Deep Thoughts From Ray Dalio

CNBC’s Andrew Ross Sorkin sat down with Ray Dalio, founder of the world’s largest hedge fund, to discuss some of his market insights and processes.  Among the highlights:

  • His biggest worry – social disruption due to mismanagement of the de-leveraging by governments.
  • There’s significant risk that the US economy hits an “air pocket” that results in economic disruption.  Policy makers are a big risk here.
  • China remains a big risk to the global economy.
  • QE3 was a “good plan”.
  • We will have a full blown depression in southern Europe in the coming years.
  • Gold is “the new cash”.  He says all investors should own some gold.

Video segment 1:

Video segment 2:

Source: CNBC


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • GF

    off subject sorry but is joe kernen drunk in this video?

  • leftcoast

    sure looks that way

  • exertia

    Unfortunately large parts of the 2 videos are covering other folks, Dalio hardly has 5 minutes to speak… I couldn’t find all the above points covered in these 2 videos, may be there were some additional segments where this was covered?

  • Cullen Roche

    CNBC spliced them all. For commercial purposes of course. See here.

  • EconFan

    is air pocket his term for fiscal cliff ? even if Congress doesnt throw the economy off the cliff, it is bound to create disruption and air pockets.

  • LRM

    I wonder why he feels QE3 is good while Cullen is not a believer.
    Is it because he knows it is inflationary which is one leg of the delever process, or it does remove dodgy assets from banks, or?

  • The Dork of Cork

    Spain will have a depression if it remains in the Euro but not outside.

    What people are missing is Spains previous very significant capital spending on internal productive capacity as well as Housing Junk.
    The problem is the Euro of course.
    It seems to function as a capital $$ exporter – the $$s good little sister (the $ is now functioning as a oil based hard rather then previously soft reserve currency )

    People still find it easy & cheap to export $$ in Spain

    Example – 3million+ people still travel on the Madrid – Barcelona air shuttle (peak 4.8 Million in 2007)

    WHY ?
    There is a high speed line operating since 2008 not running to capacity !!!

    The South needs to get out of Dodge Pronto.
    Madrid / Barcelona air shuttle passengers 2012

    jan 229,759
    feb 228,750
    Mar 244,802
    April 213,921
    May 247,514
    June 239,077
    July 206,383
    Aug 143,341 (regular seasonal lull – little business passengers)


  • The Dork of Cork

    The Euro Boys have been destroying rational internal domestic demand in Euro countries since the Big bang of London in 1986.

    With the energy not burned on internal wage based domestic demand used to sustain completly unsustainable international trade & Labour linkages destroying countries internal redundancy.
    Of course that was the plan……the Euro Market state has acheived its goals – the complete destruction of the Nation state.

    The collapse of domestic demand has been disguised by credit hyperinflation of course.

    Some interesting Irish figures if you are into disaster Porn…..

    Ireland has just posted the biggest quarterly current account surplus ever as far as I can gather at 3,235 million euros……we are bailing out the UK & others , in particular the city of London which has been running a massive current account defecit since the big bang of 1986.

    Gross domestic fixed capital for. in Ireland at current prices.

    Y2007 Q1 : 13,994 million

    Y2007 Q2 : 11,828 million

    Y2012 Q1 : 5,082 million

    Y2012 Q2 : 3,646 million.

    Total Irish domestic demand (current)

    Y2007 Q1 : 43,003 Million

    Y2007 Q2 : 42,115 Milllion

    Y2012 Q1 : 30 ,915 million

    Y2012 Q2 : 29,947 million

    Don’t be fooled by the banking spin in Ireland..(we are their best pupil)


    Economic Adjustment Programme for Ireland — Summer 2012 …

    In the above report they at least openly stated that they must take money from people so as to make private banks profitable. (think about that for a second …… if so what is the function of private banks ?)

    This is the extreme rentier dynamics that Micheal Hudson talks about.

