Ray Dalio: Trump's trade war could trigger "worse consequences than an economic recession"

On Sunday, Ray Dalio, founder of Bridgewater Associates, stated in an interview that the United States is on the brink of an economic recession, and even worse scenarios may occur:

I believe we are at a decision point now, very close to a recession. And if not handled properly, I worry that there could be something worse than a recession.

Dalio stated that Trump's tariff policies have been "very destructive so far." He described the initial implementation of these policies as "throwing stones into the production system." He believes the impact of these tariffs will be "huge in terms of global efficiency."

He pointed out that the disintegration of monetary order and the "profound" changes in the world order are happening:

When considering tariffs and debt together, it becomes clear that the shock to the existing order and system is extremely severe. If handled properly, we can transition smoothly; but if mishandled, the outcome could be much worse than a recession.

Key points are as follows:

• Five historical drivers: The five forces that have historically driven the rise and fall of nations include: ① monetary-credit-debt cycles, ② domestic class and value conflicts, ③ changes in international order (great power competition), ④ natural disasters and pandemics, ⑤ technological changes.

• Tariffs are just the surface: The tariffs imposed by the Trump administration are merely a symptom of deeper structural issues, such as fiscal deficits, domestic divisions, and the reorganization of international order.

• Current situation resembles the 1930s: We are in a period of significant change similar to the 1930s, including the potential disintegration of monetary, political, and international systems.

• Policy execution determines consequences: The tariff policy itself is not the problem; the key is whether it is executed through stable, professional negotiation or in a chaotic manner that triggers conflict.

• Currently very close to recession: The United States is currently nearing an economic recession and is concerned that if mishandled, there could be "more severe" consequences than a recession.

• The biggest risk is the collapse of the monetary system: If debt levels are too high and fiscal deficits are uncontrolled, the dollar as a "store of value" may lose trust, leading to financial turmoil.

• Multiple risks overlapping: If the monetary system destabilizes, domestic political divisions, and international conflicts occur simultaneously, it could lead to consequences more severe than the collapse of the monetary system in 1971 or the financial crisis in 2008.

• Call for both parties to control deficits: He suggested that Congress should commit to keeping fiscal deficits within 3% of GDP, or it will lead to an imbalance in debt supply and demand.

The full text is as follows:

Host: Thank you very much for coming today; we are very much looking forward to your views. As I just mentioned, you founded the world's largest hedge fund and have been working in this field for over 50 years. I think it's important for the audience to know that you consider yourself "politically neutral," and you also mentioned that the current tariff issue is actually a "symptom" of a larger problem. What do you mean by that?

Dalio: This is a financial issue; it is an imbalance issue. Historically, there are basically five major forces driving everything. The first is the monetary, credit, debt, and economic cycles, in which debt accumulates continuously, ultimately accumulating too much and causing problemsWe will face the issue of government debt, and perhaps we can talk about this.

The second long-standing trend is the power of internal conflict—the divide between the left and the right, in terms of wealth and values, which has triggered the changes in the political order we currently see. So, the first is the change in the monetary order, and the second is the change in our internal political order.

Third, there is the change in the world order. We are shifting from multilateralism—primarily a U.S.-centric world order—to a unilateral world order, which has brought about significant conflicts.

Two other long-term historical factors are natural disasters, such as droughts, floods, and pandemics. Fourth, there is the change in technology. These factors are all emerging simultaneously now, and they represent the main forces we face. For example, in such an environment, any imbalance is difficult to sustain.

Host: Do you think President Trump's tariff measures have exacerbated this complex set of challenges you described?

Dalio: I think it depends on how these issues are handled. This is the reality—we want to generate tax revenue through tariffs. This is also the reality—we want to rebuild domestic manufacturing and jobs. These are all realities. The key is whether these goals are being achieved in a pragmatic and stable manner. Are these common challenges being addressed through high-quality negotiations? Or are they being handled in a chaotic and destructive way, leading to significant conflicts? This will yield vastly different outcomes.

Host: Based on your current observations, do you think these tariff policies are being executed pragmatically or chaotically?

