Key Logic 

The author of this article (Gao Xu) posits that Ray Dalio harbors a fundamental methodological error in analyzing national debt issues, specifically by erroneously applying the debt analysis logic applicable to microeconomic entities (individuals and corporations)—where cash flow must cover principal and interest—to macroeconomic entities (nations). Furthermore, he mechanically views the macroeconomy as a machine with immutable operating parameters. This leads Ray Dalio to fail to recognize that the true determinants of national debt constraints are a country's productive capacity (overcapacity/insufficient domestic demand) and, for the United States, the more crucial "United States Dollar Hegemony". Consequently, he misjudges the debt risks of both the United States and China. The author emphasizes that understanding the macroeconomy necessitates discarding intuition and common sense in favor of logic and academic rigor, acknowledging the complexity and dynamic nature of macroeconomic operations.

Three Levels of Thought in Understanding Debt Issues 

• First-Level Thinking: Microeconomic Perspective
  • Definition: Applicable to the debt analysis of microeconomic entities (individuals or corporations).
  • Core Logic: The premise for debt sustainability is that the entity's cash flow can, at any given time, cover its debt's principal and interest payments.
  • Ray Dalio's View: Ray Dalio's assertion that "whether debt generates enough income to pay for its servicing" is a critical criterion for judging debt sustainability, aligning with microeconomic thinking.
• Second-Level Thinking: Macroeconomic Perspective
  • Definition: Applicable to the analysis of national debt issues, where microeconomic thinking is no longer appropriate.
  • Core Logic: A nation's debt constraint lies not in its cash flow, but in its productive capacity.
    • The government serves as a nation's last line of defense against debt crisis; a country's debt sustainability critically depends on the sustainability of its government debt.
    • Microeconomic entities' cash flows are exogenously given and represent a hard constraint; national governments possess the right to issue their domestic currency, making domestic currency cash flow endogenous and allowing for the repayment of domestic currency debt through money creation.
    • Special Case: Eurozone Countries: Eurozone countries' currency issuance rights are stripped by the European Central Bank, thus preventing them from repaying their domestic debt by issuing their own currency, as seen in the 2011 "Eurozone Debt Crisis".
    • Constraints on Monetary Expansion: Whether monetary expansion leads to macroeconomic instability, in turn, constrains currency issuance.
      • Countries with Excessive Domestic Demand and Insufficient Capacity: Monetary expansion would lead to rising inflation or trigger an external debt crisis (e.g., Thailand, Malaysia during the Asian Financial Crisis, as foreign debt is denominated in United States Dollar).
      • Countries with Insufficient Domestic Demand and Overcapacity:
        • No external debt problems, due to perennial trade surpluses.
        • Monetary expansion will not lead to excessive inflation (rather, it alleviates deflation), and the government can repay domestic currency debt by issuing domestic currency, which aligns with the descriptions of Modern Monetary Theory.
        • In this scenario, the size of domestic debt has no inherent connection to a debt crisis, with some loosely claiming "domestic debt is not debt."
      • Debt and Savings Relationship: Debt serves as a conduit channeling savings into investment; judging whether debt is excessive requires comparing the scale of savings and debt. If domestic savings exceed domestic debt, then even substantial debt is "insufficient."
      • Insufficient Effective Demand: Fundamentally, this is an income distribution issue, leading to a mismatch between purchasing power and expenditure desires; monetary expansion helps deploy excess savings and stabilize the macroeconomy.
• Third-Level Thinking: International Monetary System Perspective
  • Definition: Specifically addresses the United States' debt issues.
  • Core Logic: As the issuer of the United States Dollar, a primary international reserve currency, the United States can borrow foreign debt in its own currency, meaning its debt constraint is not its supply capacity, but rather "United States Dollar Hegemony".
    • The United States can issue more United States Dollar to repay its foreign debt, hence despite high national debt and long-term trade deficits, its debt crisis risk remains extremely low.
    • Only events threatening "United States Dollar Hegemony" would pose a debt risk to the United States, such as industrial hollowing-out and "reciprocal tariff" policies.

Two Major Errors in Ray Dalio's Methodology 

The author argues that Ray Dalio made two significant errors in analyzing macroeconomic issues, leading to many of his misconceptions regarding national debt.