    There is no role for credit banks in a energy starved world – they can only function as parasites which is their natural gift.


    The non national Euro experiment means we must export to countries where malinvestment is currently occuring so as to pay off previously malinvested debt…eventually when Germany is destroyed via migration following footlose capital & subsequent malinvestmet the capital will move back into previously broken countries … and the cycle repeats……downwards into a entropy pit.

    Its a entropy cycle – bank credit money only lives to run down existing social energy systems.

    A global cul de sac.

    Given that domestic customers are so much closer then external markets the energy lost from these pointless exports & externalties is huge.

    This could otherwise be used to sustain domestic demand and rational investment.

    Countries need to renationalise their money systems.


    The last time total quarterly domestic demand was in the 29,000s was in the Year 2003

    Back then stuff was a bit cheaper I gather and the population of the Irish state was far lower at 3.979 million rather then 4.484 million of 2011.

  • Andrew P

    Not necessarily. Even if the so-called ‘fiscal cliff” is fixed or punted, a big nuclear Iran war could kick the price of oil to $300, spike the price of gas to $12, undo the entire QEn effect on the stock markets, and create an “air pocket” that the Fed alone can’t fix.

  • Mercator

    He likes QE3 or QEPerpetual, which I believe is Keynesian. But he points to government de-leveraging, which implies Keynesian strategy will fail. Don’t Keynesians suggest the private sector with kick-in, making the debt a non-isue with increased tax revenue? He doesn’t seem to judge, just describes how to invest a market destined to excel and crash.

  • Johnny Evers

    A couple of months ago, he was talking positively about the ‘beautiful deleveraging’ that was going on. What’s changed his tune?

  • http://None Pete

    He didn’t say anything new from the video last week. This interview sucks big time, and there are too many interruptions. CNBC sucks.

  • Bravo

    Cnbc sucks.

  • Hans

    Come on, Ray, just say riots and don’t worry your waiting Lexicon will be there…

  • REN

    Real money describes a circle in the economy. It stands in as a good when it mediates between debt and credits. I credit you a chicken and you pay me back another one a year later, plus maybe some egg interest, then our debt/credit contract vaporizes into nothingness. Money can be used as a good to stand in for the chicken. Money divides itself to match the value of the chicken. Credit/Debt contract goes to zero when sastified with money, but money goes on to transact another deal. Money does not vaporize but credit/debt contracts do. The rate money goes on to mediate new deals, is its velocity. Real money does not drain from the economy. It can only be drained by taxation. Real money has high efficiciency as its costs are low; it can cycle forever allowing price discovery in markets.

    The lie of hypothecation is that private bankers are part of the money circle. They have intruded into the mechanism to siphon off rents. The circle is broken by double entry ledger. BM banker money flies off the Asset side of the ledger, and enters the market, standing in for money. But BM DRAINs from the supply at a high rate, cycling back to pay liabilites, which are greater than assets. So we have to create MORE BM and associated debt all the time, making a treadmill. During Hypothecation a DEBT contract is made, causing larger liability side of the ledger. BM always has a DEBT contract – a legal instrument, which is then used to bash producers, as liabilities grow exponentially outside of nature.

    The exponential usury of hyothecation cum debt instrument is a fraud foisted on humanity by the credit creating banking Goldmen of the past. Its time to dump the criminal fraudulent system and start over.

    The 1936 chicago plan will put credit back in its box, kill off BM, and make money money again. It stabs credit masters right in the heart and returns money power to the producers. The plan was analyzed finally. See link.

  • REN

    If I understand QE3 properly it is the swapping of reserves for Mortgage Backed Securities. Yes? Let me know if I’m wrong.

    Reserves are considered base money, and thus are not a debt of government. Money (Reserves and Coins and paper dollars) is properly treated under U.S. accounting conventions (Federal Accounting Standards Advisory Board 2012) as government equity rather than government debt. Government equity means that real money is a division of the commonwealth’s economic output. BM by contrast is a division of private debt instruments.

