>>> WE TURN NOW TO WHAT OUR NEXT GUEST CALLS THE BIG DEBT CYCLE.

FINANCIER RAY DALIO CALLS THIS A CRITICAL CYCLE.

IN HIS NEW BOOK HE PROVIDES SOLUTIONS AND DETAILS ABOUT AVOIDING FISCAL CRISIS.

>> THANK YOU.

RAY DALIO, WELCOME BACK TO THE SHOW.

>> SO GOOD TO BE BACK.

>> THE BIG BEAUTIFUL BILL AS TRUMP CALLS IT HAS PASSED THE HOUSE.

THE SENATE IS WRESTLING WITH IT.

IT SEEMS LIKE IT WOULD ADD $2.4 TRILLION TO THE DEFICIT.

SHOULD WE WORRY ABOUT THAT ADDING TOO MUCH TO THE DEFICIT?

>> I THINK IF THERE IS ONE THING I COULD GIVE PEOPLE THAT I'M COMPELLED TO GIVE PEOPLE NOW, IT'S AN UNDERSTANDING OF THE MECHANICS OF SUPPLY AND DEMAND SO PEOPLE WHO UNDERSTAND HOW TO ANSWER THAT BASTION WHICH IS WHY AS A GLOBAL INVESTOR FOR 50 YEARS WHO HAS BEEN THROUGH MANY OF THESE, I WANTED TO PASS ALONG MY BOOK, MY DESCRIPTION OF THE MECHANICS.

IN ANSWERING YOUR QUESTION I WANT TO SAY WHY IT'S A COMPELLING MOMENT.

IF THEY DO NOT BRING IT DOWN TO 3% OF GDP FROM WHERE IT WILL BE ABOUT 7% OF GDP.

THEY HAVE TO BRING IT DOWN BY 4% OF GDP, THERE IS VERY HIGH LIKELIHOOD OF REAL PROBLEMS.

>> YOU SAY YOU'VE GOT TO BRING IT DOWN BY MORE THAN HALF.

CAN THAT BE DONE WITH SPENDING CUTS ALONE?

OR DO YOU THINK THEY SHOULD LET SOME OF THE TAX CUTS EXPIRE?

>> IT HAS TO BE DONE BY THREE THINGS.

IT HAS TO BE SPREAD OUT AMONG THESE THREE THINGS.

ANYONE OF THOSE THREE THINGS WOULD BE TOO PAINFUL.

THOSE THREE THINGS ARE TAX REVENUE, SPENDING CUTS, AND INTEREST RATES.

ALTHOUGH CONGRESS AND THE PRESIDENT IN THE PROCESS DOES NOT DEAL DIRECTLY WITH A THIRD OF THOSE, RIGHT NOW $1 TRILLION, HALF OF THE DEFICIT, HIS INTEREST PAYMENTS.

NOT ONLY DO WE HAVE $1 TRILLION INTEREST PAYMENTS, IN THE NEXT YEAR WE HAVE $9 TRILLION OF DEBT MATURING THAT HAS TO BE EITHER ROLLED OVER OR SOLD.

>> DOESN'T THAT MEAN INTEREST RATES WILL NOT GO DOWN IF WE ADD MORE TO THE DEFICIT AND ALL OF THIS IS EXPIRING?

>> THERE IS WHAT I CALL MY 3% THREE-PART SOLUTION.

IT WAS VERY SIMILAR TO 1990 -- EXCUSE ME, 1991 TO 1998.

IT WAS CUT BY 5% OF GDP.

THE BUDGET DEFICIT.

IN THOSE YEARS IT WAS CUT BY 5% BY SPREADING IT AROUND.

THE THREE THINGS THAT ARE NEEDED.

IF THERE IS A MANTRA THAT ABOUT -- HERE IS THE MAGNITUDE OF IT.

ABOUT 4% IF IT CAME FROM TAX REVENUE.

THAT DOES NOT MEAN TAX RATES.

IT CAN BE TAX REVENUE.

4% CUT FROM THE BUDGET DEFICIT.

