NEW YORK -- Billionaire investor Ray Dalio sees the coronavirus pandemic causing a shift in the global order as momentous as that seen during the Great Depression and World War II from which China will emerge as the dominant power once the dust settles
The co-chairman of Bridgewater Associates, the world's largest hedge fund, told Nikkei in an exclusive interview that he failed to appreciate the ability of natural events like the Spanish flu in 1918 to shatter economic and political systems and sees societies being torn by conflicts over wealth and power in the aftermath of the disruption.
Dalio, whose accomplishments include helping McDonald's create Chicken McNuggets by hedging the cost of feed through futures, said that America's position in the new world order will depend on issues such as quality of education, work ethic and the respect for law.
Excerpts of the interview have been edited for brevity and clarity.
Q: How do you view the coronavirus pandemic from a historical perspective?
A: The virus triggered a surprise economic downturn, but a downturn would have inevitably come for some reason because they always do, and there was great vulnerability before the virus. Central banks had run out of power to continue the normal debt cycle in countries with a lot of debt and enormous wealth gaps.
This period is most similar to between 1930 and 1945. Like then, central banks and governments are desperately trying to fill the income and balance sheet holes with newly created money. Individuals, companies and countries that don't have much savings are going bankrupt. For basically the same reasons as existed in the 1930-45 period, this will change the global geopolitical balance of power and the world order.
There will be clashes over wealth and power. Within countries, there will be more questioning of the merits of capitalism versus socialism. Between countries -- especially between the U.S. and China -- we will see more conflict over wealth and power.
Q: How will the U.S. fare from this shift in global power?
A: In the short run, the U.S. has the great power of being able to create the world's currency -- dollars, which are desperately needed. When there is great demand for the currency because of the large amount of dollar-denominated debts that needs to be serviced, that gives the U.S. great power, as is the case now.
Once these debts are wiped out through defaults or the printing of dollars in a few years, then we will see the fall in the value of the dollar as a reserve currency. That would greatly weaken U.S. economic power. History has shown that all empires rise and decline with their debts and their currencies. This is very similar to the experience of the British and Dutch empires and their reserve currencies.
Q: After the U.S. declines as an empire, do you think China will be the next empire and the yuan will become the world reserve currency?
A: Yes, but this is happening in an evolutionary rather than a revolutionary way. While China will likely be the most important world economy in not too many years, the U.S. will likely be a rival power for quite some time. How the U.S. and China deal with that rivalry will be hugely important for the world.
As for a reserve currency, that will evolve slowly because reserve currencies have significant lag times in their powers. And in order to have a world reserve currency, one has to have open capital markets. China will evolve into being more important over the next 10 years or so.
Q: How have you stress-tested your investment strategy over the events of the recent past?
A: I have found that everything happens over and over again, and that reality works like a machine driven by understandable cause-effect relationships. What is happening now has happened many times before for essentially the same reasons, though never exactly.
For that reason, we have timeless and universal investment principles that we have tested going back to 1800. That doesn't mean we catch everything, because we don't. We didn't catch the pandemic's impact, but we have caught most big things.
Q: Do these stress tests include historical events like the Spanish flu pandemic?
A: I missed the Spanish flu pandemic because it happened in 1918 at the same time as a sharp fall in economic activity right at the end of World War I. I mistakenly assumed that downturn was exclusively a postwar adjustment. Until I saw this coronavirus pandemic, I hadn't seen the economic impact of a pandemic happening. I'm kicking myself for missing that.
Q: Could this coronavirus be an event that you will use to observe the economy and markets in the future?
A: Yes. We're going back and building various acts of nature and climate change into our decision-making system including pandemics, droughts and floods.
I've found the importance of acts of nature in breaking economic and political systems. They have been the cause of many stresses and many mighty crises. If you have an over-indebted economy, large wealth gaps and an act of nature -- those three things are a most devastating combination.
Q: If there wasn't so much debt before the pandemic, would the economy have suffered lighter damage?
A: Much lighter. If you look at what differentiates countries and people and companies, it almost entirely depends on how much savings they have versus how much debt they have. Those with strong balance sheets will be the winners. Those with savings will win, and those with debt will be the most hurt.
Q: What do you think of the economic stimulus efforts in response to the pandemic? Are they sufficient?
A: Governments have done a lot to create money and credit, which were needed and will have their own problems. Governments and central banks will need to do more to create the money and credit to fill holes in balance sheets and income statements. At the same time, that will diminish the value of money and debt assets.
Q: Do they need to do more?
A: There are different circumstances. Emerging markets with poor balance sheets that cannot print the hard money will experience credit problems and inflation because they will print local currencies. They will need enormous financial help, or they will collapse. Everyone needs strong balance sheets and reserve currencies to survive this, because that's what is widely accepted.
Q: Do you expect the world order will be transformed after the pandemic subsides? What will happen to capitalism?
A: I believe we will see a changed world order. We will go through a period of fighting over the merits of capitalism and socialism, and there will be a significant redistribution of wealth. I worry that this will be similar to what happened in the 1930s, with modern-day versions of communism and fascism.
The struggle to restructure the world order will last probably about five years. Then the winners and losers in the new system will be clearer, and we will move in a more orderly way. Still, these restructurings are temporary adjustments. The big picture is that human adaptability and inventiveness are the greatest force, so better times will follow this restructuring.
Q: Do you think that new order will be something very beneficial to the U.S.?
A: Both the absolute and relative position of the United States will depend on whether it can take care of the fundamentals that make countries strong. In the short term, there will be a big debt restructuring, but that will pass. In the long run, the quality of education and civility of its people, inventiveness, work ethic, respect for law and other such things will matter most.
Chances are that living standards will rise, but more slowly than that of China's. What happens depends largely on how the U.S. and China approach their disagreements. If they approach them badly, both will suffer.
We are seeing classic conflicts over wealth and power, both within countries and between countries. History has shown us that the outcomes depend largely on whether the parties involved handle them peacefully or violently.