CNBC Transcript: Bridgewater Associates Founder, Co-Chair and Co-Chief Investment Officer Ray Dalio Speaks with CNBC's “Squawk Box” Today

The following is the unofficial transcript of a CNBC interview with Bridgewater Associates Founder, Co-Chairman and Co-Chief Investment Officer Ray Dalio and CNBC's "Squawk Box," (M-F 6AM - 9AM) today, Tuesday, September 11th. The following is a link to video of the interview on CNBC.com here!

ANDREW ROSS SORKIN: MEANTIME, TEN YEARS AFTER THE 2008 FINANCIAL CRISIS, AN INVESTING LEGEND HAS WRITTEN A BOOK ON WHAT WENT WRONG AND THE BEST WAYS TO AVOID ANOTHER CATASTROPHE ON WALL STREET. JOINING US RIGHT NOW IS RAY DALIO, BRIDGEWATER ASSOCIATIONS FOUNDER, CO-CHAIR, CO-CHIEF INVESTMENT OFFICER. RAY HAS A NEW BOOK OUT. IT'S GETTING ENDORSEMENTS BY ALL SORTS OF LUMINARIES. IT'S CALLED "A TEMPLATE FOR UNDERSTANDING BIG DEBT CRISES." IT'S OUT NOW. AND WE SHOULD TELL YOU, THIS IS ONE OF THE BEST KIND OF BOOKS. IT'S AVAILABLE FOR FREE. YOU CAN ACTUALLY GO ONLINE AND DOWNLOAD IT AS FREE FOR A PDF. YOU CAN ALSO GET IT ON YOUR KINDLE. AND YOU CAN GET A HARD COPY IN OCTOBER. BUT IT'S A REALLY A LOOK AT CRISES OVER CENTURIES, REALLY. AND WHAT POLICIES CREATED THE CRISES AND WHAT POLICIES HELPED RESCUE THE WORLD FROM THEM. SO GOOD MORNING TO YOU. THANK YOU --

RAY DALIO: GOOD MORNING.

SORKIN: THANK YOU FOR BEING HERE.

RAY DALIO: THANK YOU FOR HAVING ME.

SORKIN: WE'RE SPENDING THE WHOLE WEEK REALLY LOOKING BACK AT THE 2008 CRISIS. BUT -- AND BY THE WAY, DURING THE MIDST OF THE CRISIS, WE SHOULD SAY, A LOT -- BIG PIECES OF THIS BOOK, HE WAS WRITING THESE MEMOS EVERY SINGLE DAY THAT PEOPLE LIKE TIM GEITHNER AND BEN BERNANKE WERE READING THAT ULTIMATELY GOT CRAFTED INSIDE THIS BOOK. BUT WHEN YOU LOOK BACK AND THINK ABOUT THE CRISIS, WHAT IS THE BIGGEST SINGLE LESSON? I KNOW THERE ARE SO MANY LESSONS IN THE BOOK, AND WE ARE GOING TO GET TO THEM, BUT THE BIGGEST SINGLE LESSON FOR YOU?

DALIO: OF ALL OF THEM, THERE'S THE DEBT GROWTH THAT FINANCES THE BUBBLES THAT HAPPEN BEFORE IT THAT CREATE THE BUSTS. YOU KNOW, THERE'S BASICALLY SIX STAGES TO IT. THERE'S THE NORMAL DEBT GROWTH THAT FINANCES GROWTH THAT PAYS FOR ITSELF. THEN YOU GET INTO THE BUBBLE STAGE, WHEN EVERYBODY'S EXTRAPOLATING WHAT HAPPENED IN THE PAST. SO ASSET PRICES ARE GOING UP AND EVERYBODY IS BORROWING A LOT OF MONEY TO EXTRAPOLATE WHAT'S HAPPENED. AND THAT BUBBLE STAGE, CENTRAL BANKS DON'T PAY MUCH ATTENTION TO BECAUSE IT DOESN'T AFFECT INFLATION AND GROWTH. AND SO I THINK AT THAT STAGE IS WHEN THE CENTRAL BANKS SHOULD BE LOOKING AT "ARE THOSE DEBTS GOING TO BE ABLE TO BE PAID BACK FROM THE FINANCIAL?" THAT WOULD BE THE BIGGEST.

SORKIN: RIGHT. AND WHAT STAGE, THEREFORE, ARE WE IN TODAY? WE HAD A SEGMENT ON AROUND 6:30 WITH BRIAN SULLIVAN WHO TALKED ABOUT HOW DEBT IN THIS COUNTRY HAS ACTUALLY INCREASED SINCE 2008.

DALIO: YEAH. DEBT HAS INCREASED. BUT DEBT RELATIVE TO THE -- DEBT SERVICE PAYMENTS, RELATIVE TO INCOMES, HAVE NOT RISEN LIKE THEY HAD IN 2007 AND 2008. SO --

BECKY QUICK: HIS POINT WAS LOOKING AT CORPORATE DEBT IN PARTICULAR.