THAT WOULD NATURALLY CHANGE THE SUPPLY DEMAND PICTURE TO BRING DOWN INTEREST RATES BY 1 TO 1 1/2% WHICH WOULD ITSELF REDUCE THE DEFICIT BY ANOTHER 2% ARE SO .

.

>> LET ME PUSH ON THAT QUESTION OF HOW ARE YOU GOING TO RAISE MORE REVENUE.

YOU SAY IT IS NOT JUST BY ALLOWING TAX CUTS TO EXPIRE.

DON'T SOME OF THEM HAVE TO EXPIRE IF THE SOLUTION IS GOING TO WORK?

>> WHERE IT COMES IS A POLITICAL QUESTION.

IN OTHER WORDS, YES.

YOU CAN LET THE TAX EXPIRE.

SO MANY DIFFERENT WAYS.

>> WHAT WOULD YOU DO?

YOU ARE ONE OF THE WEALTHIEST PEOPLE.

THE TAX CUTS HELP YOU.

WHAT WOULD YOU DO IN TERMS OF THOSE TAX CUTS FOR THE WEALTHY?

>> I WOULD ALLOW IMPORTANT TAX INCREASES IN A WAY THAT ALSO, MY OWN VIEW WOULD BE IMPROVE EDUCATION.

IMPROVE PRODUCTIVITY IN A WAY THAT RAISES PRODUCTIVITY FOR MOST PEOPLE AND SO ON.

THIS -- THIS IS NOT MY POLITICAL.

I WANT TO SAY WHETHER YOU TURN LEFT OR YOU TURN RIGHT, WHAT I SEE WHEN I GO DOWN THERE AND I SPEAK TO BOTH SIDES OF CONGRESS , THE PEOPLE WHO ARE RESPONSIBLE FOR THIS.

NOBODY DISAGREES WITH THE NEED TO GO TO 3% OF GDP IN THAT NUMBER.

WHAT I AM SEEING IN POLITICS IS THAT IT'S LIKE BEING ON A SHIP THAT IS HEADED TO ROCKS.

THERE ARE THOSE WHO WANT TO TURN RIGHT AND THOSE WHO WANT TO TURN LEFT.

THEY ARE SO BENT ON ARGUING WHETHER THEY TURN RIGHT OR LEFT THAT THEY WILL NOT GET PAST.

THEY WILL HIT THE ROCKS.

>> PRESIDENT TRUMP SEEMS TO BE TRYING TO JAWBONE THE FED CHAIRMAN JEROME POWELL INTO CUTTING INTEREST RATES.

DOES THAT MAKE ANY SENSE?

WITH THE BOND MARKET PERMIT IT?

>> IF INTEREST RATES ARE UNNATURALLY CUT BY THE CENTRAL BANK PRINTING MONEY OR PUSHING DOWN INTEREST RATES UNNATURALLY THE BOND MARKET WILL NOT WANT TO OWN THAT.

THINK ABOUT WHEN YOU OWN A BOND WHAT YOU ARE GETTING HIS INTEREST RATES.

THE DOLLAR WILL GO DOWN, THE VALUE OF MONEY WILL GO DOWN AND IT IS DISCOURAGING.

>> ON SUNDAY THE TREASURY SECRETARY SAID THAT TARIFFS WOULD HELP RINGING ENOUGH MONEY THAT WE WOULD NOT END UP HAVING AS BIG OF A DEFICIT.

DOES THAT RING TRUE TO YOU?

>> WE ARE IN A WORLD GEOPOLITICAL SITUATION THAT RELATES TO MANY THINGS SUCH AS SELF-SUFFICIENCY AND SO ON.

IT CAN BRING IN A LOT OF MONEY.

IT ALSO CREATES A LESS EFFICIENT WORLD ECONOMY.

SO HOW THE TARIFFS ARE PUT IN PLACE, WHAT AMOUNTS, IT HAS TO BE DONE SCIENTIFICALLY.

TAX REVENUE CAN COME FROM THAT, BUT IT IS A MATTER OF SURGERY AND HAS TO BE DONE CAREFULLY AND MODERATELY SO AS TO NOT DISRUPT THAT.

