Ray Dalio Dialogue: Why I'm Betting on Gold and Not Bitcoin

Original Video Title: Ray Dalio:「AI Is Eating Everything - and It Might Eat Itself」

Original Video Source: All-In Podcast

Original Article Translation: DeepTech TechFlow

Key Points Summary

During his third appearance on the All-In Podcast, renowned investor Ray Dalio delved deep into the severity of the U.S. debt crisis and made predictions about possible future trajectories. He extensively discussed the five major forces reshaping the global order, the structural limitations faced by efficient government departments, the drivers behind the historic high in gold prices, the reasons for Bitcoin's underperformance, and the true story behind tariffs and trade deficits, and he also explained why he believes the United States may be nearing the edge of a breakdown.

Key Insights Summary

On the Nature of Debt and the Economy

· The issue with the debt cycle is like the circulatory system of the human body. When the cost of servicing debt continues to grow relative to income and becomes unpayable, similar to plaque building up in arteries, it squeezes out other expenditures.

On the Structural Dilemma of Government Reform

· In an efficient government, making it even more efficient is not easy. Trying to reform in a 'surgical' way that is both efficient and rapid while avoiding too much opposition is almost impossible.

On the Fundamental Logic of Currency

· Mechanistically, currency is fundamentally a form of debt. When you hold currency, you are actually holding a debt instrument, and this tool is just a promise that someone will give you currency. When central banks have too much debt, their power is in printing money.

On the Irreplaceability of Gold

· Gold is the only long-term historical asset that can be transferred, cannot be massively manufactured, and does not rely on others' promises. In other words, most currencies, debts, stocks, etc., are just promises of purchasing power redemption by someone.

The Difference Between Bitcoin and Gold

· Bitcoin lacks privacy as its transactions can be monitored and even potentially influenced. Central banks are unlikely to buy or hold Bitcoin. There are also questions about emerging technologies, such as whether quantum computing will impact Bitcoin.

The Misconception Regarding Tariffs and Inflation

· One common mistake economists often make is not factoring taxation into inflation. I mean, if your tax burden increases, that is also inflation. Why should this be any different in its effect on you compared to a rise in housing prices?

The Three Keys to National Success

· First, you must educate your children well. Second, society needs to provide an orderly, civilized environment. Third, you must avoid war. If these three points are achieved, the nation will be successful. This is a fact that history has repeatedly proven.

The Endgame of Social Fracture

· We are moving toward that 'war,' in fact, we are already in it. When the positions people support are more important to them than the system as a whole, the system is in crisis.

The Paradox of AI 'Eating Itself'

· Artificial Intelligence seems to be devouring everything, but it might 'eat itself.' It may not be able to generate enough profit... China might consider AI as infrastructure like electricity, making it free for everyone to use. In that case, how do we compete?

A Metaphor for the Current State of America

· This is our problem — the demand for instant gratification and ignorance of whether something contributes to productivity.

The Five Forces Shaping America's Future

David Sacks: Looking back at the past year of government actions, congressional activities, and economic performance, I want to ask you a question: Are we on the right path now? Has there been little change compared to a year ago? Or are we moving too slowly?

Ray Dalio: I have studied the major cycles of the last 500 years and found that five major forces intertwine to determine the answer to your question. The first is debt and monetary issues, which I will elaborate on shortly. The second is domestic divisions, including disparities in wealth and values. These gaps have led to irreconcilable differences between the left and the right, affecting tax policies, democratic systems, and all modes of operation. The third is global power shifts. This follows the typical pattern of "rises challenging existing powers," altering the global order. The fourth is technological advancement. Technology has played a crucial role in every historical period. Lastly, there are natural disasters, including droughts, floods, and pandemics.

When we talk about order, we will mention monetary order, and all monetary orders will eventually collapse for the same reason. Similarly, all political orders, whether domestic or international, will also change. The political order of the United States has been relatively stable over the past 250 years, but has also experienced a civil war. Internationally, the transition of order is more frequent, with the shift from a unipolar world to a multipolar world being an example, and technology is also constantly changing the world.