Dalio: Currently, it seems very destructive, right? We don't know the specific numbers yet, but this could be part of a process. We'll have to see where we are in 90 days. Because the current policy is like throwing stones into the production system, and the impact will be enormous; the efficiency of the entire world will be hit with significant costs.

Host: I want to ask a question that many people are concerned about, which is your prediction for the future. I want to start with a word that begins with "R." I know you think that's just part of the problem. That's right, I'm talking about "recession." How likely do you think it is that the U.S. will fall into an economic recession due to President Trump's tariff policies?

Dalio: I think we are currently at a decision point, very close to a recession. I worry that if not handled properly, something worse than a recession could occur. Technically speaking, a recession is defined as two consecutive quarters of negative GDP. Whether we slightly fall into that range is actually quite common.

But the current situation is more profound: our monetary system is disintegrating. We must change the existing monetary order because we cannot continue to spend this much money. That is a problem. And when we talk about the dollar and tariffs, we are also discussing this issue. Our domestic governance structure is undergoing profound changes, and the global order is also experiencing significant changes. Such times are very reminiscent of the 1930s. I have studied history, and this situation has repeated itself time and againSo, if you look at factors like tariffs and debt together, along with changes in institutional order — they are essentially highly destructive. Different ways of handling them could lead to very different outcomes: either worse than a recession or manageable. Let's talk about the debt issue.

Host: Let me interrupt, because I want to ask you more specifically about what you just said regarding "worse than a recession." You mentioned that the current situation is reminiscent of the 1930s. We should also remind the audience that you accurately predicted the 2008 financial crisis. So what is your prediction now? What do you think the future holds for the United States?

Dalio: We are at a critical moment right now. For example, the budget issue. If the budget deficit can be reduced to around 3% of GDP, that is achievable. If the status quo remains unchanged, the deficit could reach around 7% of GDP. If we can keep it around 3% while properly addressing trade deficits and other issues, all of this can be managed well.

I believe members of Congress should make a commitment (what I call a "fiscal commitment") to somehow keep the budget deficit at this level. If they fail to do so, we will face a supply and demand issue regarding debt. At the same time, we are facing other problems, and the outcome will be worse than a typical recession.

Host: Following up on your point, you said "worse than a recession." You mentioned the 1930s. What specifically are you worried about? Are you suggesting it could be as severe as the "Great Depression"? What is your biggest concern?

Dalio: The value of currency. The means of storing wealth — that is, bonds — will be threatened. In other words, one person's debt is another person's asset, the asset of the bondholder. If this way of storing wealth is in danger — due to an oversupply of debt, insufficient demand, and coupled with currency inflation — then there will be tremendous chaos.

That could lead to a collapse of the monetary system like in 1971, or it could be as severe as 2008. If other problems occur simultaneously, the consequences will be even worse. Imagine if we experience political turmoil while also facing international conflicts...

Host: What is the worst-case scenario you are warning about? Please be very specific.

Dalio: To be very specific, I am concerned about the depreciation of currency value, domestic conflicts that are no longer in the familiar democratic form, and international conflicts that could erupt in ways that disrupt the global economy, potentially escalating into military conflicts. Historically, such collapses of order have occurred.

In 1945, we established a new order — a new monetary order and a new geopolitical order. These orders are cyclical and measurable. I am worried about the collapse of this order, especially since it is not inevitable; with certain measures, things can improve, particularly in terms of debt restructuring.

Host: This leads to my next question. Your new book "How Nations Go Bankrupt: The Big Cycle" proposes solutions. What are those solutions?Ray Dalio: There are many solutions, but let's first talk about the most important point.

Host: We have one minute left.

Ray Dalio: Okay, reduce the budget deficit to 3% of GDP. This is achievable and can be done through bipartisan cooperation, just like it was done from 1991 to 1998. I explain in my book how to do this specifically—coming together for greater benefits. Then, internationally, on all these issues, negotiate with high quality using America's strength, propose clear plans, avoid the huge chaos brought by bad conflicts and inefficient policies, and instead navigate this period in an orderly manner.

Host: Alright, thank you very much, Ray Dalio. His new book is "How Countries Go Bankrupt: The Big Cycle." Thank you for being here today; we really appreciate it.

Ray Dalio: Thank you