Ray Dalio lays out his thesis on the creation of debt, the wealth gap, and the rise of China’s challenging US hegemony.
“Debt creates buying power it is a short-term stimulant but a long-term depressant” noted Ray Dalio.
Ray Dalio lays out his thesis with one aspect being the imbalance of supply and demand for debt assets, such as sovereign bonds.
“Debt creates buying power it is a short-term stimulant but a long-term depressant”
“When the pile of those assets gets very big and you have less of an incentive holding those assets, then you have a problem” explained Ray Dalio.
“Money is credit you can make it up. So, government creates a lot of credit and central bank prints a lot, there is not a lot of incentive to hold this money,” said Ray Dalio.
“Think about cash as trash you hold cash you get no interest rates but there is an inflation rate of 2% a year. Think about bonds there isn’t much incentive there. So now we have a supply-demand problem because if you look at budgets and look ahead, we know you are going to need a lot more money, debt” explained Ray Dalio.
Ray Dalio lays out his thesis where he sees monetary inflation playing out due to this imbalance between supply and demand for debt
Ray Dalio recommends watching capital outflows in the bond market to figure out where other asset classes are heading.
“You have got to follow the money” said Ray Dalio.
So, Ray Dalio sees 1971 types of inflation driven by currency debasement.
“Cash is trash, meaning it will have a negative real return” said Ray Dalio.
“Cash is trash, meaning it will have a negative real return”
Ray Dalio noted that you can already see house inflation then labor inflation.
But here is the caveat to those betting on inflation. Ray Dalio acknowledges that we are in a digital society, which means capacity can be produced without supply constraints. So, the booming digital ecosystem is being built sustainably in that it requires human knowledge which can be sourced globally keeping wages down. Moreover, building the global digital ecosystem requires a fraction of natural resources compared to the industrial revolution.
“The greatest power the government has is the control of its currency and where the money flows” – Ray Dalio
Ray Dalio lays out his thesis to unravel where to invest wealth in this new paradigm
Dollar hegemony is a great privilege noted Ray Dalio.
“Global investors hold about 23trillion of dollar-denominated debt. But there is a supply-demand problem if you have a deficit you are going to have to sell bonds so the holding of those bonds has got to increase. So, investors are having to grabble with negative real yields and greater supply,” said Ray Dalio. “Then there is China, a more effective competitor for capital. In 2015 only 2% of the Chinese market was open to foreigners now it is over 60%” he added.
“The greatest power the government has is the control of its currency and where the money flows” noted Ray Dalio.
Ray Dalio lays out his thesis recommending the diversification of alternative currencies
“Bitcoin or gold why does it have to be one or the other?” he asked. “Best one for an individual is not necessarily best one for the government” he added.
All currencies eventually devalue and die. Currencies have imputed value based on belief value systems which evolve with time as societies progress from one system to the next. So, Ray Dalio recommends diversification. “I have some Bitcoin” said Ray Dalio.
But Ray Dalio also believes that Bitcoin’s greatest risk is its success. As it becomes a bigger deal and more of a threat, for example if investors want to sell bonds and buy Bitcoin in a bigger way he noted.
“The total value of Bitcoin is a little over 1 T USD total value of us bonds are about 23T USD, gold is about 5 T USD” he said.
So, what do the next five years look like through Ray Dalio’s optics?
“Whoever wins the technology race wins it all economically and militarily” he said.