DALIO: CORPORATE DEBT OF COURSE -- BUT IF YOU LOOK AT THE CORPORATE CASH AND YOU LOOK THE MATURITY OF THE DEBT. WHEN WE RUN THE PRO FORMA FINANCIAL BUSINESS CALCULATIONS, IT'S NOTHING LIKE 2007 LOOKED LIKE TO 2008. THERE'S A SQUEEZE THAT WILL BE EMERGING. BUT GENERALLY SPEAKING, WE'RE IN, I WOULD SAY, THE SEVENTH INNING OF THE CYCLE. I THINK THAT WE'RE AT THE STAGE IN THE CYCLE WHERE INTEREST RATES ARE BEING RAISED. WE'RE IN THE LATER STAGE. PROBABLY, MAYBE WE HAVE TWO MORE YEARS INTO THE CYCLE, SOMETHING LIKE THAT. AND THEN THE ISSUES OF THIS DEBT CRISIS ARE VERY DIFFERENT THAN THE LAST DEBT CRISIS. EACH ONE'S A LITTLE BIT UNIQUE. THIS ONE LOOK VERY MUCH MORE LIKE THE 1935 TO '36 -- 1935 TO '40 PERIOD.

JOE KERNEN: YOU MEAN DEBT SITUATION? YOU CALLED IT A CRISIS. WE'RE NOT AT A CRISIS YET, ARE WE? ARE WE THERE NOW? OR YOU MEAN THE DEBT SITUATION?

DALIO: CAN I DESCRIBE THE PARALLELS?

KERNEN: YEAH, PLEASE.

DALIO: BECAUSE I THINK THE PARALLELS ARE REALLY IMPORTANT TO UNDERSTAND. OKAY. 1929 TO '32 AND 2008 TO 2009, WE HAVE A DEBT CRISIS. AND INTEREST RATES HIT ZERO. BOTH OF THOSE CASES, INTEREST RATES HIT ZERO. ONLY TWO TIMES THIS CENTURY. THERE'S ONLY ONE THING TO DO NEXT. AND THAT IS TO PRINT MONEY AND BUY FINANCIAL ASSETS. SO IN BOTH OF THOSE CASES, THAT'S WHAT THE CENTRAL BANK DID, AND THEY PUSHED ASSET PRICES UP. AS A RESULT WE HAD AN EXPANSION, WE HAD THE MARKETS RISING. AND WE PARTICULARLY HAD AN INCREASE IN THE WEALTH GAP. BECAUSE IF YOU OWNED FINANCIAL ASSETS, YOU GOT RICHER. AND IF YOU DIDN'T, YOU DIDN'T. AND SO WHAT TODAY WE HAVE IS A WEALTH GAP THAT'S THE LARGEST SINCE THAT PERIOD. THE TOP 0.1 OF THE 1% OF THE POPULATION'S NET WORTH IS EQUAL TO THE BOTTOM 90% COMBINED. YOU HAVE TO GO BACK TO 1935-40. AS A RESULT WE HAVE POPULISM, OKAY. POPULISM IS THE DISENCHANTED - CAPITALISM NOT WORKING FOR THE MAJORITY OF PEOPLE. SO WE HAVE THAT PARTICULAR GAP. SO WE HAVE A POLITICAL GAP, A SOCIAL GAP IN TERMS OF THE ECONOMICS, AND WE'RE COMING INTO THE PHASE WHERE WE'RE BEGINNING THE TIGHTENING CYCLE. 1937, WE BEGIN A TIGHTENING CYCLE. WE BEGIN A TIGHTENING CYCLE AT THIS POINT. NO TIGHTENING CYCLE EVER WORKS OUT PERFECTLY. THAT'S WHY WE HAVE RECESSIONS. WE CAN'T GET IT PERFECTLY. SO AS WE'RE GOING INTO THIS PARTICULAR CYCLE, WE HAVE TO START TO THINK, "WELL, WHAT WILL THE NEXT DOWNTURN BE LIKE?" WE'RE NINE YEARS INTO THIS. AS YOU HAVE A DOWNTURN, I BELIEVE THAT THERE'S A POLITICAL AND SOCIAL IMPLICATION TO THAT RELATED TO POPULISM. AND LESS EFFECTIVE MONETARY POLICY. THERE'S LESS EFFECTIVE MONETARY POLICY BECAUSE SO FAR THERE ARE TWO TYPES OF MONETARY POLICY USED: LOWERING INTEREST RATES, WE CAN'T LOWER INTEREST RATES, AND THE SECOND IS QUANTITATIVE EASING. AND IT'S MAXIMIZED ITS EFFECT. SO I THINK THE NEXT DOWNTURN IS GOING TO BE A DIFFERENT TYPE OF DOWNTURN. I THINK PENSION PROBLEMS, HEALTH CARE PROBLEMS IN TERMS OF OBLIGATIONS THAT ARE NOT FUNDED THAT ARE NOT DEBT --

SORKIN: MORE SEVERE NEXT TIME?

DALIO: I THINK IT'LL BE MORE SEVERE IN TERMS OF THE SOCIAL/POLITICAL PROBLEMS. AND I THINK IT WILL BE MORE DIFFICULT TO HANDLE -

QUICK: WHAT YOU'RE SAYING -

DALIO: IT WON'T BE LIKE THE -- IT WON'T BE THE SAME IN TERMS OF THE BIG BANG DEBT CRISIS. IT'LL BE A SLOWER GROWING, MORE CONSTRICTING SORT OF DEBT CRISIS. BUT I THINK IT'LL HAVE BIGGER SOCIAL IMPLICATIONS AND A BIGGER INTERNATIONAL IMPLICATION.