Now, since these factors all exist, let me further explain the government's fiscal situation and answer your question. The operation of a country's economy is basically similar to that of a company or individual, except that the government has the power to print money. If we think of the government as a company or individual, its expenditure is about $7 trillion, while its revenue is only $5 trillion, resulting in a deficit that is 40% of expenditure. For a long time, the United States has been running a deficit, and the current debt level is 6 times its revenue, allowing for predictions based on this.

The problem of the debt cycle is like the circulatory system of the human body, where the capital market channels credit to different parts of the economy. If this credit is used to increase productivity and generate enough income to pay the debt service costs, then this is a healthy process. However, the issue arises when the debt service costs grow relative to income and become unpayable, squeezing out other expenses like plaque building up in arteries.

Currently, the U.S. has a $2 trillion deficit, half of which is interest payments, and we also need to roll over $9 trillion in maturing debt. If this situation were viewed in terms of a company or individual, it is evidently a problem. To stabilize the situation, a 3% of GDP deficit might be a reasonable level. However, the current situation is very unhealthy not only because it squeezes out expenses but also because there are issues with the supply-demand relationship of debt.

We need to roll over $9 trillion in maturing debt and also need to sell an additional $2 trillion in debt. So who are the buyers of this debt? Part of it is domestic buyers, and another part is foreign buyers, accounting for about one-third. From their perspective, this situation carries higher risks.

First, the proportion of U.S. dollar-denominated debt in their investment portfolio is already quite high, possibly exceeding the range of prudent investment, and there is also geopolitical risk. For example, you can imagine potential conflicts with China or even strained relations with Europe. Europeans may worry about being sanctioned, such as debt service payments being halted due to sanctions, and the U.S. also needs to worry about attracting sufficient funds.

The situations I have described have recurred throughout history. For example, we saw similar dynamics from 1929 to 1945. Therefore, this fiscal situation is not healthy for the U.S. government itself, but the bigger problem is that other factors have exacerbated these issues.

Why Government Reform Is Almost Impossible

David Sacks: You mentioned this issue before and offered a diagnostic opinion: if we could reduce the deficit as a percentage of GDP to 3%, it could mitigate the impact. But that did not happen. This time last year, we had high hopes for Elon Musk's decision to lead the Department of Government Efficiency. He had planned to implement some sweeping reforms, including cutting government spending and combating fraud.

Do you think the failure of this reform is because the actions taken were flawed, or because at this stage of the cycle, the entire system is unchangeable? Is it because there is too much capital flow in the economy, too much reliance on this capital, with too many individuals and businesses dependent on it, making it structurally impossible for us to escape this predicament? Does this attempt tell us whether government reform is still possible at this stage?

Ray Dalio: In an efficient government, making it even more efficient is not easy. Especially in situations where swift action is required due to electoral pressures, and people generally do not like these reforms, you may ultimately lose popular support. Moreover, in a society like ours, whatever you do will face criticism and scrutiny. This also raises a question: Can democracy and our system truly support an administrative leadership model that is both efficient and universally accepted?

For example, when we talk about cutting expenses, projects like the school lunch program are cut. Trying to reform in a "surgical" manner that is both efficient and rapid without triggering too much opposition is almost impossible.

Looking back at history, from a political perspective or just from common sense, you will find that finding an administrative leadership model that can satisfy the majority of people while rapidly advancing reforms is a very difficult challenge.

David Sacks: There was recently major news indicating widespread fraud in the public funds of Nino State. For example, some nonexistent daycare centers received billions of dollars in funding. Do you think this is a symptom of the current stage of the cycle? How do you see the relationship between this situation and the issues we have been discussing?