    So we are swapping Reserves (real money), which is supposedly the base used anchoring BM credit expansion, for MBS? MBS are derived instruments based on housing loans. This is a very unequal asset swap. Money for Debt insturments?

    So our private banking base money has gone from Gold (Before FDR), to base money (today), and now to synthetic derived instruments like MBS? Private Bankers are doing their damndest to keep the Credit BM game going, and thus continue their pipeline of rents.

  • REN

    BM is bank money also called credit money, MMR calls it inside money. BM not to be confused with base money. Base is real money. I define real money as a divison of the commonwealth’s output.

  • rharaz

    Ren, thanks for the link. Aside from an initial “flat per capita transfer” into private accounts (pg 36), what would be the transmission mechanism for getting additional government created money into the economy (would the government just spend new money into the economy, would they continue per capita transfers based upon the money growth rule (pg 39), other?)?

  • Cullen Roche

    Inside money far more “real” than outside money or base money. No one in the real economy can use outside money (well, except for notes and coins which also facilitate inside money and are minor forms of money when compared to bank deposits). Inside money is what’s used to transact, to innovate, to eat, to LIVE. Anyone who thinks outside money is more “real” has everything backwards. Outside money facilitates the use of inside money (primarily by making interbank settlement smoother and more stable). That’s about all.

  • Geoff

    REN, it sounds like you are still operating from a neo-classical perspective. Most of us here think that money is endogenous, and that it should expand and contract organically as the system requires.

  • rharaz

    Hi Cullen,

    Do you think the Chicago Plan (see link in REN’s comment above), which separates monetary and credit functions*, would be a better system for our society in general than what we currently use?

    * Requires 100% backing of deposits by government-issued money; new bank credit can only take place through earnings that have been retained in the form of government-issued money.

  • Cullen Roche

    I don’t see what 100% reserves accomplishes. So, when a bank makes a new loan they now will have to go to the Fed every time to borrow reserves? Banks don’t lend reserves so establishing a 100% reserve requirement accomplishes nothing. Higher capital requirements might be more effective in stabilizing banking, but you have to be careful on that front because banks tend to pass their costs on to their customers….

  • Bond Vigilante

    It seems to me that Dalio still drinks the “inflation” kool aid.

  • Cowpoke

    “You need a balance between austerity and sometimes debt restructuring and monetization”
    Ray D.

    I wish these uber people would quit speaking in such platitudes that really mean nothing to the mass common folk.
    I fact, does that statement really mean anything at all?

    @120 second mark

  • rharaz

    Hi Cullen,

    According to the IMF Working Paper linked above, “Fisher (1936) claimed four major advantages for this plan. First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations. Second, 100% reserve backing would completely eliminate bank runs. Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt. Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels.”

    The possibilities of the Chicago Plan allowing for reduced credit booms/busts, near 0% inflation, and reduced public and private debt levels are appealing to me.

  • Cullen Roche

    Who will administer money issuance? The govt? Based on what? The current system is based on an elastic money supply. So it’s based on market demand. When the economy needs more money we can take out loans. When the economy contracts some of that money gets destroyed. I am not saying it’s perfect, but I don’t see an alternative that’s superior. Should we really assume the govt can issue money in a more efficient manner than the demands of consumers?

  • Geoff

    In addition, it is not just when the economy contracts that we might see the money supply contract. It could simply be due to a change in liquidity preference. Sometimes people wish to hold more cash than other types of assets, and sometimes they don’t.

    Also, we should remember that when money is “destroyed”, it doesn’t necessarily been that wealth is gone. The corresponding debt has also been extinguished.

  • REN

    Public money is spent into the economy, thus borrowing from the existing stock, diminishing total stocks value. If economy is growing, there is no diminishing effect. Inside bank money does the same, by the way, only it creates a debt counters simultaneously.

    You have to put on a different hat when thinking about this stuff. The current worldview of all money as debt will be a mental block. If you don’t know about the behavior difference of money vs credit in an economy it will be a block.

