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Ray Dalio Contemplates World War 3

The Wizard of the Westport Woods sees pain on the horizon.

Ray Dalio has some bad news for you on the ten-year anniversary of Lehman Brothers: the next crisis is coming, and it’s going to be worse.


The Billionaire head of Bridgewater Associates is out with a new book called A Template for Understanding Debt Crises, which collects and organizes the fruits of his analysis of 48 different debt crises throughout history—analysis that helped his fund actually make money in 2008 while the average hedge fund lost 20%. The most important takeaway from the book is that debt crises are an almost inevitable byproduct of capitalism and human nature.

“Humans by nature tend to move in crowds and weigh recent experience more heavily than is appropriate,” Dalio writes, arguing that the prime driver of unsustainable increases in debt is the human tendency to predict the future through extrapolation. A prime example real estate bubble of the mid-aughts: banks kept lending to homeowners at ridiculous valuations on the belief that those home values would continue to rise as they had been. Real estate happened to be the vehicle for the United States debt crisis of 2008, but the collateral used in this buildup of debt is not as important as the fact that economy-wide debt tends to grow over time, eventually reaching a point where this debt cannot be serviced, and a crisis is triggered.

One could take comfort in the typical length of such credit cycles is quite long—the U.S. economy avoided a serious debt crisis for 70 years between the Great Depression and the Great Recession. But Dalio predicts that the U.S. economy will soon hit another recession that is reminiscent of the 1937 aftershock to the ‘29 crash, and as he told CNBC, one that will be worse than the 08 crisis in terms of the “socio-political problems,” it reveals.

In his book, Dalio provides a narrative account of the U.S. economy from the prologue to the 1929 crash up until the 1937-38 recession that America would not recover from until World War Two necessitated a near-total nationalization of the U.S. economy. The highly readable account was written with today’s economy in mind, and it’s obvious that Dalio sees serious parallels between today’s economy and that of 1935, when the Federal Reserve first started contemplating raising interest rates for the first time since the ‘29 crash.

It was Federal Reserve tightening, combined with efforts by President Franklin Roosevelt to balance the budget that triggered a recession in 1937 and 1938. The downturn wasn’t as severe as that which ravaged the country a decade before, but it does show how following a debt crisis an economy can become mired in slow growth and dependent on extraordinarily low-interest rates and large government deficits. (Sound familiar?)

What worries Dalio most, however, is the violence that often closely follows a debt crisis. Throughout the 1930s, stagnant economies and rising economic inequality helped put militarists in power in Japan and Europe, while fomenting serious unrest in the United States and elsewhere. Economic dislocation didn’t just make populations nervous, however. Dalio claims that it was a primary driver of international economic conflicts that metastasized into the bloodiest war in human history.

Dalio’s placement of World War Two at the center of our understanding of the evolution of the 20th-century economy is reminiscent of the work of economist Thomas Piketty in his work Capital. The data compiled by Piketty suggests that left to their own devices, capitalist economies will produce destabilizing levels of wealth and income inequality. The only force in history that has been able to reverse this process is war, which destroys wealth and kills workers so thoroughly that wealth inequality shrinks and incomes for the average laborer rise.

The task for economic actors and policymakers today, therefore, is to figure out how to arrest this process and manage the economic competition between nations, without triggering World War Three. Unfortunately for the brain trust in Washington, Dalio has no brilliant ideas for how exactly to do this, other than the specious and vague idea to “fix education.” Meanwhile, the rest of us are left with few options beyond buying General Dynamics stock and hoping for the best.

Christopher Matthews is a writer who splits his time between New York City and Accra, Ghana, with an interest in the intersection of markets, the economy, and public policy. He previously held staff positions at Axios, Fortune Magazine, and Time Magazine, and has been published in Forbes and Debtwire.



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