Submitted by Taps Coogan on the 12th of September 2018 to The Sounding Line.
Ray Dalio, founder of Bridgewater Associates, recently gave a rare and wide ranging interview to CNBC to discuss his new book ‘A Template for Understanding Big Debt Crises’ (it can be downloaded for free here), and to share his outlook for the economy. Mr. Dalio argues that the best historical analogue for the current economic environment is the 1930s.
“Generally speaking, we are in… the seventh inning of this cycle. I think we are at the stage in the cycle where interest rates are being raised. We’re in the later stage. Maybe we have… two more years… into the cycle and then the issues of this debt crisis are very different than the issues of the last debt crisis. Each one is a little bit unique. This one looks very much more like the 1935 to… 1940 period. 1929 to ’32 and 2008 to 2009 we had a debt crisis and interest rates hit zero. In both of those cases interest rates hit zero, the only two times in the century. There is only one thing to do next and that is to print money and buy financial assets. So in both of those cases that’s what the central bank did and they pushed asset prices up. As a result we had an expansion, we had markets rising, and we particularly had an increase in the wealth gap because if you’d owned financial assets, you got richer and if you didn’t you didn’t. And so today we’ve got a wealth gap that’s the largest since that period (the 1930s)… As a result, we have populism. Populism is the disenchanted, capitalism not working for the majority of people… So we have a political gap, a social gap in terms of the economics, and we are coming into the phase where we are beginning the tightening cycle. 1937 we (began) a tightening cycle. No tightening cycle ever works out perfectly. That’s why we have recessions. You can’t get it perfectly. So as we are going into this particular cycle, we have to think, what will this downturn be like…?”
On the prospect of less effective monetary policy in the future:
“We have less effective monetary policy because so far there are two types of monetary used: Lowering interest rates, we can’t lower interest rates. The second is quantitative easing and it’s maximized its effect. So I think that the next downturn is going to be a different type of downturn. I think that pension problems, healthcare problems in terms of obligations that are not funded, that are not debt, I think it will be more difficult in terms of the social political problems and I think it will be more difficult to handle. It won’t be… the same in terms of the big bang debt crisis. It will be a slower growing, more constricting sort of debt crisis that I think that will have bigger social implications and bigger international implications.”
There is much more to the interview, so enjoy it above.
To see Mr. Dalio explain the economic cycle, read this.
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