SORKIN: THERE'S A SENSE IN THIS BOOK THAT THERE'S INEVITABILITY TO THESE CRISES. AND SO ONE OF THE QUESTIONS IS FROM A POLICY PERSPECTIVE, IF WE'RE IN THE SEVENTH INNING, IS THERE ANYTHING THAT POLICY MAKERS CAN DO TODAY, NOT AFTERWARDS, BUT TODAY, TO AVOID THIS CRISIS YOU'RE TALKING ABOUT?

DALIO: I THINK FIRST OF ALL, TO BE ABLE TO THINK ABOUT HOW TO HANDLE IT. BECAUSE YOU'RE RIGHT, THEY'RE INEVITABLE. THEY'RE INEVITABLE BECAUSE THERE'S NEVER THE PERFECT BALANCE BETWEEN LENDING AND BORROWING. AND SO THEY'RE INEVITABLE. I WOULD SAY THE THINGS THEY SHOULD DO THAT MAYBE ARE MISSING ARE FIRST OF ALL TO HAVE THE FREEDOM OF ACTION. WE HAVE A LOT OF REGULATIONS. AND THEY'RE USUALLY WRITTEN FOR WHAT THE LAST DEBT CRISIS WAS LIKE, AND OURS ARE. BUT THERE ARE LESS FREEDOMS OF ACTION TODAY. WE HAVE A SAFER BANKING SYSTEM AND WE'VE DONE A LOT OF THINGS TO MAKE IT SAFER. BUT EACH ONE IS A LITTLE BIT DIFFERENT. AND CLASSICALLY, THERE'S THE DEVELOPMENT OF THE SHADOW BANKING SYSTEM. AND WE WILL HAVE A NEW TYPE OF SHADOW BANKING SYSTEM. SO LESS FREEDOM. I THINK WE HAVE TO THINK ABOUT WHAT IS THE MONETARY POLICY "THREE," AS I CALL IT, THAT IS NOT GOING -- WHEN WE HAVE QUANTITATIVE EASING, NOT BEING AS EFFECTIVE. AND THEN THE THIRD THING --

QUICK: THAT'S WHAT I MEAN. I MEAN, IS THE PRESCRIPTION -- WOULD THE PRESCRIPTION FOR THAT, THOUGH, BE TO RAISE RATES NOW AND TRY AND UNWIND THE BALANCE SHEET AS FAST AS POSSIBLE? BECAUSE THAT WOULD BRING ON --

DALIO: NO, NO, NO. NO, BECAUSE IF YOU RAISE RATES NOW, ALL THE RATE STRUCTURE'S AFFECTED AND CARRIES THROUGH ALL MARKETS. BECAUSE WE'RE ALL DISCOUNTED - IT'S A DISCOUNT RATE FOR THE PRESENT ASSET CLASSES. NO, NO, NO. I THINK YOU HAVE TO THINK WHAT MONETARY POLICY "THREE" IS, WHICH IS PARTICULARLY IN JAPAN YOU'RE GOING TO NEED IT, BUT THE TYPE OF THING WHERE THERE'S A -- IT'S NOT JUST THE PURCHASE OF FINANCIAL ASSETS, IT GETS INDIVIDUALS TO MAKE THEIR PURCHASES AND ACTUAL ASSETS --

KERNEN: WHAT IF WHAT WE'RE SEEING NOW IS NOT REALLY TRANSIENT IN TERMS OF THE BUSINESS CONDITIONS. AND WE CONTINUE TO SEE THIS NEW CORPORATE STRUCTURE ACTUALLY HELP IN TERMS OF CAPITAL FORMATION FOR CORPORATIONS. THE 2.9% WAGE GAINS THAT WE SAW CONTINUES. AND DOES THE POPULIST WORRIES AND CONCERNS YOU HAVE FOR INCOME INEQUALITY, COULD THAT EASE IF WE WENT INTO A PROTRACTED PERIOD OF GOOD ECONOMIC GROWTH?

DALIO: I LOOKED AT THE BOTTOM 60% OF THE POPULATION. SO TO TAKE OUT OF THE AVERAGES. AND - FOR VARIOUS REASONS TO DO WITH TECHNOLOGY AND OTHER THINGS LIKE THE ASSET PURCHASES.

KERNEN: ARE YOU GOING TO TELL ME WE'RE SCREWED EITHER WAY?

DALIO: I THINK THERE SHOULD BE A NATIONAL INITIATIVE TO LOOK AT THE PARTS OF THE POPULATION THAT ARE NOT BENEFITTING FROM THE CYCLE. AND I THINK THAT THEN, YOU KNOW, EDUCATION IN MANY WAYS IS JUST TERRIBLE.