Ray Dalio: Yes, this is indeed a manifestation of this phase of the cycle. If you want a well-managed government, you have to ask yourself: How well can government really manage? For example, go to the Department of Motor Vehicles, and you will see how large, complex, and chaotic that system is. So when you see these inefficient phenomena, are you surprised? You may not be.

Gold vs Bitcoin

David Sacks: You've previously mentioned that part of your portfolio is in gold, which has seen its price rise from $2,900 per ounce to $5,200. How has gold performed over the past year? Is it because the market has finally realized the phase of the cycle you've been talking about for years, or because China has structurally moved away from the dollar and U.S. bonds to hold more gold? Or is it because other central banks are also shifting to gold? Or is it because individual speculators and market participants have shown a great interest in gold?

Ray Dalio: This is related to the big picture cycle. What we need to understand is that gold is not just a speculative precious metal as most people think. Gold is one of the oldest and most stable currencies, and it is also the second-largest reserve currency held by central banks. Therefore, for various reasons—economic supply and demand, political, geopolitical, etc.—central banks themselves are buying gold to increase reserves. At the same time, individuals and other investors are also looking for an alternative currency.

The question is, what is money? Mechanically speaking, money is essentially a form of debt. I mean, when you hold money, what you actually hold is a debt instrument, and this tool is just a promise that someone will give you money. As I mentioned earlier, when central banks have too much debt, their power is in printing money. If you understand this, you can understand what is happening now. The key question is, David, what kind of currency do you think is safe?

David Sacks: What I want is an asset-backed currency, a physical asset with real-world limitations.

Ray Dalio: Especially an asset that can be moved from one place to another. After all, money is both a medium of exchange and a store of wealth. If a country's central bank or government wants to pay another government, it needs real money, not fixed assets like buildings. If you want to transact, you have to transact with something transferable. And gold is the only asset with a long-term history that can be moved, cannot be massively produced, and does not depend on someone else's promise. In other words, most currencies, debts, stocks, etc., are just promises for someone to honor purchasing power.

Wealth and currency need to be distinguished. Wealth can exist in the form of stocks, buildings, companies, and more, but you cannot spend this wealth directly. When you want to spend it, you need to convert wealth into currency. Currently, the proportion of wealth we have compared to currency is very high. The issue arises when trying to convert wealth into currency, as they may resort to printing money. This situation has been ongoing since we had fiat currency.

David Sacks: So, when you interact with market participants, are they converting wealth or currency into gold? In the market cycle of gold value priced in USD, how much more room for growth is there?

Ray Dalio: I usually observe who holds which assets, including central bank holdings, and the composition of these assets. I look at the ratio of wealth to currency, or wealth to gold. We can see that the total amount of wealth and the amount of other currencies held by central banks are substantial relative to hard currency gold.

The price of gold has risen from a very low level to a higher level, and this price increase and asset composition change have almost returned to historical average levels, although not fully achieved yet. However, due to the high ratio of total wealth to currency, this remains a significant concern.

As a practical example, a wealth tax is a potential risk. One might ask, "Are we currently in a bubble?" For instance, are AI-related stocks and similar ones in a bubble? But we know that a characteristic of a bubble is a demand for currency, which drives people to sell assets to raise funds to meet these demands.

Typically, this demand comes from borrowing to purchase assets, driving asset prices up. However, this situation is not sustainable as debt service costs must be met, and the assets themselves do not generate enough cash flow to cover these costs. Eventually, people have to start selling assets to repay debts or liquidate to pay wealth taxes.

Whether people support a wealth tax or not, the tax itself can lead to a flow of wealth into cash. The only way to obtain cash is to sell assets or borrow against them, causing liquidity issues. Furthermore, the societal impact of wealth inequality makes this issue politically more complex.

Therefore, I believe that whether you are an individual, a company, or even a country, you should be concerned about whether you hold enough gold. Even if you don't have a particular view on gold, you should allocate 5% to 15% of your portfolio to gold. Because gold tends to perform inversely to other assets, when the economy faces issues, gold usually performs well while other assets often underperform.

