Ray Dalio, founder of Bridgewater Associates, said during an interview with Bloomberg that he has heard from people in Asian countries that they no longer feel they can depend on the U.S. for protection and will have no choice but to accept China as the center of world order. He says the stalemate in the US-Iran war is accelerating that shift: if countries around the world, especially in Asia, doubt the U.S. can defend allies, they will naturally hedge toward China’s economic power – resulting in a modern “tribute system” centered on “China Inc.” “This has huge implications, Dalio said. The United States has about 750 bases in about 80 countries, and those bases are largely there under the assumption that the United States will turn up and defend them. Right now, that perception is changing.” “China Inc. is making a ton of money!” he said. “You’re seeing a number of leaders go up to China… It’s like the tribute system.” You will not be able to push around China,” he said. “It will be a force.” HOST: What about those longer-term trends? I mean, tectonic plates as they were shifting, whether it’s monetary, whether it’s financial, whether it’s geopolitical. How does the war in Iran fit into those long-term shifts? DALIO: It’s interesting. If you look at the markets, Pearl Harbor comes to mind. You see not much initial effect, and then you see the cash flows mattering. But over the period of time, it depends. There are the winners, there are the losers, and there are the neutral countries. Economically, the winners still experience the cost of the war. The debt, like the British Empire, had the debt and had its consequences. The losers of the war get wiped out. You change all orders. You change the domestic political order, the international order, the monetary order, and almost everything. The winners are the neutral countries because they profit during the war. The United States made a lot of money in both World War I and World War II in the time that it wasn’t in the wars, and then it accumulated a lot of gold and so on. Then it entered the period late. So the neutral countries are the ones that end up not being disrupted and end up doing the best. HOST: I’m not even sure what it means for the U.S. to win the war in Iran right now. DALIO: I think it’s clear. The world is looking at: Will Iran have control of the Strait of Hormuz? Will it retain the uranium, the nuclear? Will it also have the power through the missiles and others to inflict harm? Will the United States have the power to fight the war? In other words, with politics and Americans, with gas prices and cost of living? We now have a situation where the world is looking at this and defining it. Does the United States have the capacity to win the war? And this has huge implications, because it means, for countries, it means alliances. Why do they have the bases there? The United States has about 750 bases in about 80 countries, and those bases are largely there under the assumption that the United States will turn up and defend them. Right now, that perception is changing. So I think winning the war is clear. Iran is perceived as a middle power, not a great power. Can the United States win it or not? This is now having a big effect. When I go around the world, like in Asia, the United States has been viewed as a countervailing force relative to China. Now, it’s believed that the United States cannot be relied on to fight, that it will not be there with those bases. And this is changing relationships with China, too. You’re seeing a number of leaders go up to China and essentially have relations, but it’s like the tribute system. Also in the region, there’s the recognition, in their view, that there is an environment where the countries in the region have to recognize and respect that power. And so now you’re seeing that happen. That tribute system is not an oppressive, controlling system. It’s much more like there is the purse. The more powerful have an obligation to behave well with the less powerful, and the less powerful have an obligation to recognize the more powerful, and they should operate in a harmonious way. HOST: You say that, as far as you can tell, the Chinese by and large think they’re doing pretty well in the rivalry with the United States right now. DALIO: China Inc. is making a ton of money. In other words, if you look at the amount of money that they are making through their export earnings and the amount of financial assets that they’ve accumulated and are accumulating, it’s huge. So no one talks a lot about trade, but you have to look at money – the quantity of money, their earnings, their raising of living standards, and how they’re competing in various areas, certainly AI, robotics, and a number of areas. You would have to say that they are doing very well. HOST: You say the post-World War II order, imposed or led by the U.S., is breaking down. Do you say China has a substantial say, if not dictating the next world order? DALIO: Yes, of course. But that doesn’t mean – I think you said it well, not dictating. I think there will be an evolution. China’s rise in relative power that we’re talking about is creating a situation where they will create a tribute-system type of system. What’s important and actually practical about that is it recognizes that there are differences in power. The system that we went through, a tiny country in the United Nations could have the same vote as a huge country. It wasn’t the practical system. So I think you’re going to see it evolve in that region as a tribute-system type of system. I think increasingly we’re going to see that in the world. I don’t expect China to be an aggressive military power. I think that you will see Chinese companies competing in the world. You’re going to see an acceleration of that, the use of the RMB as a world currency. You’re going to see an acceleration of that. It won’t replace the dollar quickly, but it’s going to grow quickly for transactions. So you’re going to see that kind of operation. You’re going to see, in negotiations, that you will not be able to push around China, that it will be a force. HOST: What does this mean for investors such as you? Investments are made against an order of some sort. There’s a predictability. You have contracts. You can enforce them. If, in fact, there’s a breakdown of the world order, what does that say to investors? DALIO: First of all, when we think of investing, we have to think of what is investing for, and that’s our total life, not just making the most money. So they have to think about diversification very well. In other words, they have to think about: we’re now in a turbulent time. That means, for example, the value of money could be a risk. What currency is it going to be in? How do you diversify? For example, now, as we have AI having a big effect, it’s a fantastic technology that’s going to have big revolutionary effects. If we look in history at such cases, what we can see is it also can create bubbles. Also, liquidity is very valuable in a very rapidly changing world because uncertainty is so great. Look at the difference in SaaS stocks, by way of example. Who would guess? Who could know? So liquidity is very valuable. Diversification is very valuable. When I say diversification, I do include gold in that in terms of money, because we do have a question mark in terms of money. These are not tactical moves. In other words, I don’t think that the average man should be moving in and out based on what I say or what others say. They should have a strategic asset allocation mix that they, by and large, stick to, that has the best reward-to-risk ratio.
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