Ray Dalio Says the World Has Gone Mad and the System Is Broken
Just what bad is still anyone’s guess.
Dalio is known as a someone who thinks outside of the box. Take the firm he founded: Westport, Conn.–based Bridgewater Associates. The firm practices “radical truth and radical transparency,” requiring employees to be open to criticism as well as able to air their own, differing views. His YouTube video “How The Economic Machine Works” has been viewed more than 10 million times.
“Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give,” wrote Dalio in a Tuesday blog post on Microsoft’s (ticker: MSFT) LinkedIn.
It’s a reference to the current situation where interest rates are negative in many places around the globe. It’s an unprecedented phenomenon, where investors are willing to lose money on a bond bought instead of just putting the cash under the mattress. (If only there was a mattress large enough for the trillions people want to store.)
Zero interest rates are creating a “pushing on a string” dynamic, according to Dalio. Each attempt by global economic authorities to stimulate a moribund economy requires more and more money to less and less effect. “As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish.”
Every asset class is affected by excessive credit creation: stocks, bonds, and even venture capital, he says. “There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough,” wrote Dalio.
Now comes the rub.
Government deficits are huge, and growing. As deficits grow, the specter of higher interest rates looms. As governments seek to attract buyers for the mountains of debt needed to refinance their liabilities in coming years, Dalio sees upward pressure on interest rates.
But higher rates “would be devastating for markets and economics because the world is so leveraged long.” That is a fancy way of saying there is a lot of debt in the system. Higher rates means interest costs to finance debt go up, pressuring consumer budgets as well as governments. When government budgets get squeezed, it means public services could get cut.
Of course, global authorities aren’t going to give up and concede they were wrong. Dalio sees more central-bank bond buying and money printing. “This will exacerbate the wealth gap battle,” wrote Dalio. “The trickle-down process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken.”
It’s a dour assessment of the state of affairs. Dalio believes the situation is unsustainable and a “paradigm shift” is coming. The problem is that he doesn’t go on to describe the coming paradigm.
Maybe how to solve all the problems of a heavily indebted, interconnected global economy will be the subject of coming missives.