I AM CONCERNED ABOUT THAT.

THAT IS NOT GOING TO BE ENOUGH.

>> IN YOUR BOOK YOU ARE IN FAVOR OF SOME TARIFFS MODERATELY IT APPLIED IN A SCIENTIFIC WAY THAT IS NOT JUST HELTER-SKELTER.

EXPLAIN WHY YOU ARE IN FAVOR OF THAT AND WHY YOU THINK THAT WAY TRUMP IS DOING IT NOT BE EFFECTIVE.

>> WE HAVE A GIANT IN BALANCE.

THE UNITED STATES IS THE LARGEST CONSUMER IN THE WORLD.

IT IS LARGELY BECAUSE THE U.S. GOVERNMENT GETS IN DEBT AND DISTRIBUTES THE MONEY AND IT IS A CONSUMER.

AS WE HAVE -- CORRECTLY WE HAVE LOST OUR ABILITY TO MANUFACTURE.

CHINA IS THE LARGEST MANUFACTURER IN THE WORLD.

THEY LEND US THE MONEY TO BORROW, TO BUY THEIR GOODS.

NOW WE HAVE A BIG IMBALANCE.

WE HAVE A CAPITOL IMBALANCE AND A TRADE IMBALANCE.

IN A WORLD THAT THERE IS A RISK OF GOING TO WAR, AS WE DEAL WITH SELF-SUFFICIENCY, INCREASINGLY WE HAVE TO BECOME MORE SELF-SUFFICIENT.

WE HAVE TO BECOME MORE BALANCED ONE WAY OR ANOTHER.

IF THAT IS DONE ECONOMICALLY, WE HAVE A POPULATION THAT IS NOT PRODUCTIVE IN MANUFACTURING.

WE HAVE A GREAT POLARITY OF WEALTH.

60% OF AMERICANS HAVE BELOW A SIXTH GRADE READING LEVEL.

THERE IS A PRODUCTIVITY PROBLEM AND AN ECONOMIC PROBLEM.

IF THAT IS DEALT WITH IN A SCIENTIFIC AND BALANCED WAY, THAT COULD HAVE SOME BENEFITS.

IT IS NOT A BLACK-AND-WHITE SITUATION, BUT IT HAS TO BE DONE WITH THOROUGHNESS.

ONE WAY OR ANOTHER THE IMBALANCE WILL GO AWAY.

THE DEBT IMBALANCE, THE TRADE IMBALANCE, THE CAPITOL IMBALANCE BECAUSE THEY CANNOT BE SUSTAINED IN THE WORLD THAT NOW EXISTS.

>> WHEN YOU SAY ONE WAY OR ANOTHER THEY WILL GO AWAY, THAT OTHER SOUNDS PRETTY OMINOUS.

WHAT ARE YOU WORRIED ABOUT?

>> I AM WORRIED -- LET'S GO BACK TO THE DEBT.

I AM WORRIED THAT THE DEMAND FOR THOSE BONDS WILL NOT BE EQUAL TO THE SUPPLY.

I AM WORRIED THAT AS THE DEBT IS AT THIS POINT.

YOU HAVE TO ACQUIRE DEBT TO SERVICE DEBT.

YOU HAVE TO BORROW MONEY TO SERVICE IT.

$10 TRILLION A YEAR.

WHEN YOU HAVE THAT KIND OF CONDITION YOU WILL HAVE AN UNSUSTAINABLE SITUATION.

THE CENTRAL BANK, THE FEDERAL RESERVE WILL BE PUT INTO A POSITION OF EITHER SEEING INTEREST RATES RISE A LOT BECAUSE OF THAT PROBLEM, CROWDING OUT OTHER SPENDING, COSTING IT MONEY BECAUSE THEY OWN A LOT OF BONDS.

LETTING THAT HAPPEN OR THEM HAVING TO PRINT MONEY AND BUY THOSE BONDS WHICH DEPRECIATES THE VALUE.

VERY SIMILAR TO THE 1970S.

