Taps Coogan – September 15th, 2021

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Ray Dalio, co-chairman and founder of Bridgewater Associates, the world’s largest hedge fund, recently spoke with CNBC to lay out what he sees as the driving dynamic behind the current debt cycle: the inevitability of interest rates below the inflation rate (negative real rates).

Mr. Dalio describes the driving dynamic of this era to be:

“There’s not enough money to go around. We’re spending a lot more than we’re earning… and you can’t take it all from taxes. So, what that means is the printing of money. So, It’s the mechanics of that… you get more money, so that devalues the value of money… Cash is trash. Look, this is guaranteed. You are not going to have an interest rate that is going to compensate you anywhere for inflation, so you have to look at the cost of the money… That interest rate, whether is the bond rate or the cash rate, you’re not going to get (the inflation rate)… We have this wonderful sugar high… but that means everything else goes up in relation to cash, because it’s better to borrow cash. That’s just mechanics… So, we produce inflation… Interest rates must be below the inflation rate and must be below the nominal growth rate in order to deal with all of that debt, in order to finance it, and that depreciates the value of cash and money, so you have to invest it elsewhere. That’s the dynamic.”

 While nothing is “guaranteed” in markets, it’s certainly hard to imagine a scenario where the markets could support positive real interest rates without dipping into a recession and it’s hard to image the Fed trying.