Taps Coogan – December 14th, 2021

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While Ray Dalio, co-chairman and founder of Bridgewater Associates, has gotten into hot water recently for dismissive comments about China’s ongoing human rights abuses, he remains the head of the world’s largest hedge fund and is, as he loves to say, a student of financial history. Along those lines, he recently explained in an interview with Barron why the ‘deficits don’t matter’ argument is bogus, as should be increasingly clear to anyone who has bought anything in the last 9 months.

 

Ray Dalio explains why deficits matter:

“When a government borrows money it has to sell bonds …Now, the quantity of bonds that has to be sold is greater than the demand for those bonds, which is what forces the Federal Reserve to make up the difference by printing money and monetizing that debt. And what that does is it devalues money against goods, services, and financial assets. So, we are in the part of the cycle where you are seeing inflation rise and you’re seeing the bond yield and the interest rates very low. That produces monetary inflation and when that monetary inflation takes hold, it can have the effect of leading investors, pension funds, endowments, sovereign wealth funds, to want to sell those bonds, and when they want to sell those bonds, that worsens the supply demand problem that requires the Federal Reserve to print more money, and you get into a spiral.”

“If you take the amount of money and credit that you are giving people, and that increases by a lot more than production increases, you are going to have inflation in goods, services, and financial assets… So, I think what we are going to see is the pinching of higher levels of inflation and the squeezing of growth… and I worry about how that will happen politically… I do suspect that it won’t be dealt with with discipline. I would expect that therefore inflation will be a chronic issue.”

Milton Friedman’s old saying was that monetary policy acts with “long and variable” lags. How quickly that was forgotten in the Post-Financial Crisis landscape, when inflation rose at a slower pace than expected for a handful of years after the worst recession in 80 years and economists promptly declared inflation permanently gone regardless of how many trillions of dollars of helicopter money could be unleashed.

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