KERNEN: YOU'RE NOT TALKING ABOUT PURE REDISTRIBUTION, YOU'RE NOT TALKING ABOUT UNIVERSAL BASIC INCOME, YOU'RE NOT TALKING ABOUT ANYTHING LIKE -- YOU WANT TO KEEP THINGS GOING IN TERMS OF THE PRIVATE SECTOR.

DALIO: I THINK THE MOST IMPORTANT THING IS THE WAYS TO CREATE OPPORTUNITY AND PRODUCTIVITY IN THAT GROUP.

KERNEN: YEAH, WE ALL WANT TO DO THAT.

DALIO: BECAUSE PRODUCTIVITY -- EVERYBODY NEEDS TO BE PRODUCTIVE.

KERNEN: IT'D BE BETTER TO DO THAT IN A GROWTH PERIOD, YOU'D HAVE MORE MONEY TO DO THAT WITH IF THE OVERALL ECONOMY IS GROWING.

DALIO: I THINK THIS IS THE TIME. I THINK -- IMAGINE IT: IF YOU HAVE A DOWNTURN, WHAT WILL IT BE LIKE? I MEAN, IT'S A BASIC PRINCIPLE. IF YOU HAVE A BIG DIFFERENCE IN WEALTH AND YOU SHARE A PIE, YOU DIVIDE THE BUDGET IN ONE WAY OR ANOTHER, AND YOU HAVE AN ECONOMIC DOWNTURN THAT PEOPLE ARE AT EACH OTHER'S THROATS.

KERNEN: BUT IF YOU'RE GROWING AT 3% FOR THREE OR FOUR YEARS, IF THAT WERE POSSIBLE WHICH IS 50% EVEN MORE FASTER THAN WE WERE GROWING PREVIOUSLY, THAT THROWS OFF MOREMONEY FOR EDUCATION AND FOR SOCIAL PROGRAMS TO GET AMELIORATE WHAT YOU'RE TALKING ABOUT, DOESN'T IT?

DALIO: CERTAINLY. CERTAINLY. BUT IT DOESN'T SOLVE THE PROBLEM.

KERNEN: IT DOESN'T SOLVE THE PROBLEM, BUT YOU'RE IN -- IF YOU CHOOSE ONE OR THE OTHER, YOU'D WANT GROWTH?

DALIO: I WANT GROWTH. THAT'S WHY I WOULD SAY THE RISKS ARE SO ASYMETRICAL --

KERNEN: MUCH HARDER TO SOLVE THE INCOME INEQUALITY PROBLEM WHEN YOU'RE NOT GROWING.

DALIO: I'M SORRY?

KERNEN: MUCH HARDER TO DEAL WITH THE INCOME INEQUALITY PROBLEM WHEN YOU'RE GROWING AT 1.7%.

DALIO: YES. AND THAT'S WHY I'M SAYING WHEN THE DOWNTURN COMES -- AND DO YOU DOUBT THE DOWNTURN WILL COME?

KERNEN: I DON'T WANT TO - I - WHEN YOU SAY IT'S INEVITABLE WE'LL HAVE ANOTHER DEBT CRISIS, IT MAKES ME SAD.

DALIO: WELL, I DIDN'T ASK WHETHER YOU WERE SAD. I ASKED WHETHER YOU'RE --

KERNEN: IT'S DISTURBING. I'M NOT SURE HOW YOU'RE -- IT'S LIKE YOU'RE SAYING HUMAN NATURE MANDATES IT HAPPENS. WE OVER --

DALIO: WE GET LATE IN A CYCLE, WE NEVER GET THE BALANCE EXACTLY RIGHT.

KERNEN: WE DO THE SAME THINGS OVER AND OVER AGAIN.

DALIO: THAT'S WHAT THE BOOK IS ABOUT. THE ONE THING -- THE REASON I WROTE THE BOOK IS NOT SO MUCH TO TALK ABOUT THIS ONE AND SO ON. IT'S TO SHOW THAT THEY ALL HAPPEN IN THE SAME WAY. THERE'S ALL A MECHANICS OF THE SAME WAY. THERE ARE SIX STAGES TO IT. WE WON'T HAVE TIME TO GO THROUGH THE SIX STAGES. BUT I'M SAYING THAT SAME THING HAPPENS. IN THE FIRST 60 PAGES OF IT, AND IT'S FREE. JUST READ THE FIRST 60 PAGES OF THAT BOOK AND YOU'LL SEE -

KERNEN: NOW, IS "TOO BIG TOO FAIL," THIS NEW ISSUE OF "TOO BIG TO FAIL," CAN I DOWNLOAD THAT FOR FREE? OR IS THAT --

SORKIN: YOU CAN DOWNLOAD IT ON KINDLE. YOU CAN BUY IT.

KERNEN: BUT IS IT LIKE RAY'S BOOK? IS IT FREE?

SORKIN: I MIGHT EVEN SIGN YOUR BOOK FOR FREE. I'LL SIGN YOUR BOOK FOR FREE. YOURS.

KERNEN: YOU'RE AVOIDING MY QUESTION. IS IT FREE LIKE RAY'S BOOK? OR DO I HAVE TO --

SORKIN: I'M A CAPITALIST. HE'S A PHILANTHROPIST.

DALIO: I'M SORRY.

