Ray Dalio discusses future challenges in his latest LinkedIn video.
Ray Dalio, founded Bridgewater Associates in 1975 out of his apartment. Today Bridgewater Associates is one of the world’s largest hedge funds with $160 billion in assets under management.
Ray Dalio discusses future challenges concerning the economy and finance, which he believes is better understood through revisiting history
Ray Dalio notes that there are debt cycles, money, credit, and real economic activity.
“Cycle began in 1945, we began a new monetary system, US dollar became the world’s reserve currency at the end of WWII” he said. That was also was the beginning of the debt cycle, according to Ray Dalio.
“Spending power comes from money and credit” said Ray Dalio.
“Spending power comes from money and credit”
Ray Dalio discusses future challenges in terms of the debt cycle and the evolution of monetary policy
“That cycle allowed more stimulation but we accumulated more debt” he said.
But the ability for central banks to stimulate the economy, through monetary policy 1, which entails lowering interest rates, diminishes as the base rates near zero percent.
“Central banks then print more money and buy financial assets which they did in 2008 the way they did in 1933,” said Ray Dalio.
So monetary policy 2, where the central bank attempts to stimulate the economy by creating currency and buying financial assets, known as quantitative easing QE is where we are at today.
“Central banks then print more money and buy financial assets, which they did in 2008 the way they did in 1933” he said.
Then Ray Dalio discusses future challenges of late monetary policy in the context of a global pandemic
“Economy picks up, we have more money, debt then you have a downturn, this downturn came because of a virus” said Ray Dalio.
Ray Dalio notes that in this current economic downturn the central bank has limited capacity to stimulate the economy.
“Economy picks up, we have more money, debt then you have a downturn, this downturn came because of a virus”
Ray Dalio discusses future challenges of the post-pandemic economy by using an analogy of a tsunami crashing on the shore and leaving a trail of destruction
Even if the pandemic were to disappear today the economic-financial damage has already been done, according to Ray Dalio.
“What we are experience now is a fall in income, a lot of debt, a lot of countries and companies don’t have an adequate amount of savings, so that is where the financial crisis comes from,” he said
“Think of the virus like a tsunami that recedes but then leaves financial damage” he added.
“All the printing of money is to fill in the holes, so it is unlikely to cause inflation, it would reduce deflation” – Ray Dalio
Ray Dalio discusses future challenges in terms of central banks’ attempts to rebalance this loss of household income and soaring corporate debts which is wreaking havoc on corporate balance sheets
“So what we see now is holes in income and balance sheets” said Ray Dalio.
“So you are seeing the Fed trying to fill those holes with an unprecedented amount of debt borrowing money, then it gives that money out to fill those holes,” said Ray Dalio
It is almost identical to the 1930s during President Roosevelt’s great depression recovery plan.
Ray Dalio discusses future challenges where debt levels explode but the billionaire investor believes that inflation is not going to be a problem
“All the printing of money is to fill in the holes, so it is unlikely to cause inflation, it would reduce deflation” he said. But emerging economies, where the currency is not in demand for savings or international trade could experience inflation if they decide to print their currency to service their dollar-denominated debt.
Ray Dalio discusses future challenges in terms of emerging economies which he believes will experience monetary inflation
Emerging economies will experience “monetary inflation even while the world has a shortage of demand” said Ray Dalio. “It is going to be difficult for those countries, they can print currency but their currencies don’t have much demand for savings and international trade” he said.
“There are 60 trillion dollars of debt owned by non-Americans, as a result of that they need dollars
It is going to be much more difficult for them to get dollars to pay those debts,” he said.
A lot of those countries are going to have to drawdown on their savings, sell assets, or create more local currency to buy dollars to service the dollar debts, noted Ray Dalio.
“A lot of world will not be protected, the primary protection mechanism is the IMF, they have a trillion dollars in assets they are arguing how much they should chip in supporting G20 countries,” he said.
“There will be a lot more arguing how the wealth pie should be divided” – Ray Dalio
So how much losses will the pandemic depression cause to the world’s largest economy, the US, and the global economy?
“We estimate the loss in the US is about 5 trillion dollars and the losses in the world is a bit over 20 trillion dollars,” said Ray Dalio.
Ray Dalio discusses future challenges in terms of wealth inequality and social cohesion
Gapping wealth gaps will cause political problems warns Ray Dalio. “There will be a lot more arguing how the wealth pie should be divided” he said.
“During economic downturns, there is a redistribution of wealth, it almost always happens,” said Ray Dalio. “Equal education equal opportunity isn’t achievable through a profit-making system that is what concerns me and now we have greater reason to be concerned” he added.
Ray Dalio then refers to his linked in the piece how capitalism needs to be reformed. “I think it needs to be reformed behind the American dream, something like an equal opportunity,” he said.
Ray Dalio discusses future challenges in terms of UBI
He is skeptical about giving money away for nothing without an increase in productivity. “We can only consume what we produce,” he said.
Finishing on an upbeat note Ray Dalio said, “we are now in a wonderful revolution in terms of our capacity to think and use that, ones ability to interact digitally and help that kind of thinking either as an effective user of it or effective builder of it, there are all sorts of skills of varying dimensions we are a supporter of trades and trade skills.”
“Understanding your thinking skills or using digital support mechanisms I think will be the most value, “ he said. “We have enough resources and creativity to make it go fine, but it is all going to depend on how we are with each other,” he added.