David Sacks: Why hasn't Bitcoin shown a trend similar to gold? Since our last conversation, gold has risen by 80%, while Bitcoin has dropped by 25%. How do you view Bitcoin's performance and why hasn't it become the safe haven asset that many people thought it would be?

Ray Dalio: Bitcoin and gold have some key differences. First, Bitcoin lacks privacy, as its transactions can be monitored and even potentially controlled indirectly. Central banks would not want to buy or hold Bitcoin. Therefore, not only individuals but institutions and central banks are also unlikely to view Bitcoin as a reserve asset. Additionally, there are concerns about new technological developments, such as whether quantum computing will impact Bitcoin.

Bitcoin has a relatively small market size and is more easily controlled. Despite attracting a lot of attention, as a currency, its scale is still much smaller compared to gold. Hence, these are the dynamic differences between Bitcoin and gold.

David Sacks: What about silver? In the past year, the price of silver has also surged significantly. Is this a derivative of gold? Or are people just following the trend of gold in speculating on silver?

Ray Dalio: Silver is a byproduct in production, and its supply is hard to increase. Historically, for example, the pound was pegged to silver, and silver was also seen as a currency, but silver has gradually become a speculative asset, so people chase it because of its momentum.

David Sacks: Last time we met, you talked about the importance of maintaining low interest rates to deal with the current stage of the economic cycle. So, what is your view on today's interest rate levels and the actions taken by the Fed over the past year? Are these measures sufficient to mitigate the effects we face at this stage of the cycle?

Ray Dalio: Interest rates are one of the three main considerations in economic management, along with taxation and government spending. But we cannot artificially push interest rates too low because one person's debt is another person's asset. If rates are too low, creditors are affected, leading to a familiar dynamic: more borrowing is funneled into various things, fueling bubbles.

At the same time, rates cannot be too high, or else debtors will be squeezed too tightly and find it difficult to bear. Thus, this requires a balance: rates need to be high enough to meet the demands of creditors but not so high that debtors cannot bear it. When there are a large number of "zombie assets" and liabilities in the economy (because each zombie asset corresponds to a debt burden), this balance becomes very challenging.

This situation is even more complex in the so-called 'K-shaped economy.' In other words, parts of the economy are experiencing a bubble effect, such as when someone asks, "Who will be the next trillionaire?" referring to the wealthiest 1% of the population. At the same time, another part of the economy is struggling, for example, with 60% of Americans reading below a sixth-grade level. Making these people more productive, especially as we also face a labor substitution problem, is an extremely challenging task.

When assets and liabilities are too large in scale, and there is significant inequality in the economy, achieving this balance becomes even more challenging, making monetary policy formulation extremely complicated.

David: Over the past year, many reports have mentioned that many global central banks have stopped buying U.S. treasuries and instead are investing in gold. With this shift in the global market, is the Fed compelled to resume buying treasuries and expand its balance sheet? In the current stage of the economic cycle, do you believe the expansion of the Fed's balance sheet is inevitable?

Ray Dalio: I think in the long run, this is possible. Currently, the Fed is addressing this issue by shortening the debt duration, which, of course, increases the risk of debt rollover. The government is trying to reduce the issuance of long-term debt, keep short-term rates low to suppress the rise in long-term rates. At the same time, the government may use diplomatic means to persuade other countries to buy or hold U.S. treasuries, or attract other forms of capital into the U.S.

Economists' Misjudgment on Tariffs

David Sacks: Over the past year, many economists have vehemently opposed tariffs, fearing that tariffs could lead to inflation, reduced consumption, and possibly have a negative impact on GDP growth. The President and the government implemented a series of tariff policies under the Emergency Economic Powers Act, although the Supreme Court overturned this law in recent weeks. Looking back on the impact of tariffs on the economy, what do you think economists got right about the effects of tariffs, and what did they get wrong? Did they overlook or misunderstand certain fundamental issues?