• Error One: Erroneously Applying Microeconomic Thinking to Macroeconomic Problems
  • Manifestation: Ray Dalio applies the microeconomic judgment criterion of "whether debt-generated returns can cover debt costs" to national debt analysis, causing his analysis to remain solely within the first level of microeconomic thinking.
  • Impact: He fails to identify that the debt constraint for countries other than the United States lies in their supply capacity, and that for the United States, it lies in "United States Dollar Hegemony". This critical point is not highlighted in Ray Dalio's "The Changing World Order: Why Nations Succeed and Fail" (360,000 words).
• Error Two: Erroneously Viewing the Macroeconomy as a Machine
  • Manifestation: Ray Dalio believes the macroeconomy is like a machine, where specific actions invariably lead to specific outcomes. This was evident in his 2008 work, "How the Economic Machine Works", and reiterated in his latest "The Changing World Order: Why Nations Succeed and Fail".
  • Problem: This mechanistic research approach has been abandoned by economists for over half a century because the macroeconomy's internal structure and operating parameters change with operational methods and human expectations.
  • Example: Disappearance of the Phillips Curve:
    • From the 1950s to the 1960s, the Phillips Curve existed (inverse relationship between inflation and unemployment), due to public expectations of low inflation.
    • Entering the 1970s, when governments tried to use the Phillips Curve to boost inflation to reduce unemployment, public expectations changed. High inflation was no longer seen as a sign of economic improvement, leading to the disappearance of the Phillips Curve and Western countries falling into "stagflation."
    • Insight: Causal relationships and reactive behaviors in the macroeconomy change with environmental shifts. One cannot simply assume that central bank money printing will inevitably lead to currency devaluation; the consequences depend on the macroeconomic conditions (especially whether there is insufficient demand).
  • Other Manifestations: Ray Dalio proposes a "3% Solution" (reducing the fiscal deficit as a percentage of Gross Domestic Product to 3%), believing there is an optimal level for fiscal deficits.
    • The author considers this "asking the wrong question," as reasonable fiscal deficits and debt levels depend on macroeconomic conditions, and seeking a universally applicable standard is "futile and extremely harmful."
  • Summary: Ray Dalio's methodological errors are the fundamental reason for his "seemingly plausible but ultimately misleading" conclusions, which are more deceptive than "obviously false" views like "debt is opium."

Ray Dalio's Misjudgments on National Debt Cases 

Due to his methodological errors, Ray Dalio has misjudged the debt risks of multiple countries.

• Misjudgment of United States Debt Risk
  • Ray Dalio's View: On page 289 of "The Changing World Order: Why Nations Succeed and Fail", Ray Dalio assesses the United States government's long-term debt risk as "very high," believing it is approaching an "irreversible tipping point" that will trigger a "debt 'death spiral'."
  • Author's Rebuttal: This judgment stems from microeconomic thinking. If one understands the supporting role of "United States Dollar Hegemony" for United States national debt, one would not make such a pessimistic judgment based solely on the scale of national debt. Unless the United States government self-undermines global confidence in the United States Dollar, United States national debt is not nearing a "death spiral" tipping point.
• Misjudgment of China Debt Risk
  • Ray Dalio's View: On page 248 of "The Changing World Order: Why Nations Succeed and Fail", Ray Dalio believes China's debt level is too high and requires "harmonious deleveraging."
  • Author's Rebuttal: Ray Dalio fails to recognize the rationality and necessity of debt accumulation in China's current environment of insufficient demand and excess savings.
    • In recent years, overly stringent deleveraging measures in China have suppressed the reasonable growth of debt, hindered the conversion of domestic savings into investment, and instead exacerbated insufficient demand pressure, placing significant downward pressure on economic growth and prices.
    • China's debt rollover issue is not due to excessive debt, but rather severe deleveraging artificially created liquidity problems.
    • When deleveraging has already impacted the macroeconomy, what is needed is a correction of deleveraging ideology, not more deleveraging.

The Correct Path to Understanding Macroeconomics 

• Recognizing Ignorance of Macroeconomics
  • Limitations of Intuition and Common Sense: People's daily experiences are microeconomic in nature and cannot reflect the logic of macroeconomic operation. Macroeconomic operation is often "counter-intuitive and counter-commonsensical."
  • Paul Krugman's View: In his November 4, 2014 article, "Does a Successful Businessman Understand Macroeconomics", Paul Krugman points out that "countries are not companies," and national policies must consider feedback not commonly encountered in business life (e.g., domestic goods and services are primarily sold to domestic residents).
  • Comparison of Companies and Nations:
    • Companies: When market demand declines, companies should cut expenses and reduce costs and increase efficiency, because increased employee income will not significantly change market demand.
    • Nations: When a nation faces insufficient demand, the correct approach is to expand spending (e.g., government distributing money to residents), due to a "boomerang effect" (feedback between expenditure and income), which can stimulate economic recovery, increase fiscal revenue, and even lead to counter-intuitive situations where "money spent generates more."
  • Summary: The first step to understanding macroeconomics is acknowledging one's ignorance and avoiding the direct application of microeconomic analysis thinking to macroeconomic analysis.
• Discarding Intuition and Common Sense, Emphasizing Logic and Scholarship
  • Macroeconomic analysis should "talk less about intuition, more about logic," because logic helps grasp unfamiliar macroeconomic subjects; "be cautious about common sense, emphasize scholarship," because common sense formed about the macroeconomy is often microeconomic common sense, which does not reflect macroeconomic operating logic.
• Critically Studying Economic Theories
  • One cannot simply adopt the views of a single school or faction. For instance, current mainstream Western macroeconomics is dominated by the "new-neoclassical synthesis" paradigm, which essentially understands the macroeconomy as microeconomics. Its models' tools like "representative consumer" and "representative firm" struggle to reflect macroeconomic feedback effects.
  • This theoretical paradigm is suitable for supply-constrained Western economies but not for demand-constrained China.
  • To truly understand China's economy, one must break free from Western paradigms, draw insights from different economic schools of thought, and seek tight constraints and core logic from the dialectical relationship between supply and demand.