Ray Dalio on Regulatory Environment

The middle 2010s tested the firm's stability. Over 2014 to 2016 the University of California's Regents pulled 550 million dollars from Bridgewater over concerns about the firm's future leadership. In 2016 Connecticut approved 22 million dollars in grants and loans through a program initiated by Governor Dannel Malloy, in exchange for job training, job creation, building renovations, and retaining the 1,402 jobs the firm supported in the state, along with 30 million dollars in urban tax credits. That year the firm managed about 150 billion dollars. In October 2017 Grant's Interest Rate Observer published The Face on the Wall Street Milk Carton, sharply criticizing Bridgewater over alleged conflicts such as lending money to its auditing firm KPMG and the presence of 91 former employees at custodial bank Bank of New York Mellon. The article became the talk of Wall Street; Bridgewater denied any impropriety, and a week later Jim Grant apologized in print and on CNBC, retracting parts of the story.

On China, Dalio urged seeing the system from the inside. He described a top-down, Confucian, hierarchical approach working at odds with America's bottom-up democratic one, and warned against hearing the words Communist Party and picturing the old Mao era: the improvement in living standards came from the movement from the first phase of the revolution into Deng Xiaoping's pragmatism, captured in the maxim about cats of any color so long as they catch mice. He traced Chinese anxieties to sovereignty and the hundred years of humiliation that began around 1840 with foreign incursions and the opium wars, and to Japan's 1895 seizure of Taiwan, calling these existential issues for Beijing. His taxonomy of escalation lists five types of war, trade, technology, geopolitical influence, capital, and military, progressively more difficult and liable to run together. A military war between the two powers, he warned, would be the worst the world has ever had, given how far the technologies have advanced. His prescription echoed Kissinger's call for defining red lines: worry now, so you do not have to worry later.

The mechanics Dalio distills run as follows. All big debt cycles go through six stages, which the template describes and teaches the reader to navigate. Getting the balance right between too much debt, which causes debt crises, and too little, which causes suboptimal development, is never done perfectly; cycles swing from one extreme to the other, exacerbated because people remember what happened to them recently rather than what happened long ago, and the result is a big debt crisis roughly every fifteen years. There are two major types, deflationary and inflationary, with the inflationary ones typically occurring in countries with significant debt dominated by foreign currency. Four levers manage a debt crisis into a deleveraging: austerity, debt defaults and restructuring, wealth redistribution, and printing money to stimulate the economy. Managing well means spreading out the pain of the bad debts, which can almost always be done when debts are in one's own currency; the biggest risks come from policymakers lacking the knowledge or the authority to act. The beautiful deleveraging balances the levers so deflationary and inflationary forces offset.