Transcription
Dalio, founder of Bridgewater Associates, the world's largest hedge fund. He spent half a century studying the rise and fall of empires. He wrote another book called "How Countries Go Broke," details of which he will actually talk about at the start of the panel. And next to him, chairman of Vivandanda Investment Management, uh, former CIO of GIC, who helped build Singapore's reserves and financial defenses, and an investment legend in his own right.
So, gentlemen, thank you so much for being on stage with me. It's an exciting time, given what's happening on the world stage. Cox and I want to talk about this because you and Ray go back a long way, many years, during your days at GIC. Correct? Is this the first time both of you are coming together to share insights in a panel in front of a live audience?
Yes. Thank you very much, uh, Christine. I feel very privileged, uh, to be here at this, uh, China forum and with my friend Ray Dalio, whom I have known for 32 years. And we're very fortunate to have, uh, Ray here to share with us his experience. And what he has to share with us is captured in two outstanding books that he has written recently. The first book was about the changing world order, and the second book was "How Nations Go Broke."
Now, when Ray speaks to us, we have to realize that he speaks not only from his understanding and study of history, but he also speaks to us from practical experience. So, I think the study of history is extremely important for anyone who is in business, who is in financial markets. I think it was Winston Churchill who said, "The further you can look backwards, the further you can see into the future." So, Ray has, uh, studied financial market history, and these two books, you know, captured the essence of, uh, of what he has learned. But more importantly, he's not talking to us as an academic historian. He's speaking to us as the man who built the largest hedge fund in the world, who has made considerable amounts of money for his clients, including the GIC, where I had the privilege of working with him for many years.
So, he speaks from experience, and experience is so important because that experience came about from mistakes, from mistakes. And, you know, he has got this favorite, uh, advice to people. He says that mistakes plus reflection equals progress. So, when you learn mistakes in the financial market, it is very expensive, and therefore, those mistakes teach you a lot. So, I, I think we're very privileged to have Ray with us, and we hope that the two of us could, could share with you, you know, uh, our experience and our understanding of, uh, financial market history.
Ray, Kang and I have known each other for a very long time, 32 years, and we've been through wars, and we've had a lot of experiences. Um, and I'm going to start in 1970.
1970 was, uh, the year that Kang began at GIC, began to build GIC. And we're going to go back to a story of his doing that because I think it's telling. And, and 1970 is also a year that is quite similar to the year that we are in, for reasons that have to do with debt and money. So, I think there's a lesson in 1970. And in 1970, 1971, this is between college and going to, uh, business school. 1971, I was clerking on the floor of the New York Stock Exchange. And on August 15th, 1971, President Nixon gets on the television and tells everybody, you know, that monetary system that we had, in which you could get gold, which gold was money at the time, and then they had these fiat money that, uh, was basically like checks in a checkbook. Well, you're not going to be able to get your money. And I walked on the floor of the New York Stock Exchange in 1971 thinking, "Wow, this is a crisis. Money as we know it is ending." I would expect the stock market to go down again because I'm clerking on the stock exchange. So, I walk on the floor of the New York Stock Exchange, and the stock market went up the most in more than 10 years. That was a mistake.
And then I studied history, and I found that the exact same thing happened in March of 1933, when Roosevelt got on the radio and said the exact same thing and did the same printing of money to pay the debts rather than give the real money. So, that taught me that I needed to understand important things that happened in history before my lifetime. And there are important things that are happening in history right now that we're going to get into that happened before our lifetimes. If it isn't obvious to everybody here, it would be shocking that we are in times that are more like those that existed before than are those than we have become used to.
Kang, can you tell them the story about getting the gold?
Well, I mean, Ray spoke about 1971 when President Nixon suspended the convertibility of US dollars into gold. So, at about the same time, I think in, in 1970, I had graduated from university. And having gone to university on the government bursary, I was obliged to serve my bond with the government. So, I was posted to the Ministry of Finance in Singapore, working with, uh, the then Deputy Prime Minister, Dr. Goh Keng Swee, who wanted an investment officer. So, I started work as the first investment officer, uh, at what was then a small investment department, and today that is the GIC.
So, but anyway, it was a very, it was a baptism of fire for me, 1970, 1971, because in 1970, Singapore was just, uh, you know, six years into independence. We had a very small amount of reserves. If I remember correctly, probably a few hundred million dollars, but those were precious reserves for a relatively small and poor country. And the crisis that we faced at that time was, having been a British colony, practically all our reserves were held in Mount Sterling, and Sterling had devalued in 1967 and was in a very precarious situation. So, much of my work was spent helping, uh, the minister sort of think of ways in which we can reduce our exposure to the UK, to Sterling. So, we made certain arrangements and we decided then, well, the right thing was to reduce our Sterling exposure as much as possible and to convert a good part of it into US dollars.