    The chief thing is that public money is low cost, efficient, and drained only by taxes. Banks remain private. Money is public, not the banks. Money is money, and operates differently than credit.

    The amount of spending has to be controlled by the money growth rule, which is a knob for controlling the economy. This law keeps politicians at arms length.

    Another knob is about 15% of the economy will be devoted to credit. Credit disappears when it is paid down. So, this credit portion allows a modest drain, giving finer control against inflation.

    This credit is also targeted only at industry that can return the usury with improved outputs. The drain points at a credit institution that has government type bonds on hand.

    As compared to our existing system where almost everything is credit, the likelyhood of all sectors improving productivity is vanishingly small.

    This defect is in our current design because because it was built up ad hoc, and originally based on fraud.

    I find it interesting that MOST of the worlds great economists signed onto the plan in 1936. Yet, today it gets ignored. Are we so much smarter now – they are irrelavant to today, even stupid?

  • REN

    OK, thanks. I get it now. I have as much trouble with MMR as you do with the Chicago plan. Hard to switch gears sometimes.

    Regards… REN

  • REN

    The chicago plan has a large credit facility. Note that the credit allows expansion and contraction as needed. Credit is targeted at industry by and large. Also money growth rule would be analogous to baseband power for the economy, steady growth, depending on its needs.

    I agree that I have trouble switching hats sometimes.

    Regards, REN

  • REN

    No, Private Banks will lend out people’s savings, which are on hand. This is how most people think banks work now anyway. If they don’t have customers savings on hand, then a mutual fund like arrangement between banks can pool peoples money.

    Private banks also lend out from their credit facility. Each bank will have a credit window which in total is worth 15% of the economy. That’s a lot of credit. This facility is for loans to improve productity, which is proper use of credit.

    U.S. industry could stand being financed rather than being raided, as in today.

    Bankers are still in the business of assessing risk for their customers. Only private bankers no longer create endogenous bank money, they are transfer agents of already available credit and money. The money supply changes form.

    Sorry about blowing up the comments section here.

  • Johnny Evers

    You always get the feeling from comments like that that other people will have to adopt austerity and suffer deleveraging, while Mr. Dalio will get his bad loans get ‘restructured’, and ‘monetization’ drives up his asset values.

  • rharaz

    Page 38 of the IMF Working Paper on the Chicago Plan states “For money, the government follows a Friedman money growth rule whereby the nominal quantity of money grows at the constant (gross) rate …”.

    Regarding government vs private control over money issuance, I’d recommend you read Section II, Part A of the Working Paper. The historical evidence presented shows governments do a better job. Page 17 states “…the Great Depression was just the latest historical episode to suggest that privately controlled money creation has much more problematic consequences than government money creation. Many leading economists of the time were aware of this historical fact. They also clearly understood the specific problems of bank-based money creation, including the fact that high and potentially destabilizing debt levels become necessary just to create a sufficient money supply, and the fact that banks and their fickle optimism about business conditions effectively control broad monetary aggregates. The formulation of the Chicago Plan was the logical consequence of these insights…

    The Chicago Plan was never adopted as law, due to strong resistance from the banking industry.”

  • Cullen Roche

    Okay, so it’s a more stringent capital constraint. So where does the money come from? The govt just issues at steady amount per year? And how do they divy that up? Who gets it? How is this decided? Govt spending? Why would banks want to be involved in this scheme? Surely it won’t be very profotable for them. Would you nationalize all the banks? It sounds like you’re basically advocating a nationalized money system….Can you offer more details on how this would operationally work?

  • Cullen Roche

    I read that. I don’t see a strong case that govt money issuance would be superior to the current model…They just say debt is dangerous. Clearly, unregulated debt issuance can be dangerous….

