Ray Dalio, founder and co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, thinks it’s likely the euro will survive; however, he does predict a “10 to 15 year managed depression” in Southern Europe. In a worst case scenario, he painted a much darker picture.
“When people get at each other’s throat, the rich and the poor and the left and the right and so on, and you have a basic breakdown, that becomes very threatening,” Dalio told CNBC in an exclusive interview on “Squawk Box.” “For example, Hitler came to power in 1933, which was the depth of the Great Depression, because of the social tension between the factions. So I think it very much is dependent on how the people work this through together and worry about the social elements.”
Still, he said the most likely situation is a prolonged delveraging process.
“I think there will be a combination of monetary policy and printing a certain amount of money to relieve it,” he said. “And at the same time, there’ll be a deleveraging and restructuring of debt … I think we’re going to see both because you have to lower the debt-to-income ratio so you have a higher level of growth than you do of interest rates. And at the same time, there’ll be a deleveraging and restructuring of debt … I think we’re going to see both because you have to lower the debt-to-income ratio so you have a higher level of growth than you do of interest rates."
That process worries him, Dalio said.
“I worry about another leg down in the economies causing social disruption because deleveragings can be very painful — it depends on how they’re managed,” he said. (Read More: Gold Should Be Owned by Everyone: Dalio.)
On the other side of the ocean, policymakers may not get the right mix between fiscal and monetary policy and lead to an economic downturn, Dalio said.
"I worry about it because it is a significant possiblity," he said.
He gives the U.S. a grade of A- on his internal global competitiveness index, he told CNBC in a rare sit-down interview.
“We actually run an index. We calculate things like cost per man-hour, labor flexibility, social benefits, corruption, and then we add them together and we come up with the competitiveness index,” he said. “We're a lot more efficient than Europe; we're a lot more efficient than Japan. We're a lot more efficient than most places in the world, if you take most emerging countries.”
On the other hand, Dalio says countries like China, India, Korea, and Singapore outrank the U.S. on the competitiveness front.
“Competitiveness is really what it costs you per man-hour to get you what you want,” he said. “In other words, there’s an education level that plays into the mix and so if it’s inexpensive to buy an hour of real good education in places like China versus the U.S., that factors in.”
Dalio’s Bridgewater Associates currently has $130 billion in assets under management and counts the World Bank and foreign governments, as well as central banks, among its long-time clients.
For good measure, too. Bridgewater’s flagship $75 billion Pure Alpha fund was up over 25 percent in 2011, and 45 percent in 2010 and has delivered $50 billion to its investors since inception in 1975, according to investors.
This year, the Pure Alpha fund is up 3.1 percent year-to-date, while the $55 billion All Weather portfolio is returning 12.2 percent year-to-date. The Dow Jones Industrial Average has returned about 11 percent year-to-date.
—By CNBC’s Maneet Ahuja; Additional Reporting by Andrew Ross Sorkin