But at that time, the US economy was also in trouble because this was, you know, uh, during the time when when Nixon was in charge. The Vietnam War was, uh, raging at that time, and President Lyndon Johnson had embarked on a Great Society program on domestic expenditure. So, Sterling was weak, the US dollar was weak, which was why Nixon had to suspend the convertibility of US dollars into gold. Singapore had some US dollar reserves because we had diversified from Sterling, and so we saw that countries such as France were converting their US dollars into gold from the US. So, we decided that as a matter of prudence, we should do so. So, we were one of those countries who managed to convert some of our US dollars into gold at what was then $35 an ounce. $35. Today, it's $3,600 or more. It's an important lesson.
But basically, what I want to share about that was, we're going to talk about the rise and fall, >> of nations and of economies. But my experience in 1977, that was the time when the UK was in the late stages of decline. But that was also the beginning, in my opinion, of the American economy in decline. >> So, that is the significance of the experience which Ray and I had in our early years.
I'm just >> No, no, no, no, no. But you can't get away without telling them go the going and getting the gold.
Well, all right. I think later, you know, as you all know, Ray has been a very strong proponent that, uh, for investing, one needs to diversify, and one needs to buy insurance because we can never be so sure about the state of the world, and from time to time, we will get into crisis. And during times of crisis, gold is the ultimate hedge. So, in our case, in Singapore, we've always held gold as part of our reserves. And not only held gold as an asset, as a real asset compared to monetary assets, but the gold you have, you can have it in paper gold, or you can have it in gold bullion, in physical gold. So, physical gold, in order for it to really play a diversification role, you have to diversify where you hold the gold. So, obviously, you don't hold all the gold in your own country if your country, you know, is vulnerable in times of war. So, the decent thing is the right thing to do is to diversify. So, in our case, we would hold our gold in a diversified way. And what Ray was talking about was, I was sharing with him that on one particular occasion, I had the onerous task of bringing back physical gold from, uh, from gold vaults in London to bring it back to store part of it in Singapore. That was the context.
Tell them about the plane.
About the plane. Well, we have to ship the gold back from, from London to Singapore, you know, and everything was very nicely balanced, you know, on the Singapore Airlines, uh, aircraft and flew into Singapore. Everything was fine at Heathrow. We made a, a landing in, in, I think, in Dubai. But upon arriving in Singapore, we thought that the good thing to do was to ask the passengers to disembark from the plane first. But lo and behold, when the passengers left the plane, the plane tilted under the under the weight of the gold. So, we had to get the passengers to get back to the plane to rebalance so that the gold can be loaded in a gentle way without tilting.
Did the passengers know why they had to get back into the plane?
I thought you'd enjoy that story. But there's, um, the, I think we're talking about back to our theme.
Yeah. Um, to a large measure, what is happening now is analogous to what happened in 1977, which it is analogous to what happened in 1933, when Roosevelt, um, made the same move. And that is the creation over a period of time of an enormous amount of debt. And what debt is for an individual, rule for a country, is the same as the individual, except the government can print the money to get out of it. And so, in those cases, as in now, we have that kind of set of circumstances. We go through these cycles over and over again.
May I get into that?
Yes, please get into your analysis, how countries go broke.
Yeah. Um, history rhymes because the same cause-effect relationships have over time, quite often in a cyclical way. Um, as Kirk Sug mentioned, I did a book, uh, called "How Countries Go Broke." I did a video, it's also a YouTube video to make it more, uh, palatable. And I did a, uh, four-minute clip of that, which I'd like to show, and then, um, I'll describe it. So, if we can show that four-minute clip, I'd appreciate it.
Can we roll the video, please?
I studied the 10 most powerful empires over the last 500 years, and the last three reserves.
Is it being projected? It took me through the rise and decline of the Dutch Empire and the Gilder, >> the British Empire and the pound, the rise and really decline in the United States Empire and the dollar, and the decline and rise of the Chinese empire and its currencies, as well as the rise and decline of the Spanish, German, French, Indian, Japanese, Russian, and Ottoman empires, along with their significant conflicts as measured in this chart. To understand China's patterns better, I also studied the rise and fall of Chinese dynasties and their monies back to the year 600. Because looking at all these measures at once can be confusing, I'll focus on the four most important ones: the Dutch, British, US, and Chinese. You'll quickly notice the pattern. Now, let's simplify the form a bit. As you can see, they transpired in overlapping cycles that lasted about 250 years, with 10 to 20 year transition periods between them. Typically, these transitions have been periods of great conflict because leading powers don't decline without a fight. So, how am I measuring an empire's power? In this study, I used eight metrics. Each country's measure of total power is derived by averaging them together. They are: education, inventiveness and technology development, competitiveness in global markets, economic output, share of world trade, military strength, the power of their financial center for capital markets, and the strength of their currency as a reserve currency. Because these powers are measurable, we can see how strong each country is now, was in the past, and whether they're rising or declining. By examining the sequences from many countries, we can see how a typical cycle transpires. And because the wiggles can be confusing, we can simplify it a bit to focus on the pattern of cause-effect relationships that drive the rise and decline of a typical empire. As you can see, better education typically leads to increased innovation and technology development, and with a lag, the establishment of the currency as a reserve currency. You can also see that these forces then decline in a similar order, reinforcing each other's decline. Let's now look at the typical sequence of events going on inside a country that produces these rises and declines. In a nutshell, the big cycle typically begins after a major conflict, often a war, establishes the new leading power and the new world order. Because no one wants to challenge this power, a period of peace and prosperity typically follows. As people get used to this peace and prosperity, they increasingly bet on it continuing. They borrow money to do that, which eventually leads to a financial bubble. The empire's share of trade grows, and when most transactions are conducted in its currency, it becomes a reserve currency, which leads to even more borrowing. At the same time, this increased prosperity distributes wealth unevenly. So the wealth gap typically grows between the rich halves and the poor have-nots. Eventually, the financial bubble bursts, which leads to the printing of money and increased internal conflict between the rich and the poor, which leads to some form of revolution to redistribute wealth. This can happen peacefully or as a civil war. While the empire struggles with this internal conflict, its power diminishes relative to external rival powers on the rise. When a new rising power gets strong enough to compete with the dominant power that is having domestic breakdowns, external conflicts, most typically wars, take place. Out of these internal and external wars come new winners and losers. Then the winners get together to create the new world order, and the cycle begins again.