>> DO YOU THINK THERE IS A CHANCE OR LIKELIHOOD OF A RECESSION?

>> WE ALWAYS HAVE RECESSIONS.

JUST IMAGINE WHAT HAPPENS IF YOU HAVE A RECESSION.

ON AVERAGE SINCE 1945 WHEN THE NEW WORLD ORDER BEGAN, WE'VE HAD 12 AND A HALF CYCLES.

YOU WILL ALWAYS HAVE A RECESSION.

I'M VERY WORRIED THAT THIS SET OF CIRCUMSTANCES WILL ASSUREDLY, WE WILL HAVE A RECESSION.

THAN THE DEFICITS GO UP.

IT IS VERY DIFFICULT AT THAT TIME BECAUSE PEOPLE ARE AT EACH OTHER'S THROATS.

THERE WILL BE AN INTERNAL FIGHT.

THE IMPORTANT THINGS TO DEAL WITH THIS NOW BEFORE YOU HAVE A LOT MORE DEBT, BEFORE YOU HAVE A LOT MORE COMPOUNDING OF THE DEBT.

BEFORE YOU HAVE A RECESSION.

>> LET ME READ YOU A SENTENCE FROM YOUR BOOK THAT MADE ME SNAP MY HEAD.

IT SAYS, QUOTE, THE POLICIES PRESIDENT TRUMP IS USING TWO, QUOTE, MAKE AMERICA GREAT AGAIN I REMARKABLY LIKE THE POLICIES THOSE OF THE HARD RIGHT COUNTRIES IN THE 1930S USED.

TELL ME WHAT YOU MEAN BY THAT.

>> WHAT I MEAN BY THAT IS THE 1930S HAD A DEBT CRISIS.

LOCAL GOVERNMENTS WERE DYSFUNCTIONAL AND FOUR DEMOCRACIES CHOSE TO GO TO MORE AUTOCRATIC POLICIES FOR SOMEBODY TO GET CONTROL OF THE SITUATION IN ORDER TO FIX THE SITUATION.

YOU HAD A DEBT PROBLEM.

WHAT GERMANY DID, AND A NUMBER OF COUNTRIES, THEY ESSENTIALLY DEFAULTED ON THE DEBT.

THEY DID NOT PAY AND THEN YOU HAVE THAT MORE AUTOCRATIC TYPE OF POLICY BECAUSE THE PEOPLE WANT SOMEBODY TO GET CONTROL OF THE SITUATION AND THEN YOU HAVE THE CLASSIC CONFLICT BETWEEN THE LEFT AND THE RIGHT.

THIS HAS HAPPENED REPEATEDLY.

THEN YOU HAVE A FIGHT BETWEEN THE LEFT AND RIGHT.

THIS HAS HAPPENED REPEATEDLY.

I'M REFERRING TO THE 30s BUT THIS HAS HAPPENED REPEATEDLY THROUGHOUT HISTORY.

>> DO YOU THINK IT IS HAPPENING IN THE UNITED STATES THAT WE ARE SLIPPING TOWARD AUTOCRACY?

>> YES.

I DO BECAUSE THE PEOPLE WANT SOMEBODY TO GET CONTROL OF THIS THING.

YOU SEE IT YOURSELF.

WE ARE NOW QUESTIONING, THERE IS A CHALLENGE.

HOW DOES THE LEGAL SYSTEM WORK.

WHO HAS WHAT RIGHTS.

THE POSSIBILITY OF THIS NOT ACCEPTING AN ELECTION RESULT.

THESE THINGS ARE VERY REAL TODAY.

'S REMARK WHEN YOU TALK ABOUT PERHAPS WE ARE MOVING INTO A AUTOCRACY THERE IS ANOTHER SENTENCE THAT STRUCK ME .

AS SHOWN IN HISTORY THE TRANSFER OF OUR FROM DEMOCRACY TO AUTOCRACY WAS MORE OFTEN THAN NOT ORDERLY BECAUSE PEOPLE WERE SICK AND TIRED OF THE SYSTEM FAILING TO WORK AND WANTED TO GIVE POWER TO A LEADER THAT WOULD TAKE CONTROL AND MAKE IT WORK WELL.

