Ray Dalio’s nightmare scenario is a conjunction of inflation, populism, and war

I spent an hour yesterday interviewing hedge-fund-billionaire-turned-historian Ray Dalio for the Economic Club of New York and came away with a clearer view of the Armageddon he sees lurking before us. Dalio takes 500 pages to tell his story in his book, and I have only 300 words, so forgive me in advance for oversimplifying.

As I wrote when the book published in November, Dalio’s study of cycles has led him to pinpoint three problem areas at the current moment in history: the financial order, distorted by massive debt creation; the internal U.S. political order, wrecked by distrust and polarization; and the external order, threatened by the rise of China and the decline of the U.S. Each of these has parallels in the past and follows similar patterns that make it possible to project their future.

What I didn’t fully appreciate after reading the book was how he sees those three cycles interacting with one another. The nightmare scenario, as I interpret it, comes when persistent inflation leads the Fed to hike interest rates and precipitate a downturn—an event that he suggested is likely to hit at the end of 2023 or the beginning of 2024. That would be just in time to fuel populism as the U.S. heads into a presidential election, creating a fraught situation in which neither side is willing to accept a loss. The result would be a constitutional crisis hobbling the U.S. and creating a moment of opportunity for China to move on Taiwan, or Russia to move on Ukraine, or maybe both. Boom.

Given this week’s events—the worst measured inflation in 40 years, increased congressional infighting over the Jan. 6 commission, and failed talks with Russia over Ukraine—that scenario doesn’t sound so outlandish. 

Asked by one participant what could be done to reduce the risk, Dalio was quick to answer: Heal the political divide. Reject both political extremes and restore a spirit of compromise. Good luck with that. By the way, Dalio told me earlier that the only presidential candidate he’s ever supported was John McCain—and only then because of McCain’s bipartisan history. Maybe Joe Manchin should be calling for support.

More news below. And while we are talking about China, read Grady McGregor and Eamon Barrett’s smart piece about how China’s increasingly challenged COVID-zero policies could add to supply-chain chaos.

Alan Murray
@alansmurray
alan.murray@fortune.com

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This edition of CEO Daily was edited by David Meyer.