So, everything happens. There's these cause-effect relationships. I, I want to say that, uh, in order to understand this, just briefly, there are five big forces that interact, and everything that we're going to talk about falls under that category of the five big forces. And the five big forces are: first, the debt, money, economy force. We'll get into that. You borrow money, you create credit. If it can be paid back, it's one thing or another. There were conversations about that. The second is very much related to that, is the internal order and disorder force. Uh, that leads it increasingly to populism of the left and the right, and increased conflicts about what to do, and, and then that leads to fights that are forms of civil war that we are going through. The third is the great power conflict, um, that we know about, the rise of China and other, uh, powers, and, and the United States, and the great power conflict. The fourth is nature. Acts of nature, droughts, floods, and pandemics have killed more people than wars and disrupted more orders than wars. And number six is man's inventiveness, particularly of new technologies. And so, what we're seeing is each one of those evolve, >> in very classic ways and interacting. So, that's the, if one can see that and see the evolution and understand the cause-effect relationships, one can understand the dynamic that's at work. It was a pleasure for me to hear the earlier speakers address these things. Now, but that's my context for looking.
Let's talk about your first big force and applying what you've learned. When you look at the US right now running record deficits, is the US repeating itself? Is history repeating itself? Are we seeing signs that we're seeing the end of the US empire?
You're seeing the end. You're seeing the threat to the monetary order. We've always seen breakdowns in monetary order. We just talked about a couple. Um, and so the other factors together will determine whether we're seeing the end of the entire US edifice. But let's be clear. Um, here's the facts. And the economics for a country, as I say, are the same as they are for, um, a company or an individual. The United States, um, is spending this year, will spend $7 trillion, and it will take in $5 trillion. Um, it cannot cut back on its spending >> for various reasons. So, it's overspending by 40%. Because it has overspent for so long, it has a debt that is six times the amount of money that it is taking in. In these cycles, uh, you see the process of debt service payments squeezing out spending. So, in other words, as debt rises relative to incomes, you have to pay more debt service payments in the form of interest and principal payments. So, what we have now is, um, we're going to have to borrow $2 trillion for the deficit. We have an interest payment of a trillion, so half the budget deficit. And we have to roll over maturing debt of $9 trillion. That means you have to sell $12 trillion in debt. And the market in the world does not have that same sort of demand for that debt.
And that creates a supply-demand imbalance, which is a problem. In addition, if you continue to do that, these debt service payments are squeezing out those expenditures and is producing this dynamic. This is producing the equivalent to an economic heart attack. In other words, and it's like, um, in the circulatory system, that is the capital markets, credit is a wonderful thing in that it creates buying power. But if it's used to buy, uh, to make investments that then pay back, it's a healthy system. If not, the debt service payments accumulate like plaque in the system, and they squeeze out that. So, look, a doctor looking at this, because one can look at it. It's all in charts, and you could see it. You could see that dynamic happening, and therein lies our problem.
How did things get so bad in the US? I mean, you're highly connected in economic and political circles in the US. Years of doing business there. How did the situation get so bad?
Human nature. Human nature, you know, um, self-discipline. You know, we talk about Singapore and the history of Singapore. Uh, and it was, you know, just said earlier, you know, um, it's basic the self-discipline to save, thrift. It was mentioned, and that's self-discipline. Look at the opposite. Look, um, I think it's now that, uh, the earnings from the saving pay for about 20% of the budget here. So, self-discipline, often a political system, >> there's a challenge, um, from the political system to have, um, self-discipline because people want. I went to Washington and I spoke to leaders of both sides and explained all of this, and we discussed >> Are they listening? >> And everybody agrees. >> And then I say, "I have a path. I have a path." If you can get the deficit down to 3% of GDP from where it'll be about seven, uh, which would require about a 4% increase in taxes, a 4% decrease in spending, and an interest rate decline that would naturally come from that, then you would stabilize the situation, at least not add to it. And so I said, "I think you need, you know, if you get everybody to take the 3% pledge, we'll get it down to that." Um, and so, uh, the answer I said, uh, that I got is that, "That's not possible."
