Original Author: Ray Dalio (Founder of Bridgewater Associates)
Original Translation: Deep Tide TechFlow
Introduction: In light of the high national interest in the midterm elections and the power shifts in both houses, Ray Dalio, co-founder of the world's largest hedge fund Bridgewater and a renowned macroeconomist, writes a lengthy article, stepping out of the noisy partisan struggles to analyze the deep trends of the American economy through his classic Big Cycle historical model.
Dalio emphasizes that the election results merely change the specific individuals responsible for handling issues, but do not alter the objective realities faced by the United States, such as massive debt, wealth disparity, great power competition, and challenges in climate and technology. With the temporary fiscal appropriations set to expire in December and the federal debt ceiling approaching in Spring 2027, the polarization and confrontations between the two parties not only will struggle to bridge the deficit but may also undermine the credibility foundation of U.S. Treasury bonds as the global core collateral.
Many people have asked me about my thoughts on the U.S. midterm election results, so I decided to share my reflections in writing. Due to the myriad impacts involved in changes across government seats, I will focus only on the most significant aspects.
My conclusion from a broad perspective is that these political changes will not alter the objective environment that our government representatives must face. Our problems will not disappear on their own; the key lies in whether the representatives will address these issues through effective bipartisan cooperation or ineffective confrontations. More specifically, we will continue to face the same debt issues, the same wealth and value gap issues, the same international geopolitical issues, the same climate issues, and the same technology issues, and the election results will not change the dynamics of how struggles over wealth and power typically unfold. The midterm elections will only change who addresses these issues and how they are handled.
The most important question is whether the struggles and dysfunction will increase or decrease; I believe more struggles and greater dysfunction are more likely to occur.
We will soon see whether my judgment is right or wrong, starting from the direction and subsequent developments of the lame-duck session, which will affect many issues. For example, we will see how the elected government representatives handle the issue of money, more specifically, how the government spends and taxes.
This issue will resurface when President Trump's temporary appropriations expire on December 11, and again in March 2027 when the federal debt is expected to hit the ceiling, and once more in Fall 2027 when the Treasury is expected to run out of funding options.
The struggles surrounding these appropriation issues are likely to be fierce, and the uncertainty from these struggles may drive up short-term treasury bills and similar short-term yields as investors seek to avoid paying uncertainty. It is also likely that concerns over liquidity and credit risks will continue to intensify, thereby weakening confidence in U.S. Treasury bonds as the world's primary safe collateral. Similarly, Elizabeth Warren's appointment as chair of the Senate Banking Committee is likely to trigger struggles and changes that will impact the economy and markets.
These are just a few examples among the many disruptions that are likely to occur.
The changes brought by the election will also leave the United States facing a president who is battered, in a lame-duck state, under attack in some form of internal conflict (most likely peaceful), confronting isolationist public sentiment and isolationist opposition, while also facing severe debt and monetary issues. This will weaken both him and the United States internationally and is likely to lead to a contraction of the United States; in turn, this contraction will enhance the influence of the most powerful nations within major geographical regions (such as China in Asia).
As for what is needed, I still believe that, as a principle, the only path to success for the United States and all democracies that are excessively indebted, politically fragmented, and trapped in the same issues (such as France, other European countries, and the United Kingdom) is for smart and steadfast moderates from both the left and right to work together to counter the extremists and properly address these challenges. This requires them to reach a consensus and motivate the government and the public to undertake the difficult but necessary actions to restore national strength. I still believe the likelihood of this occurring is low.
In terms of the political aspect, we have seen this internal political dynamic throughout history, as there are always political disagreements and at least four different political stances regarding how to address these disagreements. The continuum from left to right includes: 1) extreme left, 2) moderate left, 3) moderate right, 4) extreme right. As conditions worsen, these groups become increasingly polarized, with the left and the right confronting each other more intensely until one side (either the left or the right) wins; at that point, moderates and extremists within the winning side will again struggle for control. This struggle has been intensifying, and the logic is simple: as the wealth and value gaps widen, irreconcilable divisions will also grow larger. We are now observing such struggles simultaneously arising within both the Republican and Democratic parties. I expect that intra-party struggles and inter-party conflicts will become much more prevalent.
In my view, this political dynamic stems from the way human nature operates. It has occurred in every part of history and is currently happening in nearly every country, though with slight variations. For instance, in China, a hierarchical structure has formed due to culture (mainly Confucian culture), maintaining a powerful hierarchical order; however, the degree of this hierarchy swings between extreme hierarchy and more open debate. Currently in the United States, the extremists in both parties are demanding control, thus almost violent conflicts have arisen between the two parties, which is now evolving into struggles within each party itself. In many other countries, such a situation would lead to the emergence of more than two political parties. However, given the resources possessed by the existing two parties greatly exceed those of any potential new party, further fragmentation into more parties is generally viewed as impractical.
Regarding the issues being contested by the two parties, I have already spoken about this like a broken record, so I assume you are familiar with my thoughts: five big forces typically emerge in the context of the Big Cycle, how these forces have evolved in this cycle, and at what point we currently stand in the Big Cycle. Therefore, I will not elaborate further on this.
Moreover, I believe you know what is healthy and what is unhealthy, as this is both fundamental and apparent, so I assume you can judge whether what is happening now is healthy or unhealthy. I also believe you can understand what it takes for the United States to regain fiscal strength, as it is not complex and has always been the case.
For example, the natural financial law of borrowing applies to both governments and individuals (for instance, you cannot continue to spend beyond your means without consequences), except that governments can print money, making it easier to repay debt, which dilutes the debt. These truths have been clear for thousands of years. Thus, we should understand the position the United States is in and recognize that those in government must do those painful yet healthy things to restore America’s productivity and fiscal strength, which is unavoidable. However, this seems unlikely to happen, as voters do not want to undertake the difficult tasks needed to sort out the country's finances; for instance, they do not want to raise taxes and/or cut benefits, nor can they reach a consensus on how to handle the debt. This issue will soon reach a showdown.
As someone who believes the only successful way out is for smart moderates on both sides to collaborate effectively, I indeed think the following point is noteworthy and very important: most Democrats elected in swing states appear virtually indistinguishable from moderate Republicans. Therefore, labeling them as "Democrats" and describing the divide as a Democrat versus Republican struggle is overly simplistic.
Most Democrats elected in the prior “red states” bear no resemblance to extreme left Democrats (such as the Democratic Socialists of America), even though they too carry the label of Democrat. It is also noteworthy that the democratic norms of voting and accepting election results have been upheld across the nation. While this is a significant victory for democracy, the larger question remains whether democracy can function effectively.
In 2021, I published my book, "Principles: For Dealing with the Changing World Order." This book predicted what has transpired since then by describing the Big Cycle and the causal relationships that drive it through six phases. In it, I depicted the late phase of the Big Cycle, focusing particularly on the pendulum of domestic cycles swinging between order and disorder in the fifth and sixth stages. This part can be found on pages 167 to 191 of the book or in the article I shared last year.
As Winston Churchill said in 1948, “Those who fail to learn from history are doomed to repeat it.”
Since I have already written extensively, I have decided to wait a few days before discussing what I believe the Democrats, Republicans, or bipartisan cooperation need to deliver to succeed in the future. If they can prioritize this most critical task, agree that they need it, understand what creates it, and then commit to delivering it, everything will be much better. I will explain this in my next brief article.
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