Ray Dalio on the Coming Crisis in US Debt

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, have you ever seen those visuals of a trillion dollars where it's like, here's $100 bill, here's a stack of $10,000, here's a million dollars, and eventually you get to one trillion, and it's just all these pallets of notes that are worth a billion each, and they're covering the size of a football field or something, and they're double stacked.

Joe Weisenthal (0:48)

I love those, I never really know what they mean. It's like, oh, this is as big as the Statue of Liberty or something like that. And it's like, okay, like, I mean, that is objectively big. Is that a good way to visualize money in terms of what it means? I don't know, but yes, money, especially if you use small denomination bills, can really pile up before you get to real value.

Tracy Alloway (1:09)

Well, okay, speaking of big numbers, the US budget deficit was about 1.8 trillion in 2024 So if we stick with the visual, almost two football fields of double stacked palettes of $1 billion each. So quite a lot. But I think this illustrates-

Joe Weisenthal (1:28)

You know, we saw those stacked palettes.

Tracy Alloway (1:29)

I know, but we didn't see a trillion dollars. We saw billions. And I think this kind of illustrates one of the really difficult things about finance and debt, which is all of us, as you mentioned earlier, kind of struggle to grasp the scale of these numbers that are involved here. And 1.8 trillion seems so abstract that we have to describe it using football field analogies or whatever else. And if we can't really grasp the scale of the debt because it's just this big number that no one really understands or even take seriously, then it feels like it's difficult to tackle, to solve, right?

Joe Weisenthal (2:08)

Well, I will say two things on that. I mean, I think, A, you have to question at any given point, what is an economy solving for, right? And so people have anxiety about the size of the debt and the deficit. And it's like, but, you know, there's also high inflation.

Tracy Alloway (2:25)

They also have anxiety about social services.

Joe Weisenthal (2:27)

Yeah, and things like that. And then there is also the question of, you know, we think of a household or any entity as like you have to have money to pay your bills. Are there other dynamics besides numbers that cause a financial crisis? So for example, you could have a country with very high debt to GDP and it's fine because, you know, it goes on for longer than people expect. And you can have countries with low debts and deficits, but because they have an internal political crisis, because people no longer have confidence in the government of the central bank to pay it back, you can have a crisis even at low levels. And so even thinking about what does it mean to solve a debt crisis, to talk about debt at the national level, is simultaneously a financial discussion and one about political confidence.

Tracy Alloway (3:14)

A social conversation. All right. Well, on that note, I am very happy to say that I think we have the perfect guests to talk about all of these things. Someone who has consistently had some very big thoughts about these very big numbers, we're going to be speaking with Ray Dalio, the legendary founder of Bridgewater, the author of numerous books, including a new one titled, How Countries Go Broke Principles for Navigating the Big Debt Cycle, and most importantly, a key player in the invention of the chicken nugget. I am very excited. Ray, welcome to the show.

Ray Dalio (3:49)

Wow. What an introduction.

Tracy Alloway (3:51)

Thank you.

Joe Weisenthal (3:52)

Tracy is good at introductions. If it had been me, I would have just been like, Ray Dalio, you all know his name, let's bring him in. But Tracy does it properly, especially for a guest of your stature.

Ray Dalio (4:03)

You do pretty good too, Joe. Thank you for having me.

Tracy Alloway (4:06)

So I want to start with the really important stuff. So first, let me just thank you on behalf of millions of Americans for your contribution to the chicken nugget. What did you do exactly when it comes to chicken nuggets? What was your role?

Ray Dalio (4:20)

Well, when I was pretty young, I started trading commodities because they had the lowest margin requirements.

So I figured if I was going to be right, and I wouldn't do it if I wasn't going to be right, that I would be able to get the most amount of leverage out of these. And so I started trading commodities before most people started to trade commodities. And then that led me in 1973, when I graduated from business school, to become a commodity investor, sort of. And what I did was I was in charge of institutional futures at one of these brokerage houses. And that brought me in contact with the mechanics of how hedging and how chickens and grain and everything works. So fast forward, I got to meet the biggest chicken producers in the world. And McDonald's hired me as a consultant of sorts to advise them on how they were going to safely price the chicken McNugget. You see, their worry was that if they, this was very volatile times then. And their worry was if they bought the chicken and they put it on the menu and the prices changed, like went up a lot, they'd have to change the menu price. So they needed to know that they could have stable prices. And we talked. And I knew that the mechanics of chicken, how do you produce it? There were little chicks and they didn't cost much. And what cost most of the money to make a chicken was the corn and soybean meal that they produce as feed to feed them to get them to be big chickens and so on. And so I went to one of my chicken producing clients and McDonald's and I showed how this chicken producing client could hedge the price and give them a stable price. And because of that, they were able to put chicken McDuggets on the menu.