"That's not possible" >> because, um, it's essential to make the pledges to the people who elect you. "I pledge I will not raise your taxes," and "I pledge that I will not cut your benefits." And if you don't make those pledges, you won't get elected. And in fact, that's now political party, um, plan. So, we have human nature, you know, um, and a political situation where the dynamic of "we need to be disciplined and deal with it that way" is not going to fly.
Okay. So, that's where I guess Trump tariffs come in, and they're trying to scramble to try to fill ways to plug up the gap. Cox, I want to come to you now. You spend years, decades understanding investing in capital markets. Are you seeing, do you predict, do you think it's the end of US exceptionalism?
I, I think it's good to go back to the five big forces that Ray expounded in his book. You know, the, the debt situation of the US, and it's not just the US. We face a similar problem in the United Kingdom, perhaps even worse. We see it in France, and we saw it in Japan, and we are seeing it in China, in other words, governments get into an almost unsustainable debt situation. Now, so that's one of the big. And the reason why suddenly we're having this discussion about the unsustainability of US debt is because in the last 12 years, since the global financial crisis, the US went into a recession, went into a recession. The government had to spend to get the US economy out of recession, to some extent. They were able to do that, coupled with a very aggressive, uh, quantitative easing of monetary policy by the Federal Reserve. Then, from the GFC, we went into the pandemic crisis of 2020, and the amount of money that was spent, you know, in order to rescue the, the US economy was considerable. So, all of a sudden, the debt accumulated. I think during the Biden period, having to do with the pandemic, it was total about a few trillion dollars added to the debt. And we would have thought that if the debt has risen so sharply because of the GFC, because of the pandemic, that President Donald Trump coming in, you know, would do something about it. Guess what? He had the big beautiful bill, which raises the debt situation even higher. So, as Ray says, he gave you the numbers. The US economy is a $30 trillion economy. Government expenditure is, uh, $7 trillion. Government revenues, $5 trillion. Budget deficit, $2 trillion, 7, 12% of GDP. Interest payments, $1 trillion. All right. And every year, $9 trillion of debt needs to be refinanced. So, we are to talking about a total debt borrowing each year of $12 trillion, 9 + 2 + 1. Now, that was not really a problem a few years ago, before 2022, because interest rates were at zero. When interest rates are at zero, there's no problem. Today, interest rates are at 4%. See, and you can understand why Donald Trump is telling J. Powell, "You have to cut interest rates by 3%." Because it's gone from zero to four. All right? And so, we have to bring in the other two forces, the domestic political order and the geopolitical order. Because the domestic political order means this fight between the left and the right means that the US will find it politically almost impossible to cut spending or to raise taxes in order to balance a deficit. That's why we have a big problem there. And then globally, globally, Donald Trump says the US has been paying for global security. So, he's now telling countries, "I'm going to tariff you. I want you to make you pay for what we've been giving you, you know," and he's telling the Europeans, "You have to provide for your own security." So, that's where I think Donald Trump's agenda is. He wants to make America great again. But in the process of doing so, he's going to face enormous domestic political challenges, and also, it has got very important implications for for the world. You know, Donald Trump is trying to remake the international order in order to make America great again. In other words, the rest of the world will have to pay for it. But the key point which Ray is making, which I really agree to, is that the US has reached the tipping point. >> The tipping point. We do not know when the crisis is going to unfold, and we can talk about what is likely to happen in the immediate future.
Okay, that's where I come in. This big beautiful bill is now giving way to a big beautiful problem. Ray talked about appetite for US debt. Um, we all know, um, that record deficits, appetite for US debt, China, Japan, two of the big foreign holders of US debt, something like $2 trillion. What happens if this US debt continues to spiral? Gong, what do you predict is going to happen?
Well, it's interesting that, okay, the US will not default on the debt. It's American debt, US dollar debt. Countries don't default. Not like you and me, you know, personally, we can go bankrupt. The US is not going to default on its debt. You know, so if you have $100 worth of US Treasury bonds, you're still going to get back $100. The question is, what is it that $100 worth in terms of gold, in terms of other currencies? So, I think we're going to have a situation where, um, depending on how inflation behaves in the next one or two years. All right. If inflation gets stuck at above 3% where it is now in the US, interest rates are not likely to come down, and there might be some pressure on on rates to go up if inflation begins to to go up. But the point is that the US government has got various ways in which to repress interest rates.
Interest rates have to go up because the borrowing is so large, but is within the capacity of a of a government if he so chooses to what I call repress interest rates. What do I mean by that? Well, for example, the most obvious way is for them to get the Federal Reserve.
