a country’s government is either unable or unwilling to repay creditors. Argentina, Lebanon, and Ukraine are among the countries that have defaulted on their debt in recent years.
Persistent economic stagnation undermines a country’s ability to service its debt and leaves its economy more vulnerable to shocks such as a recession or a pandemic. It also erodes the confidence of foreign and domestic creditors, making it more difficult and costly to refinance debt.
According to Moody’s, chronic stagnation was the primary cause of sovereign debt defaults by Russia and Ukraine in 1998, Argentina in 2001 and Venezuela in 2017.
The chances of a default on the US national debt is incredibly low, and many commentators do not expect this to occur.
- Stark implications for US leadership and national security:
As of August 2022 it costs $677.6 billion to maintain the debt, which is 12.66% of the total federal spending.
Economists debate whether the spending is sustainable. The U.S. finances the debt by selling bonds at auction. Demand has traditionally been high due to the size of our economy and a historically stable government.
The cost to just finance our debt is expected to be $378 billion in 2021 and increase to $665 billion by the end of the decade, according to CBO estimates. That money will be spent only on interest, not on the principal.
“We’re getting to the point now where the interest expense on the debt is so high that it’s going to eat up our ability to basically service the next generation, and I’m not even sure about the current one.”
It has been shown that nations with ratios of public debt above 90% had lower economic growth compared to nations with public debt below 90%. Furthermore, many observers have noted that a failure to raise the debt ceiling could force the U.S. to reduce expenditures in sectors like healthcare or other public programs.
Moreover, the crowding out effect reduces investment for crucial areas like infrastructure, education, and research, which can create a considerable drag on the economy. Overall, the level of interest rates caused by the government’s large debts can impact the nation’s industries and overall economy, all of which undermine the status of the U.S. as a global leader.
The large national debt also has negative implications for national security. Higher debt servicing costs could lead to cuts in spending for defense and other national security concerns, drive up interest rates, result in higher taxes and retard economic growth.
Lowered defense spending would decrease U.S. influence in international affairs, undermine confidence among its allies, and reduce the ability of the U.S. to respond to national security crises. Additionally, the impact of the burgeoning national debt on U.S. economic standing could lead to a rise in the influence of rivals, particularly China. Moreover, especially due to rising geopolitical tensions resulting from ongoing war in Ukraine, national security could be seen as a rising priority around the globe.
Massive government spending has driven up the national debt to record levels, leading to inflation that has not been seen since 1982. Over the past 12 months, the consumer price index has risen 7.5% which is much higher than the Fed’s set target of 2%. The Chairman of the Federal Reserve, Jerome Powell, has previously called this sharp rise in consumer prices as “transitory.”
However, post his re-election as Chairman, Powell revised his view on inflation in early December, claiming that inflation is not “transitory” and that the rise in prices could leave a “permanent mark in the form of higher inflation.”
Concerns around US debt usually centre on interest payments. In May 2022, the CBO projected that government spending on interest would rise from 1.6% of GDP to 7.2% over the next three decades. In addition, interest payments would rise to ~24% of all spending from ~7% today (see Exhibit 5).
To make matters look worse, the CBO’s interest payment projections were based on forecasts for market yields that were much lower than those that exist today and those that markets imply will exist 10 years from now (see Exhibit 6).
The CBO argues that high and rising debt could increase the likelihood of a fiscal crisis because investors might lose confidence in the US government’s ability to service and repay its debt. The CBO also argues that it could lead to higher inflation expectations, erode confidence in the US dollar as a reserve currency, and constrain policymakers from using deficits in a countercyclical way.
The government debt load in Japan has stood as a notable counterpoint to concerns of this nature for decades. With net debt near 170% of GDP and gross debt a whopping 263%, Japan’s situation mitigates some of the CBO’s trepidations (see Exhibit 7 and Exhibit 8).
The US currently has net debt of GDP at 130%, and gross debt at 137% in 2021.
For summary, US net debt of GDP is at 130%, in comparison to Japanese net debt of GDP at 170%. And, US gross debt is at 137%, compared to Japanese gross debt of 263%.
Overall, to conclude, there is an array of issues within the US in which can perhaps concern investors regarding the world power change that society is experiencing. Ray Dalio does seem to be an evident advocate for the new world power, and what this means for investors. Some of the issues explored includes national debt, human organisation, cultural wars, and the inefficiency within Governments. These in conjunction could validify the commentary by Ray Dalio regarding Chinese potential dominance.
