China could see stagnation as Japan did: Ray Dalio

The founder of the globe’s biggest hedge fund, Bridgewater Associates with assets of over $124 billion, has been a long-standing China bull but, of late, the 75-year-old founder is concerned about the $17 trillion economy that is grappling with a deepening slowdown. In the latest finding of The Great Powers Index 2024, Dalio mentions that the United States and China continue to be the two most powerful countries with high levels of conflict between them. In an interaction with Fortune India, Dalio shares his views on an unsettling global macro landscape.

The U.S. remains the #1 global power in your Power Score Index 2024, but its expected growth has declined. What are the key steps U.S. policymakers could take to reverse this trend, especially in light of growing internal conflicts and economic challenges?

The greatest threats to the U.S.’s strengths are its internal conflicts owing to its highly skewed education-productivity-income distribution and its high government debt levels. It can improve by creating broad-based excellent education-productivity-income distribution, and by engineering what I call a “beautiful deleveraging,” which means restructuring some debts (e.g., changing maturities to spread them out) and monetising them. To make these reforms and be cohesive, it must have very strong political leaderships from the middle — stronger than what now exists at the political extremes. This is difficult to imagine but it is theoretically possible, especially when the U.S. dollar is essentially the only reserve currency, which is currently the case.

China is ranked #2 globally and is noted for its rapid ascent, driven by infrastructure, global trade, and military strength. How sustainable do you believe China’s growth trajectory is, given its internal challenges amid faltering growth and geopolitical tensions?

To me, the most important challenge China now faces is its debt challenge. If it doesn’t solve it, it will have a lengthy economic stagnation in the non-government sectors of the economy — such as Japan’s in the 20 years following the 1990 debt bubble bursting. Because most of its debts are domestic and in its own currency, “a beautiful deleveraging” — i.e., one in which the bad debts are restructured and monetised in a balanced way to reduce the debt burdens — is possible. In addition to restructuring the debt, monetary policy will have to have negative real rates, nominal bond yields below nominal economic growth, a positive slowed yield curve, and probably an orderly weakening of the currency. Also, it will be important not to scare entrepreneurs and investors about property rights while reforming the tax system to redistribute wealth so that it is invested in areas such as education to produce broad-based productivity and prosperity.

The Power Score Index uses quantitative methodology to assess the relative strength of countries. How do you balance quantitative measures with qualitative factors such as political stability and leadership, which are harder to quantify but can significantly impact a country’s trajectory, as is evident in the evolving political landscape across economies?

I have found that most all qualitative judgements can be quantitatively measured but to the extent they can’t, I still use them to help inform what I think — i.e., I use these readings as objective measures of these 24 countries conditions that tells me a lot about these countries’ conditions and prospects.

Many major countries, including the U.S., face high debt burdens. How critical is it for these nations to address debt issues to maintain or regain their global standing, and are there any historical precedents that offer lessons on how to manage such debt? Also, in a highly leveraged global economy, having control over debt markets (as the U.S. does with its reserve currency) might actually be an advantage rather than a risk?

There are many historical examples to look at to understand how these debt problems work. I did a study that I put out as a book titled Principles for Navigating Big Debt Crises that looked at all of them — 48 of them — that occurred over the last 100 years. The big debt cycle is very easy to understand if people study it. As for the situation now, in the U.S. and many other major economies, debt and debt burden levels are now reaching levels that borrowing will have to accelerate into an unsustainable upward spiral to fund debt service expenditures and will soon lead to either debt service problems or an accelerating debt monetisation that will lower the value of money.

Could rapid technological development, particularly in AI, ironically hasten the decline of great powers by creating social upheaval before they generate long-term benefits?

It seems to me that AI will greatly improve productivity while making a small percentage of the population very rich and putting a lot of people out of work. So, the great challenge will be how to use it to create broad-based productivity and broad-based prosperity. It will also be used to enable bad things like wars. For these reasons, its effects will depend on how leaders guide the usage of it.