All right, you, the Federal Reserve, I want you to bring short-term rates down from 4% to 1%. I would like you to try to bring the bond rate from 4% downwards as well. And how do they do that? They do that as Ray's study of history has shown. They do it by going quantitative easing. Quantitative easing is when the central bank buys long-term bonds and inject liquidity into it.
Now, the problem about that is, if you do that too much, yes, you're introducing a lot of spending power. Inflation might begin to to go up. So, so inflation will be the biggest constraint on what the Federal Reserve, uh, do. Now, in addition to forcing the Federal Reserve to to to cut interest rates, you might very well have capital controls in the US. Capital controls, it was introduced back in the 1950s by the US. It's not the first time it's happened. Capital controls, which is making Americans, making it difficult for Americans to to take their money out of the US, also making it difficult or expensive for foreigners to invest in the US, you know, so I think we are likely to see all kinds of attempts, capital controls, financial repression, in order to prevent the inevitable, the inevitable rise of interest rates resulting from this massive, uh, borrowing.
Mhm.
So, I think what does it mean? I mean, the US has got a huge deficit. It is a, it is the net borrower. The rest of the world, especially the countries in Asia, China, Japan, South Korea, Taiwan, Singapore, the Middle East countries. These are the huge surplus countries. These are the countries that hold considerable amount of, uh, of US debt. I think in the case of China, I think we know that in 2015, the Chinese, uh, official foreign reserves had reached $4 trillion. 2015, there was a crisis, capital outflows. Official reserves went down to $3 trillion. In the last eight years, China has continued to achieve record trade surpluses. So, China has, uh, earned, in my estimate, probably another $3 trillion of reserves, >> except that the reserves probably now in the order of $6 trillion. Only about half of it is held by the central bank. The other half is probably held by the state banks. You know, it could be held by, by the development bank, and a lot of the US dollars are being held by the private sector. I mean, business people here from China, who have, uh, you know, where do you put your money? If you, if you want to diversify your money beyond the renminbi, the likelihood is that a very good part of it is held in US dollars. But anyway, I'm saying that the holders of US debt, I think, are going to face a lot of, uh, sort of, uh, demands from the US. So, my suspicion is that the current discussions about tariffs, you know, negotiation of tariffs. I think the key point was that the tariffs were being perceived by the Trump administration as a form of leverage. Leverage for what? For example, it is quite conceivable that the Trump administration, in its discussion with the surplus countries of Asia or the Middle East, would say, "Well, you guys hold, you know, two or three trillion dollars of my US Treasury securities, which has an average maturity of three and a half years. How about you extending that maturity to 30 years, to 50 years? Why? Because we're protecting you. We're giving you the security umbrella. Who is paying for the security umbrella for Japan, for South Korea, for Taiwan?" So, in return, you extend your holdings of bonds, maturity of three and a half to 30 years to 50 years at the same interest rate of 3%.
Ray, do you agree?
I mean, that is perfectly possible. >> The dynamic, it's important to understand the the dynamic. Um, Kang described it very well. Um, and also a necessity of that. Just understand. I think that there are unsustainable imbalances in which, on the one hand, the United States has become, um, a great consumer, but in that overconsumption has become a great borrower, um, largely from China and other countries. And that China has become a great manufacturer. Chinese manufacturing is greater than the United States, Germany, and Japan combined, and is making great progress. And so, that imbalance, um, is not sustainable economically or financially, particularly at a time that there could be war, type of war. We are, we are in a trade war. We're in a technology war. We're in a geopolitical influence war. And there could be even a military war in which supplies are, um, cut off. And so, the idea of being self-sufficient, the United States has to produce things, >> not just borrow money and buy them. That dynamic also has to do with the domestic political environment. In other words, we've lost the middle class because the middle class was manufacturing. Okay? So, there's a political necessity, a financial necessity, and there's, uh, the need to create this production. So, for these reasons, these forces are inevitable. You cannot fight these things.
So, what does this mean for the dollar at the end of the day? I mean, a lot of talk, a lot of chatter about de-dollarization, the dollar as a dominant reserve currency. When you look at how the pound, and you and you talked about this in your video, lost credibility as part of the decline of the British Empire, are we seeing a similar shift for the US dollar?
Of course. But let's be clear, like in 1970, where we started the story of the 1970s to the 80s, and then, and the 1930s, what we have is, as Kang said, a common problem of the debt. >> And so, what happens normally is that you have the depreciations of all currencies. They have similar problems, too much debt, and that's why all fiat currencies tend to go down. So, our tendency is to look at the dollar relative to other currencies, and the dollar's gone to down by about 10% this year relative to other currencies. But those currencies go down relative to gold, which has now become the second largest reserve currency. Right? So, you have to look at it in light of all those currencies, and that's why gold is doing what gold is doing, and that is why that dynamic works that way.