SORKIN: LET ME -- RAY, HERE'S A POLICY QUESTION FOR YOU. ONE OF THE THINGS WE'VE ALL HEARD FROM HANK PAULSON, BEN BERNANKE, TIM GEITHNER, IS THEY WISH THEY COULD HAVE ARTICULATED THEIR POLICY RESPONSES BETTER. AND THAT THERE'S A VIEW THAT MAYBE IF THEY DID, SOMEHOW THE POPULISM THAT WE HAVE TODAY MIGHT BE DIFFERENT. DO YOU THINK THAT'S TRUE?

DALIO: NO. I THINK THE MAJORITY OF POPULATION IS NOT WATCHING YOUR TELEVISION SHOW OR -- AND UNDERSTANDS THE COMMUNICATION. I THINK THAT THEY UNDERSTAND THEIR EXPERIENCES. AND WHAT THOSE EXPERIENCES THAT PRODUCES ANGER.

SORKIN: BUT WHEN YOU LOOK AT THE POLICY RESPONSES, PEOPLE HAVE TALKED ABOUT WOULD WE BE BETTER OFF IF THERE WAS PRINCIPAL REDUCTION FOR HOMEOWNERS DIRECTLY. REMEMBER, A LOT OF THE RESENTMENT IN THE PUBLIC CAME IS THE FEELING THAT THE MONEY WAS GOING TO THE BANKS RATHER THAN DIRECTLY TO THE HOMEOWNERS IN TROUBLE. OR SOME OF THESE OTHER STEPS. YOU'VE LOOKED AT THESE DIFFERENT CRISES AND HOW PEOPLE SORT OF FEEL ABOUT THEM AFTERWARDS.

DALIO: I THINK THAT OVER AND OVER AGAIN, IT'S EMOTIONS AND IT'S NOT LOGIC. AND WHEN THERE'S THE POLARITY, SOMETIMES IT EVEN GETS, YOU KNOW, IT EVEN GETS VIOLENT. AND YOU KNOW, SO I THINK IT'S EMOTIONS.

SORKIN: WHEN YOU SAY VIOLENT, WE HAD A CONVERSATION. YOU TALKED ABOUT PEARL HARBOR.

DALIO: WELL, WHAT I WAS REFERRING TO IS THAT THE CONFLICTS THAT WE HAVE INTERNALLY BETWEEN THE LEFT AND THE RIGHT AND THOSE WHO HAVE AND THOSE WHO HAVE NOT, ALSO GET ELECTEDED POPULIST. AND THEN WE ALSO HAVE INTERNATIONAL TENSIONS. SO WHEN WE HAD THE SMOOT--HAWLEY TARIFF AND WHEN WE HAD JAPAN RISING AS A POWER, GERMANY RISING IN A POWER, IN MUCH THE SAME WAY AS WE HAVE CHINA RISING AS A POWER, WE HAD A SITUATION WHERE THERE WERE ECONOMIC RIVALRIES OUT IN ASIA. AND SO 1931 WAS WHEN THE JAPANESE INVADED MANCHURIA AND THAT THEY STARTED TO COMPETE WITH RESOURCES. AND THAT TOOK NINE YEARS. BUT 1941 WAS THE BOMBING OF PEARL HARBOR. I'M SAYING THAT YOU'RE IN A SITUATION WHERE ALSO WE HAVE RISING POWERS, CHINA IS A RISING POWER, COMPETING WITH THE UNITED STATES. AND THOSE TENSIONS GET CARRIED FORWARD THERE. AND THOSE ARE ECONOMIC TENSIONS OF PARAMOUNT IMPORTANCE. THOSE ECONOMIC TENSIONS PRODUCE CONFLICTS IN VARIOUS WAYS. AND THAT EVERYBODY SHOULD BE CAUTIOUS ABOUT THAT.

KERNEN: HOW DID THE STOCK MARKET DO IN '36 TO '39? NOT TOO GOOD.

DALIO: NOT TOO GOOD. FELL OVER 50%.

KERNEN: WHAT'S YOUR CURRENT COMMENTARY?

DALIO: I DON'T THINK IT HAS ANYTHING LIKE THAT. I THINK -

KERNEN: BUT IN GENERAL, HOW ARE YOU FEELING? ARE WE -- IS IT FAIRLY VALUED?

DALIO: RIGHT NOW - RIGHT NOW, WE HAVE JUST GOTTEN TO THE POINT IN MY JUDGMENT THAT IT'S MORE THAN THE RISK RETURN, IS MORE NEGATIVE.

QUICK: -- OUT OF THE MARKET? -

DALIO: WE USED TO HAVE A LOT OF - WE TALKED AT DAVOS.

KERNEN: AT DAVOS, I REMEMBER YOU SAID THAT. STAY IN. BUT YOU WEREN'T COMFORTABLE BUT YOU SAID STAY IN TO THIS THING.