Ray Dalio: Firstly, an important aspect of tariffs is tax revenue. One common mistake economists make is not considering taxes as part of inflation. If your tax burden increases, that is also inflation. Throughout history, we can see that tariffs have been one of the main sources of government revenue in many historical periods. For many countries, tariffs are a perfectly reasonable way of raising funds, and we should take this into consideration. Additionally, foreigners also pay some of the costs for tariffs.

However, from a macro perspective, one of the major issues we face is that our economy is not self-sufficient. We have seen the hollowing out of manufacturing and the middle class, which is a significant problem. The question now is, do we attempt to rebuild these industries? Do we continue to sustain massive trade deficits? The U.S. trade deficit is unsustainable, relying on foreign capital to offset the gap, which is unsustainable, so we need to find some way to address this issue.

Tariffs can be part of the solution, in my opinion, and I think they are entirely reasonable. But this is not a singular solution; it needs to be part of a larger plan. This includes developing the industries we need, building infrastructure, and attracting relevant industries. This is not just an economic necessity but also a geopolitical one.

We are entering a world of escalating conflict, transitioning from a multilateral world order to a power-based confrontational global economy. In this environment, threats between nations are increasing, with the possibility of moving from trade wars to capital wars. Therefore, we must establish economic and political independence, which is part of building the future world.

David Sacks: In this week's State of the Union address, President Trump shared his vision, suggesting that tariffs could outright replace the U.S. income tax. Do you think this is a viable path? Can tariffs serve as an effective taxation tool, potentially replacing other forms of taxation altogether?

Ray Dalio: I don't think that's realistic. Primarily due to the scale of tariffs and their combined impact, tariffs operate as a regressive tax system, and we still need to address the wealth gap issue. In my view, the wealth gap is not only a significant social problem but also a productivity problem. We must make the majority more productive through means like infrastructure development, which I see as a critical issue to tackle.

David Sacks: Based on my analysis, nearly half of Americans currently work directly or indirectly for the government or government service providers. In the past year, the federal government labor force has shrunk by about 317,000 people, accounting for 14% of the total federal workforce. This administration has downsized some agencies and laid off certain employees. Do you believe these individuals will transition to the private sector and become more productive, or will they be absorbed into other government bodies, continuing in roles that do not substantially contribute to economic growth?

Ray Dalio: I have studied these data, but I don't think I can fully answer this question. Overall, the efficiency of the government is very low. Although the government has its important role, even these roles are carried out very inefficiently. Some other countries may have better management in areas such as education, and what we need is fundamental reform.

For example, education is one of the most worthwhile investment areas. Wherever these government officials go, the issue of their resettlement and role, as well as the inherent inefficiency of the system, are the problems. There is a benefit in the capitalist system that if something is not worth investing in or cannot be profitable, it cannot survive, but even so, the system is still full of inefficient manpower and mechanisms.

David Sacks: Is there currently a lack of sufficient productivity-driven economic growth to provide more people with the opportunity to increase their income, wealth, and living standards? Or is it that people's own abilities and education are insufficient to make them productive, so the system itself has let them down?

Ray Dalio: The key to success lies in three points. First, you have to educate children well, so that they have the ability to be part of productivity, while also teaching them to interact civilly with others. Second, society needs to provide an orderly, civilized environment where people can compete and cooperate, thereby enhancing productivity and benefiting the majority. Third, you must avoid war, including civil and international wars. If these three points are achieved, the country will succeed. This is a fact that history has repeatedly proven.

David Sacks: Are these the strategies to address current social issues? For example, the rise of unions, increasing support for the socialist movement, and the discussion of wealth tax, can all these phenomena be addressed through education, a civilized environment, and avoiding war?

Ray Dalio: We need to stop infighting; the current situation is that we are facing irreconcilable differences. When the position people support is more important to them than the entire system itself, the system will be in crisis. Our system is in danger because people will not accept the existing system or alternatives; they will choose to fight.