Do you think the dollar can hold on to its dominant reserve currency status, and for how long?
A currency has two purposes: a medium of exchange and a storehold of wealth. As a medium of exchange, um, it will remain an important medium of exchange. It's almost like the English language has become the world's language, and we're in the habit of using it, and we'll do that. Though we're going to lose a lot of that because China now is the world's largest trading partner. In other words, it exports and imports more than the United States does. And increasingly, you're seeing it, trade denominated in its currency. So, I think we're going to see that continue to happen. However, the more important issue is the storehold of wealth. >> And none of the countries are as attractive as storehold of wealth. Their bonds, partially because of the debt raisin, but also because of the security of you're going to get it back. >> Foreign exchange controls. Would you trust, let's say, holding Chinese bonds as a storehold of wealth and be, and trust in the government not to have foreign exchange controls, not to have those other things? So, I think all currencies are going to have the problem of being an effective storehold of wealth. I, and that's why I think gold as a storehold of wealth, and then there's the question of, is what role do does Bitcoin or other digital currencies play? But in any case, we're going to see non-fiat currencies become, we are seeing non-fiat currencies become more important as the storehold of wealth money. And what I mean by money is it can go from one country to another in a non-political way. You know, um, during such periods of conflict and these types of problems, even the closest allies don't trust the debt. They don't want to give credit to the other. And so, that's why, um, gold plays such an important role.
Okay, Kang, let me bring you in this, because you talked about how Singapore diversified away from Sterling into the US dollar. At what point in the dollar's decline would institutional investors like yourself start diversifying in a big way away from the greenback?
Well, I think, um, we have to, why, why are we talking about this issue about the unsustainability of US debt, and why are we talking about the likely debasement of fiat currencies, including the US dollar? Why are we talking about it? We are talking about it now because in recent years, the amount of US debt has risen considerably, as I said, partly because of the huge spending during the pandemic, exacerbated now by the big beautiful bill. All right, that is the problem. The second reason why we're talking about it now is because interest rates have risen. The cost of debt has quadrupled, you know. So, that puts a lot of pressure. Now, so far, we have not had a crisis of US debt because I think in the last 12 years or so, a lot of global investors have been beguiled by what we call American exceptionalism. As we speak today, the US S&P 500 is at record highs. US 10-year bonds is at 4%. The dollar has come off a bit, but it is still at a very lofty level. So, I think the day of reckoning has been postponed because the debt was under control in the past. Now, it's getting out of control. It has been postponed because I think over the last 12 years, the US has been in a situation where the rest of the world was worse. So, all this talk about American exceptionalism, from my point of view, is like a beauty contest. A beauty contest where the winner is the least ugly. So, I, I think it obscures us. Now, what, what do I mean by that? Go back to 2012. In 2012, we had a Eurozone crisis. The Euro is supposed to be the challenger to the US dollar. Well, Greece, Italy, they got into trouble. The Eurozone went into a crisis. Mario Draghi said, "Whatever it takes." He brought interest rates down to zero and negative. Money fled from Europe. And where did they go? They went to the United States. Japan in 2013, Bank of Japan, Kuroda, >> "Whatever it takes." They brought interest rates down to negative territory because they were determined to lift Japan out of deflation. Guess what? Huge amounts of money fled from Japan. Japanese pension funds, Japanese insurance companies, Japanese banks. A lot of money went into the US, and to some extent, money has left other places like, you know, China and elsewhere. It went to the US, and so you had a situation where there was so much money flowing into the US, and what do they invest in? Well, they're not so interested in bonds because bond yields were not very high. So, they went into equities, lifting the S&P to record highs, particularly because of the tech boom, the Magnificent 7. They went into private equity because the US is the world's leading capital for private equity investments. And now private credit. Anyone looking for yield goes to the US. So, you have this 12-year period where I think it postponed the day of reckoning, and everybody says the US is exceptional. The US is not exceptional in terms of economic performance and in terms of public finance. If, if the US is in such a wonderful state, if the US were that great, why does Donald Trump have to make America great again?
Okay. Okay, my next question to both of you. I want both of you to gaze into your crystal ball. If you had to put the odds on the dollar still being the dominant reserve currency of choice in 20 years, what would the odds be? 90%, 50%, or below that?
Well, when you say reserve currency, I think again, the dollar through the 70s became a, maintained its stature as a reserve currency. So, we're dealing with the transactional basis. Um, I would, I would guess that the dollar's role as a reserve currency would be probably in the vicinity of 40%. It would decline to about 40% as a medium of exchange. Uh, but I do think, as we're talking about, as a storehold of wealth and its value, >> which is reflected in the, uh, purchase, the real purchasing power of holding it, um, and you hold it in a debt instrument, I think that that would decline, uh, very significantly. >> I think, as we speak now, if you look at the, just look at holdings of, uh, reserves, official reserves by central banks. With a very sharp rise in the gold price in 2025, I think in terms of market value, gold holdings is now the number two reserve currency.
Yes.