DALIO: THERE WAS A LOT OF CASH ON THE SIDELINES. A LOT MORE OF THAT CASH HAS BEEN DEPLOYED. WE HAD HAD THE BENEFIT OF THE CORPORATE TAX CUTS BEHIND US. AND IF WE LOOK AT WHAT'S BEING DISCOUNTED, WHAT'S BEING DISCOUNTED IS ABOUT RIGHT. IN OTHER WORDS, IF YOU LOOK AT THE PROJECTED RETURNS OF EQUITIES RELATIVE TO CASH AND BONDS, THE PROJECTED RETURNS LOOK SORT OF ABOUT RIGHT. BUT YOU REMEMBER. BUT THE UPSIDE, THE UPSIDE IS LIMITED RELATIVE TO THE OTHERS.

QUICK: MEANING YOU WOULD PULL MONEY OUT OF THE MARKET? OR YOU JUST WOULDN'T DEPLOY THE CASH?

DALIO: RIGHT NOW WHATEVER IS MORE DEFENSIVE, I WOULD THEN BE IN A MORE DEFENSIVE POSTURE. WHATEVER YOUR STRATEGIC ASSET ALLOCATION ISSUE IS. YOU KNOW WHAT YOUR STRATEGIC MIX IS. I WOULD BE LESS AGGRESSIVE RATHER THAN MORE AGGRESSIVE.

KERNEN: HE REMEMBERS WHAT HE TOLD US IN DAVOS. BECAUSE I REMEMBER, AND YOU REMEMBER TOO. THAT'S GOOD. YOU DON'T GIVE THAT MANY INTERVIEWS, I THINK, SO YOU KNOW EXACTLY WHAT YOU SAID. BUT THAT IS ACCURATE. I WAS GOING TO MENTION THAT. YOU WEREN'T -- I WOULDN'T CALL YOU RAMPANTLY BULLISH BUT YOU SAID THIS IS GOOD, THAT THINGS WERE GOING TO GET BETTER. BUT YOU HAD CONCERNS EVEN THEN, BUT THE END OF THE CYCLE --

DALIO: WELL, I HAVE CONCERNS OVER A TWO-YEAR TIME HORIZON. IF I WAS TO TAKE NOW AND THINK OVER THE NEXT TWO YEARS, THAT'S WHERE MY CONCERNS ARE. I'M NOT EXCITED ABOUT -

KERNEN: COULD WE BE WHERE WE ARE - COULD WE CONSOLIDATE FOR TWO YEARS AND STAY HERE AT THESE LEVELS?

DALIO: I THINK MORE THAN LIKELY WE'LL BE IN THESE GENERAL VICINITIES FOR AWHILE.

KERNEN: OKAY.

DALIO: BUT AS TIME PROGRESSES, THE RISKS INCREASE.

KERNEN: OKAY.

SORKIN: WHAT DO YOU THINK THE FED SHOULD DO RIGHT NOW?

DALIO: I THINK THE FED SHOULD MAKE SURE IT DOESN'T RAISE RATES FASTER THAN IS DISCOUNTED IN THE CURVE. RIGHT? BECAUSE THERE'S AN INTEREST RATE CURVE THAT CALCULATES HOW FAST RATES ARE GOING TO RISE. THAT RATE CURVE IS PRICED INTO ALL ASSET CLASSES, INTO BONDS, STOCKS, EVERYTHING ELSE. AND SO THEY SHOULD MAKE SURE THEY'RE -- NOT QUITE AS FAST AS THE CURVE OR EQUAL TO THE CURVE. BECAUSE ASSET PRICES ARE VERY SENSITIVE.

KERNEN: I THINK THAT WAS SOMETHING YOU SAID AS WELL.

SORKIN: I WAS GOING THE ASK YOU ABOUT CHINA. I CONSIDER YOU SOMEWHAT OF A CHINA-FILE, SOMEONE WHO SPENDS A LOT OF TIME THERE AND KNOWS THE PEOPLE THERE. WHAT DO YOU THINK IS GOING ON IN THEIR ECONOMY? THERE SEEMS TO BE A LOT OF DEBATE AND DISCUSSION.

DALIO: YOU MEAN ABOUT WHAT ABOUT WHAT - ABOUT THE DEBT RESTRUCTURING, ABOUT THE THE TARIFFS? ABOUT WHAT?

SORKIN: ALL OF IT.

QUICK: TARIFFS AND TRADE.

DALIO: I THINK THAT THE ACTUAL SIZE OF THE TARIFFS AND TRADE ON THE CHINESE ECONOMY IS NOT THAT BIG A DEAL. AND THERE'S THE $500 BILLION THEY EXPORT. THERE'S THE SIZE OF THAT. THEY'VE GOT A GIANT ECONOMY AND THEY CAN HANDLE THOSE TYPES OF THINGS. SO I DON'T THINK IT'S THAT BIG OF A DEAL FOR THEM. I THINK THE BIG DEAL IS THE NATURE OF THE RELATIONSHIP IS. IS THIS GOING TO BE A RELATIONSHIP IN WHICH THERE IS SORT OF A GIVE AND TAKE OR IS THIS AN ANTAGONISTIC RELATIONSHIP? I THINK THAT'S MUCH - ALMOST A WARLIKE RELATIONSHIP. I DON'T THINK THEY LIKE THE TERM TRADE WAR AS THIS THING FROM TRADE NEGOTIATION OR DISPUTE.

SORKIN: BUT YOU THINK IT'S WARLIKE?