  • REN

    The government only supplies money aggregate. We the people get to use it. Our private banker works for us – the people, as we are creditors and debtors to each other. Our money power returns to us, and our government is our limited partner. We cycle money back and forth at low cost. Granted a meteor blast or something similar may make us people freak out and hoard, then the Govenment can step in a direct spend to create demand. But, they can do that now too.

    IMHO credit should not be used in the normal economy to transact trades becuase of its high costs and debt drag, as well as instabilities. The producers of the world deserve better.

    Money aggregate in the 100% world is controlled by law, so it is easy to watch and see if there are any predatory shenanigans by politicians.

    Also, unlike credit, money stays in the supply and cycles. It can cycle forever unless it is taxed away. Or, money may be converted to a bond, where it no longer cycles and it becomes an asset/deferred demand.

    Government is not picking winners and loosers, it is not State Banking. It is public money only.

    State Banking when done right shows how beneficial money can be, for example Canada 1938-1974. Even China with its state banks has efficiency advantages over us by way of their money system. But, as a conservative and fan of monetary history, I know that State Banking can be a path to Fascism. Public Money (1936 plan/100% reserve) threads the needle and avoids the defects of Public Banking and also defects of Private Banks with endogenous credit creation.

  • REN

    Here’s a copy from the Congressional Record. HR2990 This act is based on the Original Chicago Plan. Interesting how the Chicago school got attacked by Austrian Monetarists post 1936 isn’t it? Private Banking powers understood the threat.

    I admit embarassment that a liberal has to put forth a bill to return our commonwealth to constitutional public money.

    It is spent into the supply on a means of production, like infrastructure. Also, states get grants, which empowers the states, reducing Washington by comparison. Federalism is empowered.

  • Colin, S.Toe

    You may find the most support for your line of thinking among ‘liberals’.

    I have tended toward political leanings conventionally considered ‘liberal’, though I have never been totally comfortable with the label (I resent the conflation of ‘liberal’ with ‘big government'; moreover ‘liberals’ have at times supported military interventionism, including at least initially, in Vietnam). Many of those considered ‘liberal’ are opposed to any excessive concentration of power, whether in government, corporate, or individual/family hands.

    We may have reached a time, when major realignments may be necessary to break through political stalemate, and out of unsustainable economic systems.

  • Cullen Roche


    How similar is this to the AMI’s plan to have the govt distribute all the money?

    Speaking of liberals….Kucinich backed this for a long time.

  • rharaz

    I think Page 5 gives a good summary of the plan. It states “The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business.”

    Why should banks (and no other business) be given the “extraordinary privilege” to create the nation’s currency, especially if there are other potentially better ways to run a monetary system which do not require banks to have this privilege?

  • Johnny Evers

    How is that really different from deficit spending, in which the government exchanges a bond (a financial asset) for a dollar and then spends into the economy.

  • REN

    We exited WW2 with little debt, despite the massive destruction of war. Personal debt was a fraction of what it is today, as people took their public money and paid off their BSR.

    This is a clue of just how powerful and efficient public money can be. Margrit Kennedy has estimated the debt drag and inefficiency of endogenous money at 40%. Even a fraction of that number should make the hair stand on your head. The banks were private during WW2 weren’t they? There weren’t too many inside loans taken out then, and they survived.

    Germany caught up with England’s industrial age using a banking system that was geared toward industry, such that the credit usury would be offset with productivity.

    Direct spend exogenously into the economy would be good, and Cullen has mentioned that many times. How it is spent is important though.

    But today, QE increases reserves, and there is no transmission mechanism other than putting pressure on bond prices. Private banks are only interested in spreading debts, because that is their business model.

    The system has to be fixed, and I prefer the Chicago plan because of all of its numerous advantages.

  • Cullen Roche

    Banks just meet the market’s demand for money. It’s an elastic money supply like any market that is dependent on a supply/demand of something. When there is little demand for money the money supply doesn’t expand through bank loans. When demand for money is high banks issue more loans. Banks are designed to regulate the elastic money supply through a competitive process. The USA has always had a market based system and the banks fit right into that model. That’s the design. The alternative is not market based, but controlled by government by having the govt shell out money to who ever they want however they want in an inelastic form. Maybe that would be better. But good luck getting that passed!