Next to the United States. In other words, gold in terms of value have exceeded the euro as a number two reserve currency, partly because of the sharp rise in the gold price. But that is an indication, you know, of how things, uh, have changed. But I, I, I think it's quite important. We don't want our audience here to go away with, um, uh, with with with gloom. And I think we're talking about what are the, what are the investment implications >> of the kind of scenario that Ray and I are are sharing. So, I think in investments, you need to make a, uh, there are certain principles involved. I think the first principle involved is, of course, diversification. Diversification is how much bonds you want to have, how much equities you want to have, and most importantly, how much insurance you have, you want to have in terms of real assets. By real asset, I mean something like gold, for example, which has proven its worth over a long period of time. So, we are making an argument that that in a world where governments have to borrow so much, bonds as a store of value is being threatened.
Even if you suppressed interest rates, inflation might go up as a result, and therefore the real value of gold, of bonds will go down. The attractiveness of, uh, of gold, the attractiveness of, uh, Bitcoin, for example, for younger investors, you know, is that it offers an alternative, you know, to what I call, uh, assets of nominal >> value. So, I think, but even if you have a debt situation where where interest rates might be under some upward pressure, but could be repressed by central banks, you could very well have a situation where equities continue to do quite well, >> because equities has got certain protection against, against inflation, and equities have got certain protection against currency debasement, >> you know. So, you might very well have a situation where, even if interest rates, even, even if we have a crisis, you know, I mean, that's what Ray found out. Ray found out in 1971, you know, that you had a currency debasement situation, but guess what? The stock market went up. He had a similar experience in 1982, I think, you know, uh, when when the US government had to basically bail out the American banks because of the problems they had with Mexico, you know, and guess what? The stock market went up after that. So, so, so equities compared to bonds is actually a more defensive asset in that kind of situation against the debasement of currencies. So, so I think, I think we want to to add a word of caution that we are not saying, look, we're in crisis mode. You know, put all your money in cash. You put all your money in cash in the time of inflation and and debasement of currency, it's not going to help. But the other issue which is important for global investors is to understand that your currency exposure >> can be managed separately from your asset exposure. They need not be coupled together because you can hold a US stock, but if you are concerned about the value of the dollar, you could hedge the currency exposure. So, what we are saying is that the debasement of currencies could lead to a loss of value of the US dollar against gold, maybe against other currencies, but you, you need to look at your currency exposure separately from your asset exposure.
Just building on also what Kang said for a minute. Um, I would say, uh, speaking with, um, Secretary Besson and people in the administration, there is a greater realization of these problems, and there is a greater proactiveness to be able to deal with them than there was before, by a lot. So, certain actions are being taken. Now, those actions, what they might mean, um, are interesting.
Do you have insights to those actions?
Uh, no, I have no insight, and I'm, and, uh, but what I am saying is that there is a recognition of a lot of the things that we're talking about. Then there is also an understanding, a greater understanding of the mechanics of the choices that are at hand. Um, so that should be kept in mind. Um.
Okay, let me at this point throw to the floor to see whether everybody was paying attention to what our two gentlemen were saying. How many of you are still bullish or still have confidence in the US dollar? A show of hands, please. US dollar confidence? Only this side.
What about gold? Gson talked about gold.
Ray talked about gold. Who likes gold in this room?
Ah, show of hands there. Now you get a clearer picture.
And there's also a saying in the markets, um, that I learned repeatedly, and he talked about mistakes, and that's right. There's a saying in the markets that he who lives by the crystal ball is destined to eat ground glass. And what I, what, what I think is the important thing, the most important thing, is for people to know how to diversify well, not to make any bets on one or another, unless most people who do that don't do well doing that. And I think that to think about, uh, gold as a percentage of your portfolio, maybe it should be 10% of the portfolio, or 50, 10, something. Uh, but if I think in terms, and also to look at your portfolio in real terms, not in nominal terms. Those would be two things to keep a moderate, well-diversified portfolio. That's the best advice I think that we would want to give.
Right. Okay. Yes.
And speaking of diversification, we are at the Future China Global Forum, and this is a nice segue to bring in China. We know US-China trade tensions, clearly a result of China's rise as a global powerhouse. You have helped to build China's or develop China's financial markets since 1984. What are some of the conversations you're having with Chinese policymakers about how they're managing the country's rise and how they're managing this rivalry with the US?
Um, in the earlier session, uh, there was a very clear review of Chinese history. Um, so I would emphasize the understanding of, uh, the hundred years of humiliation, the importance of sovereignty, of which Taiwan represents part of that sovereignty. Um, and to understand what Xi Jinping said about the greatest challenges in a 100 years.
what that means. Um, I think that perspective is important, and I think that what people have heard during the day is a very good summary of the five forces as it relates to China and so on.