David Sacks: How does this affect productivity?

Ray Dalio: When we try to build a good education system, we face a chaotic and inefficient reality where no one can truly take control. If we look back in history, around 350 BC, Plato wrote about the theory of the cycle of democracy and its threats. The current situation is similar to that of Caesar in Rome, being assassinated in the Senate.

We need a strong leader to drive reform and make the country function well. But the question is how to get these fragmented groups to stop fighting and focus on increasing productivity. This requires a tough leader who can compel everyone to take different actions, stop fighting each other, and focus on a common goal.

Is America Headed for Collapse?

David Sacks: It sounds like we are on an inevitable path to ultimately having to choose between some form of socialism and some form of fascism. Is that the current state of the nation?

Ray Dalio: I believe so, we are heading towards that "war," in fact, we are already in it, I call this the "Fifth Stage." When a country's finances are in bad shape, along with huge wealth and values gaps, irreconcilable differences, and facing internal and external threats, this dynamic occurs. I think that is our current situation.

I am like a mechanic, my goal is not based on ideology but from a practical perspective, trying to make money in the markets and describe what is happening. From my perspective, that is the current state.

David Sacks: Regarding the AI bubble issue, how do you see it? Many people think they are investing in technology, but they are actually investing in these company's stocks. Do you think this is a misconception?

Ray Dalio: This is indeed a common misconception, there is a significant difference between technology and a company's performance. Often, many startups cannot survive, only a small number of companies succeed, while the technology itself continues to evolve and improve, I want to emphasize that this dynamic has a significant impact on the market. We can look back at the 2000 tech bubble, or even trace it back to the late 1920s, technology will continue to develop, but not necessarily the companies.

It seems that currently, artificial intelligence is devouring everything, but it may end up "eating itself," as it may not be able to generate enough profit. We cannot view this issue solely from a domestic perspective; we also need to pay attention to the situation in China because the economic philosophy there differs from that of the United States. The U.S. economy is mainly profit-driven, while China may consider profit to be a secondary concern. For example, they may see artificial intelligence as infrastructure like electricity, allowing everyone to use it for free, even open-sourcing it. In this way, they may achieve higher utilization rates, thereby enhancing productivity through usage.

In this scenario, how can we compete? Suppose their technology is nearly as good as ours but free and open-source, while we need to sustain ourselves through profits. This systemic difference also brings potential risks to artificial intelligence, and of course, there are many unknowns here.

David Sacks: Reflecting on U.S. history, I often ask myself a question: How did we get to where we are today? Whether it's the scale of debt, government spending, or the role of the central bank and the risks we currently face, it seems that all of these could have been avoided if different decisions had been made years ago. If you could go back in time, become one of the founding fathers of America, and rewrite the Constitution, what different choices would you make? What clauses would you add to the Constitution to avoid the predicament we are in today?

Ray Dalio: This question reminds me of the "marshmallow test," where a child is given the choice of eating one marshmallow now or waiting 20 minutes to eat two marshmallows; those who choose to wait 20 minutes often have better decision-making abilities in life. This is exactly where our problem lies— the demand for instant gratification and ignorance of whether certain things will bring productivity.

However, I must also say that this system has shown remarkable adaptability. We have gone through crises, dealt with debt, and ultimately come out on top, always finding ways to weather the storm. But striking a balance between fiscal prudence and innovative invention is a challenging issue. For example, with today's artificial intelligence, no one knows what outcomes it will bring, nor do we know if it will yield returns. Writing clauses into the law to ensure fiscal prudence and control while not hampering innovation and entrepreneurial spirit is indeed difficult to achieve.

Perhaps the main point I would suggest is: Read history. Understand these patterns and strive to find a balance in all aspects. The key to everything lies in balance—whether it's the pain of facing failure or the agony of investing in failed projects, finding balance is paramount.

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