Large wealth gaps. Large value gaps. A lot of debt. An economic downturn.
This is what Ray Dalio believes is on the economic horizon unless the situation takes a turn for the better.
Hello everyone, and welcome back to investing with Antoaneta. Recently I came across a very interesting interview with Ray Dalio, and, in today’s blog, we’re going to take a look at what he said together.
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So, Ray Dalio, founder of Bridgewater, believes that they are in for some rough times unless “the economy recovers to a place where it is good for most people”. And, if I have to be honest, it’s difficult to disagree with the notion, especially if you look at it from his point of view.
But what is Bridgewater? Oh, just the largest hedge fund in the world, valued at over 150 billion dollars in the assets that it trades with. So, I believe it’s safe to assume that the founder of such an establishment has a decent idea of what he’s talking about.
You see, Ray Dalio has a thing for history and patterns in history. He spends a great deal of time studying historical financial data and market patterns.
And when someone with his background says the four sentences that I quoted at the bottom of this blog, then there’s probably a good reason for it.
How Is the Economy Doing?
With this, Ray Dalio doesn’t mean value in financial terms, but human values and principles. The divide between people, he warns, is growing deeper. People are starting to look at everything in terms of “us” and “them”, or even worse – “us” against “them”. Political ideologies, ideals, life and life philosophies, and … just about everything else. This creates a ton of tension and is very harmful to the economy.
The wealth gap in the world today is wider than it’s ever been. The health crisis and the lockdowns also contributed to the problem. A lot of small and medium-sized businesses were hurt really badly by the lockdown, and countless people lost their jobs.
Things are looking pretty grim for everyone but the richest people. The top ten wealthiest billionaires managed to actually gain a combined total of over 540 billion dollars.
As you can imagine, this places an even greater strain on the already tense economic climate. Or, as Ray Dalio puts it, it makes the entire system shaky.
And when I say debt, I don’t just mean individual debt. I’m talking about debt on a national level across the board.
US national debt, for example, is over 25 trillion dollars. And, yes, this is much higher than their GDP. They’re so deep on debt that even if they took every single penny that was generated during 2020 on trying to pay it off, it still wouldn’t be enough.
Dalio is worried that the situation we’re looking at could potentially be worse than what the economy went through back in 2008.
We’ve got the Fed (federal reserve) printing a ton of money that just gets pushed into the economy in an unnatural way, and it’s only making matters worse in the long run. Of course, they are doing what they’re doing because it allows them to patch up things in the short term, but the economy can’t keep going on with band-aid solutions. They need to start thinking about the long term, or the world might find itself in the middle of a huge crisis.
- The US has massive debt that it needs to cover
- The people who lost their jobs need to be provided with financial aid
- Business need to be provided with loans
The worst part is that the Fed can’t stop doing any of these things, or the situation will get even worse.
They need more money, but the economy can’t provide them. The solution?
Print more money, inject them into the economy, and hope that things get better before they get worse.
A band-aid solution, and a flimsy one at best.
Ray Dalio warns that this is not the “natural” or intended way to finance things. The money is meant to come from producing more and selling more. That is what taxes are for.
One of the ways in which the government introduces new money into the economy is by using bonds. They are supposed to allow individuals and institutions to buy stuff. However, there is another problem here. Ray Dalio points out that there are more bonds and other assets that can be sold than there is money to actually cover them.
Or, in his own words:
“These claims on those bonds are far greater than what would be allowed to happen”.
This is not a recent thing, he says. “You can go back thousands of years and see the same pattern.” Of course, this doesn’t make it a good pattern. It’s a very bad and very dangerous pattern – both for the economy and for the dollar itself.
And, yes, I know that most people are 100% convinced that the dollar is going to remain “the” currency, but there are no real guarantees for that, especially with the current economic situation in mind.
As a matter of fact, the US dollar is severely weakened in comparison to the Pound, the Australian dollar, and the Chinese Yuan. The facts show that the flat is rapidly losing its positions (in no small part thanks to the Fed’s printing around the health crisis). If something doesn’t change soon, we could actually see the US losing its reserve currency status in the near future.
Ray Dalio warns that the current situation reminds him of what was happening during the 1930s.
- The financial dynamic is the same.
- The polarisation is the same (wealth, values, politics)
- There is a great power on the rise (China)
And, yeah, in case you missed the memo, China is an economic powerhouse. Their economy is growing almost three times as fast as that of the US (6-7% Vs 2-2.5%), they’ve got a much larger population (about 4 times larger than that of the US), and, to top it all off, they’ve also got a lot less debt to worry about (4 times smaller debt and 2 times smaller governmental debt).
Some economists have also come out and said that they expect China’s economy to overtake that of the US by 2028.
In closing, I just want to point out that I didn’t make this blog to bring you down or make you worried. My goal here is to help people stay in the loop and on top of things. I also believe that all of this is really interesting and can definitely serve as a practical example of why we can’t afford to ignore the importance of history.
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Thank you all for reading and until next time.
Recommended for further reading:
- Stock Market Investing For Beginners: The Investment Guide
- Think and Grow Rich
- The Wealthy Barber
- Learn how to make more money and transform your life
- The Barefoot Investor: The Only Money Guide You’ll Ever Need