Um, there is a new world order changing, and I would say that the recognition of the debt and money part is part of a recognition of that. I would say, um, the most important word that captures the Chinese perspective is probably harmony. In other words, if you go to a Confucian perspective and if you go to the international perspective, that's really the tribute system and how that works. It's really meant to achieve a certain harmony, but also respect for the most dominant, for relative powers. And so I think that those are the guiding principles. And we are in a time that in all countries, in the United States as well as in China, there's a desire to have greater unity and greater control over the population and the mission to be able to deal with these very difficult times.
Um, so I think that those are the guiding principles. Okay. Um, both of you know China's state-managed capitalism has been a big growth engine for China because it allows Beijing to really channel or pump resources, distribute resources into certain key industries and really to ramp up and boost global competitiveness. How much of a leverage does that give China?
You're seeing the United States move in the same exact direction. And if you study history, you would see that during periods of great conflict, such as now, you have what we might be calling state capitalism or state-controlled economic management because the standard consumer system where consumers earn money and spend money on expensive consumer goods like, you know, I don't know, handbags, is not going to be the way that there needs to be direction. So in the United States as well as China, you're seeing initiatives. Well, that's why you're seeing President Trump with tech leaders and dealing with energy. How do you produce more electric energy for AI and such things? So you're seeing both operate in a manner that is very consistent with the way countries operate during such times.
Mhm. Gong, how much leverage does state-directed capitalism in China give China a leverage where profit is not the main motive?
Well, I think the foremost policy imperative in China is to avoid the disaster that befell the Japanese economy. In other words, I think China should look carefully into how it can achieve what Ray, in his book, calls a beautiful deleveraging in China. The problem is not in the central government. The problem is in the high level of indebtedness in the provincial governments and state-owned enterprises and also to some extent in the property sector, in the private sector. But China has got a debt problem as well. And if China doesn't find a way of addressing this, take some action to relieve the high state of leverage, then you're going to enter into a prolonged period of economic stagnation that Japan has. And the relevance of this is that because the Chinese economy has been a very weak state, it has got to rely on exports. Guess what? Chinese exports, trade surplus are at record levels despite an ongoing trade war. So I think in Ray's book, he pointed out that people who invested in Japan, if you had invested in Japan, let's say in Japanese bonds, you would have lost something like 60% against gold. The bonds did not fall in value, but what fell in value was the currency.
I mean, the Japanese yen depreciated from below 100, you know, today is 146. So here you're talking about the debasement of a currency resulting from excessive debt. So I think that is the key for China because China cannot face a more difficult world in order to export itself out of recession. So it becomes even more imperative for the Chinese government, and thankfully the Chinese government has capital controls. So you can manage the flow of capital better, but the opportunity should be used to see how do we restructure debt, you know, how do we bring about a beautiful deleveraging so that it avoids the catastrophe that befell the Japanese economy.
Everything is beautiful these days, isn't it? Time is up, but I want to get a one final word from both gentlemen. Um, what was the one piece of advice you would give policymakers and investors, or policymakers rather, in Asia on how to avoid their countries going broke, right? One piece of advice.
I think just like it was said in the earlier session, you know, there are three basic things that make a successful country. First, educate your children well and have civility. Second, earn more than you spend. And third, avoid a war.
Box. If Singapore goes broke, who is going to finance us? We are not the United States. And that is why I think one of our fundamental strengths of our economy is that Mr. Lee Kuan Yew, going back to the 1980s, conceived of the idea that in good times, we must save for bad times. In other words, we should build up our reserves. And we've now reached a point where not only have we built up the reserves, but we have put in constitutional arrangements to ensure that the reserves are prudently invested, that we only take part of the investment returns for the budget. So that's talking about out of necessity because we are a small economy. We cannot. And going broke means you're spending more than you take in. So thankfully, year after year, the Singapore government has been able to achieve a budgetary surplus. Occasionally it says we have a deficit, but usually the outturn is a surplus, and that's a good thing out of necessity for a small economy like ours. So I think, you know, we have a lesson to learn, you know, that we can't afford the kind of profligacy that the UK had, that the US is now having.
Gentlemen, thank you so much for talking to me today. Such a pleasure to have both of you come together. Such a rare opportunity. By the way, how far back do you go again? How long have you known each other?
32 years.
32 years to be exact. Ever thought about writing a book together?
We'll think about it.
No, one of the good things is that Ray now comes to Singapore quite frequently, you know. But not only does he come here to share with us his wisdom, but he has made an important contribution to Singapore by launching a program at our Wealth Management Institute here in Singapore, WMI. Not only has he written the books and he has designed the syllabus, but he personally teaches at the Wealth Management Institute, where I had the privilege of being the founder chairman. So I think there are lots of young professionals here. You know, there's a Wealth Management Institute program which was designed and taught by Ray and is available here in Singapore. That way you can continue to benefit from his wisdom. In closing, I know we're over time, but I just want to say I am so grateful for the relationship. I have a, I'm a resident. I have the family office here. I have my family members who are here. Singapore is a place that I admire and love and am just so grateful to contribute in any way that I can.
We're very pleased to have you here, Ray.