  • Cullen Roche

    That’s basically the AMI’s plan. It’s govt issued money. Will never happen in the USA. At least not in my lifetime.

  • REN

    Agreed, but we should be in the debate, also against the public banking option.

    For example, public bank options are Government controlled banks that have credit creation powers. China and Nazi Germany use/used this type of system, and it can be dangerous. We cannot just ignore their efficiency advantages, especially as we continue to loose jobs. The social explosion that may come will be unpleasant, and that may well be in our lifetime.

    We conservatives should be in the debate with public money (Chicago plan/100% reserves). I think I was the only one carrying the banner for direct spend to the states. Fortunately they put it in. Imagine if it was 50% or 75% instead of 25%? We re-federalize, power is pushed down low, states are laboratories of democracy, families can be single breadwinner again, and we would be rebuilding the economy.

    It is important to keep the banks private and fascist forces at bay. But endogenous debt money cannot be defended historically or even by today’s evidence. We should not trade one hidden financial master with money power for a political master who holds the money power (State Banks).

    Chicago plan only has government maintaining monetary aggregates based on legal formula. Also it has tremendous advantage as it is mostly money, not credit. How it is spent should have conservative values and voice in the debate. Instead we are ceding the debate to both public money and public credit banking.

    For example, a conservative would want the monetary authority of public money, not in the executive branch, but in the judical, or perhaps a fourth branch of govt. These things are not even being discussed because we are mired down with a myopic current paradigm world view. I believe changes are coming and we conservatives are lost in the woods.

  • REN

    The plan accounts for elasticity, and banks remain private with competition. The people own their money power rather than transferring it to unelected hidden money masters. The people transfer their debts and credits without a slice of their wealth being stolen. Everything is still private. Only money becomes public good. That means that money aggregates are controlled, not unlike the FED does indirectly with interest rates.

    All economies have a natural S shape. Private endogenous bank money does not align to economies due to exponential debt claims. It’s a fundamental mismatch and error.

  • Cullen Roche

    I still don’t see how this plan fixes anything. The claim is that banks have to borrow from Tsy stock, but that’s basically what they do now. They borrow from the Fed to meet a reserve requirement and everyone thinks the banks are operating on some stringent constraint from the govt. Nothing would stop the banks from making loans to create profits so they’d start categorizing everything as “investment”.

    Also, while I like to theorize about stuff like this, it’s truly a waste of time. There is no chance in hell this plan would ever come to fruition in the USA. The banks run this country and they always have. The idea that we’re going to convince them to willingly shut themselves down (or even substantially reduce their business model to being constrained in this way) is like arguing about when my 40 yard dash will hit 4 seconds.

  • Colin, S.Toe

    “The banks run this country and they always have.”

    To me that is a telling line, and also an unacceptable situation.

    It may be true that there is little chance of changing this under current conditions, but the ‘Chicago Plan’ was given serious consideration, because in the mid 1930’s, people thought the system was at serious risk of breakdown. If the GFC has only been dealt with by ‘can-kicking’, and instead of being resolved, returns with a vengeance, we could be dealing with similar times.

    I also cannot believe there is not a way to have the private banking system retain some power to extend credit, but limit the total within the system to a maximum that does not exceed the current supply of base money.

    This would likely require a very different role for the Fed (and possibly international arrangements).

    Thus, if effectively, reserves held by the private banking system had to equal at least 50% of deposits within that system, the FFR might have to be set by market forces rather than the Fed. The profitability of making new loans would then reach equilibrium with the price of borrowing reserves within the private banking system, in a way that would prove self-limiting for both expansion and contraction, avoiding both ‘bubbles’ and collapses.

    Obviously, the Fed could retain some emergency powers, but, turning ‘monetarism’ on its head, the main role for government would be setting fiscal policy.