Dalio believes that in the conflict between the US and China there are no boundaries; that the trade war is part of a wider geopolitical conflict and a shift from a co-operative relationship to a confrontational one. "Everyone is realising that we could be in an era of, not just trade wars, but other kinds of wars. Naturally that’s leading each party to think about how they can be self-sufficient. Loading "In this conflict I worry that the way each side will try to push the other will be rough and encompass all areas. This will go way beyond trade. This is a broad geopolitical conflict. This move from a co-operative relationship to a confrontational relationship is a big deal.’’ Disturbingly, Dalio doesn’t believe the confrontation can be resolved by a changing of the administration in the US, saying the Democrats are as anti-China as the Republicans and also that because, even if there were a more moderate president, China and the rest of the world would still face enormous uncertainty because when the US changed presidents its policies changed.

In other words, neither China nor anyone else threatened with Donald Trump’s tariffs will be able to trust that a change of administration will lead to a permanent cessation of the trade wars. He is just as pessimistic about the broader outlook for the global economy. "What’s going to happen, which we have seen many times in history, is pushing on a string. The term ‘pushing on a string’ was made in the 1930s. "What needs to happen is a co-ordination between fiscal policy and monetary policy and the central bank monetising the debt that results, in much the way Japan is doing and in much the way in which Europe is doing. "We will need much more fiscal stimulation. In other words, the governments either spending or cutting taxes, debts rising and central banks monetising those debts. Doing that will depend on the ability for there to be government co-ordination about those policies,’’ he said.

Political parties would also have to agree on fiscal policy. The problem the world faces now, however, was largely a problem of a lack of co-ordination, he said. This move from a co-operative relationship to a confrontational relationship is a big deal. Ray Dalio ‘’In my opinion, we’re in a period very much like the 1930s. "In the 1930s we had a debt crisis, interest rates fell to zero and central banks printed a lot of money and bought financial assets.’’ The same thing happened in 2008 in the US and in Europe in 2011 in response to the global financial crisis. Interest rates fell to zero or lower as central banks bought $US15 trillion of financial assets, causing the value of financial assets to rise and the economy to improve (as occurred in the 1930s between 1932 and 1937).

Those with financial assets benefited relative to those who didn’t, in the 1930s and today, producing a wealth gap. "That led to populism in the 1930s and over the last few years. Also in the ‘30s, and now, central banks didn’t and don’t have the power to ease monetary policy in a downturn because interest rates are close to zero and quantitative easing won’t be very effective. "So, we have that set of circumstances very much like the ‘30s. We also have, like in the ‘30s, the emergence of a great world power in the form of China to challenge the existing great world power in the form of the United States.’’ The world is more leveraged today, and more leveraged to financial assets, than it was before the crisis. Governments, businesses and households have gorged on ultra-cheap debt. While Dalio doesn’t think another debt crisis is likely, he does think a "defining moment’’ is approaching when asset prices "don’t do well’’ and that the moment is drawing closer because it is late in the business cycle.

More likely is that the rate of growth in debt – and the purchasing power it has provided – will slow as the limits to leverage near, with obvious adverse implications for economies, including Australia’s. He knows Australia well, having first travelled here to advise (in pre-Bridgewater days) Bond Corp on how to hedge its interest rate and currency exposures and subsequently to market to and advise superannuation funds (and acquire rural properties with his "pal,’’ Bell Potter’s Colin Bell). "I’ve always been attracted to Australia and Australians because I love the culture of the place. It’s always been a bit like our American West,’’ he said. The Dalio analysis of the world’s settings is particularly disturbing because essentially he’s saying that the trade war is part of a larger and more permanent conflict between the US and China; that the policy prescriptions for responding to an over-leveraged and slowing global economy are limited and that inequality and populism can only be addressed via radical economic policies that probably can’t be effectively implemented. The Sydney Morning Herald/The Age are partners of the Sohn Hearts & Minds event to be held in Sydney on November 22. For more information go to: www.sohnheartsandminds.com.au.