Bridgewater founder Ray Dalio: My Deep Reflections on the US Midterm Election Results

Original author: Ray Dalio (Founder of Bridgewater Associates)

Original translation: TechFlow

Introduction: In response to the highly watched midterm elections and the shifting balance of power in both chambers of Congress, Ray Dalio, co-founder of the world's largest hedge fund Bridgewater Associates and a renowned macroeconomist, wrote a long-form piece that steps away from the noise of partisan politics and analyzes the deep trajectory of the U.S. economy through the lens of his classic Big Cycle historical model.

Dalio points out incisively that the election results only change who is responsible for dealing with the problems, but cannot change the objective realities facing the United States, such as its massive debt, extreme wealth disparity, great-power competition, and climate and technological challenges. With the temporary fiscal funding set to expire in December and the federal debt ceiling approaching in the spring of 2027, polarized partisan confrontation will not only fail to close the deficit but may instead shake the credit foundation of U.S. Treasuries as the world's core collateral.

Many people have asked for my views on the U.S. midterm election results, so I decided to share my thoughts in writing. Because the implications of the changes in various government seats are too numerous to cover one by one in this short piece, I will focus only on the most important parts.

My overall conclusion is this: these political changes will not alter the objective circumstances that our government representatives must face. Our problems will not disappear on their own. The key question above all else is whether representatives address these problems through effective bipartisan cooperation or through ineffective confrontation. More specifically, we will continue to face the same debt problems, the same wealth and values divides, the same international geopolitical problems, the same climate problems, and the same technology problems, and the election results will not change the dynamics of how struggles over wealth and power typically unfold. The midterms will only change who deals with these problems and how they do so.

The most important question is whether fighting and dysfunction will increase or decrease; I believe more fighting and worse dysfunction are more likely.

We will soon see whether my judgment is right or wrong, starting with the course of the lame-duck session and what follows, which will affect many issues. For example, we will see how elected government representatives handle money—more specifically, how the government spends and taxes.

This issue will resurface when President Trump's temporary funding expires on December 11, then again in March 2027 when federal debt is expected to hit the ceiling, and again in the fall of 2027 when the Treasury is expected to exhaust its financing options.

The fights over these funding issues are likely to be brutal, and the fighting and uncertainty will likely push up short-term Treasury bill and similar short-term yields, as investors will want to avoid payment uncertainty. It is equally likely that concerns about liquidity and credit risk will keep rising, thereby weakening confidence in U.S. Treasuries as the world's foremost safe collateral. Similarly, Elizabeth Warren becoming chair of the Senate Banking Committee will likely trigger fights and changes that will affect the economy and markets.

These are just a few examples of the many such disruptions that are about to occur.

The changes brought by the election will also leave the United States facing a president who is battered, in lame-duck status, attacked in a kind of civil war (likely a peaceful one), confronting an isolationist public and an isolationist opposition, while also facing serious debt and monetary problems. This will weaken him personally and the United States internationally, and will likely lead to U.S. retrenchment; and U.S. retrenchment, in turn, will increase the influence of the strongest powers in major geographic regions (for example, China in Asia).

As for what is needed, I still believe that, as a principle, for the United States and all other over-indebted democracies that are fiscally, socially, and politically fractured and trapped by the same problems (for example, France, other European countries, and the United Kingdom), the only potentially successful way out is this: smart and committed moderates from the left and right must work together against the extremes and properly address these difficult issues. This requires them to reach consensus and push the government and the public to do the hard things that can make the country strong again. I still believe the probability of this happening is very low.

As for the political dimension, we have seen this kind of internal political dynamic throughout history, because political divisions always exist and there are at least four different political positions on how to deal with them. The spectrum from left to right includes: 1) the extreme left, 2) the moderate left, 3) the moderate right, and 4) the extreme right. As conditions worsen, these groups become increasingly polarized, with the left and right fighting each other more and more intensely until one side (left or right) wins; at that point, the moderates and extremists within the winning side then fight each other for control. This fighting has been intensifying, and the logic is simple: when the wealth and values divides widen, irreconcilable differences become larger. We are now seeing this kind of fighting emerge simultaneously within both the Republican and Democratic parties. I expect there will be much more intra-party fighting as well as inter-party fighting.

In my view, this political dynamic stems from the way human nature works. It has happened everywhere in history and is now happening in almost every country, with slight variations. For example, in China, because of culture (mainly Confucian culture), a hierarchical structure has formed, and a strong hierarchical order has always existed; however, the degree of hierarchy swings between extreme hierarchy and more open debate. Right now in the United States, extremists in both parties are demanding control, so near-violent fighting has already emerged between the two parties, and this fight is now turning into fighting within each party. In many other countries, this would have led to the emergence of more than two parties. However, given that the resources of the existing two parties far exceed those of any potential new party, further splitting into more parties is generally considered impractical.

As for the issues the two parties are fighting over, I have talked about this like a broken record for so long that I assume you already know my thinking: the Five Big Forces that typically appear in the Big Cycle, how these forces are evolving in this cycle, and where we are now in the Big Cycle. Because of that, I will not elaborate further.

In addition, I believe you know what is healthy and what is unhealthy, because it is both basic and obvious, so I assume you can judge whether what is happening now is healthy or unhealthy. I also believe you can understand what is needed to make America fiscally strong again, because it is not complicated and has always been so.

For example, the natural financial law about borrowing is the same for governments as for individuals (for example, you cannot persistently spend more than you earn without consequences), except that governments can print money to make debt easier to repay, which devalues the debt. These truths have been clear for thousands of years. Therefore, we should be clear about where the United States stands and understand that those in government must do the painful but healthy things to make America strong again in productivity and fiscal terms; there is no avoiding this. And this looks unlikely to happen, because the people who vote do not want to do the hard things needed to put the country's finances in order—for example, they do not want to raise taxes and/or cut benefits, and they cannot agree on how to handle the debt. This issue will soon come to a showdown.

As someone who believes the only successful way out is for smart moderates on both sides to work well together, I do think the following point is both noteworthy and very important: most Democrats elected in swing states look almost indistinguishable from moderate Republicans. Therefore, calling them "Democrats" and describing the split as a fight between Democrats and Republicans is overly simplistic.

Most Democrats elected in previously "red states" look nothing like extreme-left Democrats (for example, the Democratic Socialists of America), even though they use the same name, Democrats. It is also worth pointing out that democratic norms of voting and accepting election results were observed across the country. Although this is a major victory for democracy, the larger question of whether democracy can work effectively remains.

In 2021, my book Principles for Dealing with the Changing World Order was published. By describing the Big Cycle and the causal relationships that drive it through six stages, the book predicted much of what has happened since. In it, I described the late stages of the Big Cycle, with particular attention to the fifth and sixth stages, in which the domestic cycle swings between order and disorder. That material is on pages 167 to 191 of the book, or can also be found in an 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 too long, I have decided to wait a few more days before discussing what I think the Democrats, Republicans, or a bipartisan collaboration need to deliver in order to win in the future. If they can put this most important thing first, 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 short piece.