Ray Dalio explains monetary inflation, higher prices caused by currency creation.
Ray Dalio believes the current financial turmoil in the bond market is due to a disequilibrium of supply and demand for treasury bonds.
“When the supply offered is more than the demand then there is monetary policy 2 MP2.
Quantitative easing is the printing of money and purchasing those bonds,” he said.
He noted that QE makes the owners of bonds and other assets bullish because asset prices appreciate, making holders of assets more wealthy.
But he noted that the trickle-down wealth effect of MP2 doesn’t work, and the wealth gap widens.
“When the supply offered is more than the demand then there is monetary policy 2 MP2. Quantitative easing is the printing of money and purchasing those bonds”
RAY DALIO
Ray Dalio explains monetary inflation at the MP3 stage
Monetary Policy 3 MP3 is the coordination between fiscal and monetary policy. He noted that central banks can tax and spend, but they can’t create money, which central banks can do.
“The sending out the checks, the federal bank borrows money, and the central bank prints money, and then we have an inflationary cycle, which is the nature of dynamics we are experiencing,” he said.
The destruction of debts is how Ray Dalio explains monetary inflation
He notes the limitations of debt where one man’s debt is another asset, and central banks buy the imbalance.
“The problem is the existing budget deficits, and the monetization works in the last part of the cycle,” said Ray Dalio.
“The sending out the checks, the federal bank borrows money, and the central bank prints money, and then we have an inflationary cycle, which is the nature of dynamics we are experiencing”
RAY DALIO
“Debt service payments start to squeeze out consumption, which becomes a higher percentage of income.
Interest rates go up, and debt service payments become greater, and as those debt service payments become greater, that squeezes out consumption, and it becomes a self-reinforcing problem,” he said.
“Owners of the debt see this, and there is an imbalance. Banks come in and print, or they have losses. Bondholders sell, and central banks themselves get into financial difficulty.
Because of those losses, they print more and more.
“Debt is money and, will those debts be paid with real money, hard money, or currency-creation depreciated money?” – Ray Dalio
You see this in many cases in emerging countries and during 71 breakdowns of the system,” he added. That becomes the dynamic when you can’t create a lot of debt.
The Bank of Japan BOJ bought enormous amounts of bonds. If interest rates go up, there will be a problem for BOJ.
“So you end up with yield suppression, with the central bank absorbing the toxic bonds, the creation of currency, and monetary inflation, which causes private bond investors to flee,” he said.
Ray Dalio’s takeaway is that whatever central bank policy, whether easing or tightening the debt is toxic and central bank policy won’t change that.
Ray Dalio explains monetary inflation, paying debts with currency creation
“Debt is money and, will those debts be paid with real money, hard money, or currency-creation depreciated money?
In the end, they all devalue, or the currency dies, but it creates monetary inflation,” he said.
He thinks debt assets are worse than equities when they start creating currency,
He thinks real estate is a problem because it is easily taxed, and it is not a transportable asset. The government could also confiscate investor’s gold or force them to sell below market rate.