DALIO: I THINK THAT IT IS AN EXCHANGE OF PAINFUL ACTS AND AN INTIMIDATION KIND OF THING RATHER THAN A NEGOTIATION OF YOU KNOW, "WHAT DO YOU NEED, HOW CAN I HELP YOU, HOW CAN YOU HELP ME?" SO I THINK IT'S GOTTEN ON A FOOTING THAT I THINK IS DISCOMFORTING TO CHINESE OFFICIALS.

QUICK: BUT THERE ARE PEOPLE HERE WHO SAY IT'S GOTTEN UNCOMFORTABLE BECAUSE IN THIS RELATIONSHIP NEGOTIATION THAT WE'VE HAD TO THIS POINT, AMERICANS HAVE FAIRED LESS WELL. AT LEAST THAT'S THE PERCEPTION IN A LOT OF PLACES. DO YOU THINK THAT'S ACCURATE? AND IS THERE A WAY TO BE A TOUGHER NEGOTIATOR WITHOUT MAYBE RUFFLING THE FEATHERS QUITE AS MUCH?

DALIO: YEAH. I THINK TOUGH NEGOTIATIONS, NOBODY IS AGAINST TOUGH NEGOTIATIONS. EVERY COUNTRY UNDERSTANDS THAT IT NEEDS TO --

QUICK: IT'S THE RHETORIC.

DALIO: IT NEEDS TO DO WHAT'S BEST IN THE COUNTRY. BUT THE QUESTION IS, I THINK THE REAL ISSUE OF CHINA, A LEADER IN CHINA DESCRIBED IT AS FOLLOWS. HE SAID: IN THE UNITED STATES THAT UNIT THAT MATTERS THE MOST IS THE INDIVIDUAL. YOU'RE A COUNTRY OF INDIVIDUALISTS. YOU PROTECT INDIVIDUAL PROPERTY RIGHTS IN A CERTAIN WAY. AND IF YOU UNDERSTAND OUR MENTALITY, WE ARE A FAMILY. IN OTHER WORDS, THE WORD COUNTRY IN CHINA IN CHARACTERS IS STATE FAMILY. AND HE SAYS WHEN WE RUN THE COUNTRY, WE THINK ABOUT HOW YOU, A HEAD OF THE FAMILY, WOULD RUN THE FAMILY. SO IT'S MUCH MORE FROM THE TOP DOWN. IT'S VERY MUCH MORE HIERARCHICAL. SO THE NOTION OF CHINA INC., IN OTHER WORDS, OF COURSE THERE'S ALMOST A PYRAMID. AND THEY THINK AT THE HEAD OF THE FAMILY, AT THE HEAD OF THE GOVERNMENT, THEY THINK WHAT IS BEST FOR CHINA AND MY CHINESE COMPANIES. SO THAT APPROACH, VERY MUCH DIFFERENT FROM OUR APPROACH WHICH IS THIS BOTTOM UP, AND IT REDEFINES SO MANY THINGS -- HOW WE HANDLE DATA, HOW WE HANDLE EACH OTHER, AND SO ON, THAT'S A VERY STRUCTURAL IMPORTANT DIFFERENCE. IT WORKS FOR THEM. AND SO THEIR NOTION, WILL YOU HAVE THE STATE-OWNED ENTERPRISES BEING HELPED BY THE GOVERNMENT AND HOW WILL YOU COMPETE IN THAT?

KERNEN: WHAT STAGE ARE THEY IN IN TERMS OF THE SIX STAGES?

DALIO: THE MOST IMPORTANT THING ABOUT DEBT IS WHETHER THE DEBT'S DENOMINATED IN YOUR CURRENCY OR A FOREIGN CURRENCY. IF IT'S IN YOUR CURRENCY, YOU CAN MANAGE IT JUST LIKE WE MANAGED IT. YOU SPREAD IT OUT AND YOU MOVE IT AROUND AND MONETIZE SOME OF IT. IN THEIR CASE, IT'S DENOMINATED IN THEIR CURRENCY, MOST OF THEIR CURRENCIES. SO THEY'RE GOING TO BE ABLE TO MANAGE THAT, I THINK, WELL. AND THEIR CORPORATE DEBT LEVELS ARE HIGH. THEY'RE GOING THROUGH THE RESTRUCTURING. BUT GENERALLY SPEAKING THEIR DEBT LEVELS ARE NOT AS HIGH AS OTHERS. AND ONE OF THE GREAT THINGS IS THEY'RE DOING IT BEFORE A CRISIS. WE DO IT IN A VERY REACTIVE WAY. AND IN THEIR PARTICULAR CASE, THEY KNOW THAT THEY'VE GOT A DEBT SITUATION AND THEY'RE IN THE PROCESS OF MANAGING IT. I THINK THAT THEY'LL MANAGE IT JUST FINE. I THINK THEY'LL MANAGE THEIR ECONOMY JUST FINE. I DON'T THINK WE'RE GOING TO HAVE ANY BIG -- THERE'LL BE BUMPS ALONG THE WAY, THEIR RECESSIONS, SLOWER GROWTH, A BIT OF THAT. BUT I THINK CHINA WILL BE -- I THINK THE BIG ISSUE ARE OUR RELATIONSHIP WITH CHINA OVER A PERIOD OF TIME. I HOPE IT DOESN'T FOLLOW A PATH THAT IS VERY SIMILAR TO THE U.S./JAPANESE PATH WHERE THE ECONOMIC TENSIONS, THE COMPETING FOR TRADE ROUTES, THE COMPETING FOR INFLUENCE IN DIFFERENT COUNTRIES AND ALL THAT LEADS TO AN ANTAGONISM, LEADS TO EMBARGOES.

