Bridgewater's Dalio: My views on the results of the U.S. midterm elections

Author: Ray Dalio, Founder of Bridgewater Associates

Compiled by: Jiahua, ChainCatcher

Many people have asked me how I view the results of the U.S. midterm elections, so I decided to write down my thoughts. The changes in the seats of various government departments have too many implications to discuss all in this brief article, so I will focus only on the most important points.

My overall conclusion is: These political changes will not alter the circumstances that government representatives must face. Our problems will not disappear, and the most important question is whether they can solve these issues through effective bipartisan cooperation or resort to inefficient confrontation.

More specifically, issues such as debt, wealth disparity, value differences, international geopolitical issues, climate issues, and technological issues will still exist, and the election results will not change the usual dynamics of wealth and power struggles. What the midterm elections changed is simply who will address these issues and how they will do so.

The most important question is whether political struggles and government dysfunction will increase or decrease. I believe that both struggles and dysfunction are likely to intensify.

The Debt Issue Will Again Be in the Spotlight

We will soon see whether my judgment is correct, starting with what happens during the lame-duck Congress session and what follows. This will affect many issues.

For example, we will see how the elected government representatives handle funding issues, more specifically, how the government spends and taxes. This issue will resurface when the temporary government funding signed by President Trump expires on December 11; subsequently, it is expected that federal debt will hit its ceiling in March 2027, at which point this issue will arise again; by the fall of 2027, the U.S. Treasury is expected to exhaust its available funding options, and this issue will surface once more.

The struggles surrounding these funding issues are likely to be quite intense, and the conflict and uncertainty may drive up the yields on short-term U.S. Treasury bonds and similar short-term securities, as investors will want to avoid the uncertainty of not being able to receive payments on time. The market is also likely to become increasingly concerned about liquidity and credit risks, which will undermine confidence in U.S. Treasuries as the world's primary safe collateral. Similarly, Elizabeth Warren's chairmanship of the Senate Banking Committee is also likely to bring about struggles and changes that affect the economy and the market.

These are just a few examples of the many potential shocks that could occur.

The election results will also leave the U.S. with a politically hamstrung president who is under attack. He faces a conflict akin to a civil war (likely a peaceful one), along with an isolationist populace and opposition, while also dealing with severe debt and monetary issues. This will weaken his and America's influence internationally and may prompt the U.S. to retract its foreign involvement, thereby allowing the most powerful countries in each major geographic region to gain greater influence, such as China's influence in Asia.

As for what needs to be done, I still believe that, in principle, the only path that may succeed for the U.S. and all democracies burdened by excessive debt and divided fiscally, socially, and politically, including France, other European countries, and the UK, is for wise and capable moderates from both sides to unite against the radicals and jointly address the tough issues. This requires them to reach a consensus and push the government and the populace to make difficult changes to restore the nation's strength. I still believe this is difficult to achieve.

From a political perspective, there have been many instances of such internal political changes throughout history. There have always been political differences, and there are at least four different political positions on how to address these differences. In order from left to right, they are: 1) far-left; 2) center-left; 3) center-right; 4) far-right.

As the situation deteriorates, these groups will become increasingly polarized, and the struggle between the left and right will escalate until one side prevails. After that, the moderates and radicals within the winning camp will struggle for dominance. This struggle will continue to intensify for a straightforward reason: as wealth disparity and value differences widen, irreconcilable conflicts will multiply. We are now seeing such struggles begin to emerge within both the Republican and Democratic parties. I expect that struggles within and between the two parties will significantly increase in the future.

In my view, this political change stems from human nature. Throughout history, it has occurred everywhere, and it is currently happening in almost every country, albeit with some subtle differences. For example, China, due to its culture, primarily Confucian culture, has a hierarchical nature, thus maintaining a strong hierarchical order; however, the degree of this order can oscillate between being extremely strict and more open, allowing for discussion.

Currently in the U.S., the radicals in both parties are demanding to take control, leading to near-violent struggles between the two parties, which are now evolving into struggles within each party. In many other countries, this situation may lead to the emergence of more political parties. However, given that the resources of the existing two parties far exceed those of any potential new parties, splitting into more parties is generally considered impractical.

The U.S. Needs to Make Difficult Fiscal Adjustments

Regarding the issues debated between the two parties, I have discussed my views extensively, so you are likely familiar with them: there are usually five main forces at play in a major cycle; how these forces have evolved this time; and what stage we are currently in within the major cycle. Therefore, I will not elaborate further.

Additionally, I believe you know what is healthy and what is unhealthy, as these are fundamental and obvious, so I trust you can judge whether what is happening now is healthy or unhealthy. I also believe you can understand what the U.S. needs to do to regain fiscal strength, as this is not complex, and the reasoning has always been the same.

For example, the basic financial principle regarding borrowing applies equally to governments and individuals: you cannot continually spend more than you earn without facing consequences. The difference is that governments can print money, making it easier to repay debt, but this will devalue the debt. These principles have been clear for thousands of years.

Thus, we should know where the U.S. currently stands, and we should understand that the government must make painful but beneficial adjustments to restore America's productive capacity and fiscal strength; there is no way to bypass these necessary measures. However, this seems unlikely to happen, as the voting populace is unwilling to undertake the difficult tasks required to rectify the nation's finances. For instance, they do not want tax increases and/or benefit cuts, nor can they reach a consensus on how to handle the debt. This issue will soon become more urgent.

The Effectiveness of the Democratic System Remains in Question

As someone who believes that only the wise cooperation of moderates from both sides can find a successful path, I think it is worth noting, and very important: most Democrats elected in swing states appear to be almost indistinguishable from moderate Republicans. Therefore, simply labeling them as "Democrats" and describing political differences as those between Democrats and Republicans oversimplifies the situation. Most Democrats elected in the previously "red states," although also called Democrats, are completely different from radical left Democrats, such as American Democratic Socialists.

It is also noteworthy that democratic norms of voting and accepting election results have been followed across the country. While this is a significant victory for democracy, the critical question of whether the democratic system can function effectively still remains.

In 2021, my book "Principles: Life and Work" was published. In it, I predicted what would happen afterward by describing the major cycle and the causal relationships that drive it through six stages. In the book, I described the later stages of the major cycle, particularly focusing on the oscillation of domestic order between order and disorder in the fifth and sixth stages. Relevant content can be found on pages 167 to 191 of the book, and it can also be found in this article I shared last year.

As Winston Churchill said in 1948, "Those who cannot remember the past are condemned to repeat it."

Since I have already written too much, I have decided to wait a few days before discussing what I believe the Democratic Party, the Republican Party, or bipartisan cooperation needs to provide to succeed in the future. If they can always remember this most important thing, they need to reach a consensus on what can bring about this result and then work together to achieve it; everything will be much better. I will explain this in the next article.