DO YOU THINK IT IS A DESIRE OF PEOPLE IN THE UNITED STATES TO MOVE TO AN AUTOCRATIC SYSTEM.

>> THERE IS A STRONG DESIRE FOR SOMEBODY TO GET CONTROL OF THIS AND WILLINGNESS TO HAVE THAT MORE AUTOCRATIC TYPE TO DELIVER THOSE RESULTS.

I THINK SO.

>> WHEN YOU TALK ABOUT THE POTENTIAL OF GETTING MORE REVENUE, I THINK IN YOUR BOOK YOU TALK ABOUT A 2% INCREASE IN THE INCOME TAX.

WOULD YOU MAKE THAT PART OF YOUR SOLUTION PACKAGE?

>> SURE.

I THINK WHAT IS REQUIRED IS A LITTLE BIT FROM EVERYBODY AND EVERYTHING.

>> WHAT ABOUT EXPENDITURE CUTS?

WOULD YOU CUT THE MILITARY?

>> AS YOU GO DOWN THAT PRIORITIZATION, THESE ARE POLITICAL QUESTIONS THAT NOW BECAUSE OF THE DEBT SERVICE BEING SO HIGH, WE HAVE VERY LITTLE ROOM TO CUT ANYTHING WE DO NOT THINK IS ESSENTIAL.

NOW YOU HAVE THE REPRESENTATIVES IN CONGRESS HAVING TO MAKE THAT CHOICE.

THEY BETTER MAKE THE CHOICE AS TO WHETHER IT IS THE MILITARY OR SOMETHING ELSE.

I DON'T REALLY CARE.

CUT IT, GET TO SOMETHING LIKE A 4% CUT AND THAT IS NOT EASY.

SO WHERE THAT HAPPENS BECAUSE IF WE LOSE OUR ECONOMIC WELL- BEING, IF WE LOSE OUR HEALTH AND POWER ECONOMICALLY, AS WE LOSE THE DOLLAR IT REVERBERATES THROUGH NOT ONLY AMERICAN POWER.

IT REVERBERATES THROUGH THE WORLD BECAUSE THE U.S.

BOND MARKET, THE TREASURY MARKET IS THE BACKBONE OF ALL MARKETS.

THAT COULD PRODUCE THAT KIND OF TRAUMA.

SO HOW THEY GET THERE AND THE PARTICULAR TRADE-OFFS IS FOR THOSE EXPERTS AND REPRESENTATIVES IN WASHINGTON TO WEIGH THOSE CONSIDERATIONS.

IT IS NOT FOR ME.

>> IF YOU ARE GOING TO HAVE SOMETHING THAT IS A THREE MINISTRY MINISTRY SOLUTION THAT WOULD REQUIRE -- 3-3-3 SOLUTION, DO YOU THINK THAT IS A GRAND BARGAIN AND IS IT POSSIBLE?

>> I DO NOT THINK WE WILL HAVE A GRAND BARGAIN UNTIL AFTER THE 2026 MIDTERMS.

THE BUDGET WILL PASS.

IT WILL BE THIS SITUATION I'M DESCRIBING.

THEN, WHAT MY HOPE WOULD BE IS THAT THERE IS A MANDATORY BIPARTISAN SOLUTION.

THEY CREATE THE EQUIVALENT OF A MANHATTAN PROJECT AND SO ON AND CREATE A MANDATORY BIPARTISAN WAY OF DEALING WITH THAT.

DO I THINK THAT IS LIKELY?

I DO NOT THINK IT IS LIKELY BUT IF WE DO NOT ACHIEVE A BIPARTISAN SITUATION WE WILL HAVE A FINANCIAL CRISIS AND BE FIGHTING WITH EACH OTHER.

HOPEFULLY THE COMPELLING NATURE OF THIS, BEFORE WE HAVE A RECESSION WHICH WILL MAKE THE SITUATION WORSE.

>> RAY DALIO, THANK YOU FOR JOINING US.

>> THANK YOU.