SORKIN: TWO FINAL QUICK QUESTIONS. ONE ON POLICY WHICH IS $21 TRILLION IN DEBT IN OUR COUNTRY. DO YOU THINK THAT WE CAN ULTIMATELY MANAGE THAT? THAT'S ONE -- PEOPLE TALK ABOUT "TOO BIG TO FAIL." THAT WAS IN THE CONCEPT OF BANKS. NOW PEOPLE TALK ABOUT IT IN THE CONTEXT OF THE COUNTRY, MUNICIPALITIES OR CITIES.

DALIO: I THINK THAT THAT'S EXACTLY RIGHT. IF YOU -- WHILE WE DON'T HAVE AN IMMEDIATE DEBT ROLLOVER LIKE IN THE NEXT YEAR OR TWO, WE HAVE A GIANT SQUEEZE HAPPENING. IT'S NOT ONLY BECAUSE OF THE DEBTS. BUT EVEN MORE IMPORTANT, THE UNFUNDED PENSION LIABILITIES, THEY -- AND THE HEALTH CARE COSTS AND SO WE HAVE A SQUEEZE THAT'S EMERGING. WE WILL IN TWO YEARS HAVE THE FISCAL STIMULATION THAT WE HAVE PASSED. AND WE ARE GOING TO BE SELLING BONDS -- A LOT MORE BONDS TO THE REST OF THE WORLD. WE ARE A RESERVE CURRENCY, AND BECAUSE WE'RE RESERVE CURRENCY, WE'RE IN THE VERY PRIVILEGED POSITION OF HAVING OTHER COUNTRIES WANT TO SAVE OUR CURRENCY AND BUY OUR BONDS. BUT THAT IS GOING TO BE RISKED BY THE QUANTITY OF DEBT THAT WE'RE --

SORKIN: FINAL QUESTION. GIVEN THAT YOU'VE SEEN HOW POLICY MAKERS HAVE RESPONDED TO CRISES, HOW WOULD YOU GRADE HANK PAULSON, TIM GEITHNER, AND BEN BERNANKE. I'M GOING TO SEE THEM TOMORROW AT THE BROOKINGS INSTITUTE. WHEN YOU LOOK AT THE -- GIVEN THE POPULISM AND ALL THE ISSUES YOU'VE RAISED ABOUT WHERE WE ARE TODAY.

DALIO: "A" OR A-PLUS. I'D GIVE THEM "A" OR A-PLUS. I MEAN, I REALLY DO THINK ONE COULD THEORETICALLY SAY YOU COULD HAVE ANTICIPATED. WE WERE ABLE TO ANTICIPATE IT BY DOING THESE PRO FORMA FINANCIAL NUMBERS AND SO ON. BUT ACTUALLY, WHO DID? RAISE YOUR HAND IF YOU DID. HARDLY ANYBODY DID. SO ONCE THAT POINT HAPPENED AND THEY WERE OPERATING IN THAT POLITICAL ENVIRONMENT, THE ACTIONS THAT THEY TOOK, THE SPEED AT WHICH THEY DEALT WITH, ALL OF THAT LED TO THE RESULTS THAT WE NOW HAVE. SO, YEAH, I THINK THEY DID A GREAT JOB.

KERNEN: RAY, IS THERE ANY INCOME INEQUALITY PROBLEM IN CHINA THAT YOU SEE?

DALIO: YEAH.

KERNEN: WHAT'S THE BOTTOM 60%-- IS OUR BOTTOM 60% BETTER OFF THAN THEIR BOTTOM 60%?

DALIO: THEIR INCOME PROBLEM, INCOME GAP PROBLEM IS VERY SIMILAR TO OURS, IT'S ESSENTIALLY ALMOST THE SAME AS OURS. AND IT'S AN ISSUE. IT'S PART OF THE DEVELOPMENT OF THE WESTERN PROVINCES AND THOSE TYPES OF THINGS. BUT ON THE OTHER HAND, THEY DON'T HAVE THE SAME SORT OF POLITICAL AND SOCIAL PROBLEMS OF DEALING WITH IT. YOU KNOW.

KERNEN: THEY MIGHT DEAL WITH IT DIFFERENT THERE.

DALIO: THEY DEAL WITH A LITTLE DIFFERENTLY.

SORKIN: RAY DALIO, THE LEGENDARY LEADER OF BRIDGEWATER, AUTHOR OF THE NEW BOOK - YOU CAN GO OUT AND DOWNLOAD IT RIGHT THIS MINUTE, "A TEMPLATE FOR UNDERSTANDING BIG DEBT CRISIS." WE THANK YOU FOR JOINING US THIS MORNING.

DALIO: THANK YOU.

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