Ray Dalio latest insight into these challenging times was revealed in a recent interview.
“Three things that surprise us that have not happened in our lifetime but happened many times throughout history are the creation of enormous amounts of debt and debt monetisation; second is internal conflict, large wealth gaps that make internal conflict, politics of populism, and then there is great power politics and the possibilities of war,” he said.
“Three things that surprise us that have not happened in our lifetime but happened many times throughout history are the creation of enormous amounts of debt and debt monetisation; second is internal conflict, large wealth gaps that make internal conflict, politics of populism, and then there is great power politics and the possibilities of war”
RAY DALIO
The debt cycle and where we are; Ray Dalio latest insight
“There are short debt cycles, lasting on average seven years, give or take about three. You have a recession, interest rates are low, and the Fed becomes stimulative, and then you have non-inflationary growth,” added Ray Dalio. Inflationary growth follows with tightening monetary policy, then you have the slowdown recession, and the cycle repeats itself, noted Ray Dalio.
“We have had twelve of those. We are in the thirteenth half through that cycle, the point where interest rates have to rise,” he said.
Ray Dalio gives his latest insight into a looming credit crisis triggered by supply-demand risk
“You have to satisfy a debtor and creditor, and that means that interest rates have to be high enough that the creditor gets a real return for their capital,” he said.
“So if you don’t do that, you create the cycle that we had before where money is essential to free interest rates are nil, or in some cases, negative, and you are in a situation where you do not have to pay principle.
“You have to satisfy a debtor and creditor, and that means that interest rates have to be high enough that the creditor gets a real return for their capital”
RAY DALIO
Supply-demand imbalance is enormous because there is not enough demand to buy those bonds, so the Fed goes in there and buys those bonds and redistributes wealth,” he said.
“To create this transfer of wealth, the government borrows a lot of money and sells lots of bonds,” he added.
Winners and losers of credit crisis; Ray Dalio gives his latest insight
“The Fed buys those bonds, and the big losers of this cycle have not been the individual balance sheet which has improved. Those holding government debt are the losers,” he said.
So central banks have all lost a lot of money, and commercial banks bought these debts. If we look at the commercial bank debt problem, it was primarily a government debt problem, government long-term bonds with short-term interest rates, so that was the squeeze,” said Ray Dalio.
“The higher you raise the debt, the higher the interest rate has to be so we have a trade-off where interest rates have to be high enough for the creditor but not too high for the debtor,” he said.
Inflation comes in two parts: if you spend a lot more than you earn and give a lot away, you have inflation.
It also comes from supply and demand for bonds. So, we have supported high inflation, and interest rates have to remain high, which creates a stagflation-type environment.
“We are at the beginning of a classic debt crisis when you produce too much debt. It’s a supply-demand imbalance where there is a shortage of buyers” – Ray Dalio
Ray Dalio gives his latest insight debt crisis
“We are going to spend more than we earn, with more bonds sold, there is a supply-demand risk, and we live in a different world as supply chains change.
The only big question is technology and what impact that will have on productivity. Demographics are not favourable, because we will draw down on savings,” he said.
“We are at the beginning of a classic debt crisis when you produce too much debt. It’s a supply-demand imbalance where there is a shortage of buyers.
Global investors have lost money in treasury bonds, and geopolitical changes are all headwinds on demand for these bonds,” he added.
So the Empire of debt sacrifices its colonies in Europe, cuts off the engine of Europe, Germany from plentiful sources of Russian energy, and promotes a policy aiding and abetting war in the east of the continent.
It is a classic debt cycle with a beggar thy neighbour policy pursued as the solution. A broken Europe makes the US attractive to global investors. The study of Ants and superpowers share similarities in that the Queen Ant will sacrifice its soldier ant colonies to remain on the throne. Reading between the lines the US dollar needs to outperform all other currencies to attract global capital. If your local currency collapses, a US dollar-denominated asset with dollar yields is still attractive.
“If you don’t worry now, you will need to worry” – Ray Dalio
In Argentina, inflation is running at 100%. Demand for USD is so hot there is a black market for dollars. Those fortunate enough to have savings pay above 10% spot rate on USD. The same happened in Europe in 2013 during the sovereign debt crisis in Greece.
The lyrics of Bob Marley, “So Much Trouble In The World,” and a sweet dollar, come to mind.
So US foreign policy promoting geopolitical woes keeps the Empire of debt on the throne.
But as well as destabilising markets, this is a potential global existential threat. The Empire of Debt has 90% of the world’s foreign military bases and an arsenal of nukes capable of destroying the world more times over than it is meaningless to count. US nuclear modernization programme could reach 2T dollars.
Ray Dalio gives his latest insight
Ray Dalio is not optimistic and who is today. He thinks the economy could worsen, and he sees tensions escalating, supply issues, particularly strategic industries, chips, and rare earth metals. Semiconductor chips are the new oil.
Out of the crisis, he sees the building of self-sufficiency, which will be a headwind on economic growth and inflation.
“If you don’t worry now, you will need to worry,” said Ray Dalio.
Climate crisis; Ray Dalio gives his latest insight
He noted that acts of nature toppled more civilisations over the centuries than any other events.
Ray Dalio thinks the climate crisis is not an easy or inexpensive problem to solve and sees other domestic social problems overriding the climate crisis.
He hopes to see a bipartisan middle in the US to navigate these challenging times.
