over 4 years ago • 2 mins
Outspoken investor Ray Dalio published an article: “The World Has Gone Mad and the System Is Broken”. It’s interesting – and a little scary.
The full essay is pretty long-winded, so we’ll summarize it. Dalio starts by explaining the current US situation, in which a huge amount of money has been injected into the financial system by post-crisis “quantitative easing”. A lot of that cash has flowed to investors, who have, erm, invested it, and driven asset prices up. Returns – most noticeably from bonds, but also from equities – have then gone down. When interest rates drop, as Dalio explains elsewhere, returns are “pulled forward” – they arrive sooner. That makes current returns look fantastic, but future returns become underwhelming.
Then there’s government debt. Massive deficits in the US will expand as the government shells out more for pensions and benefits – thanks to the above, which has led pension returns to fall short, and inequality to increase. In short, the economic “recovery” has benefited those with financial assets, but not those without.
So why can’t the US government just borrow more, issuing bonds to fund this deficit? Well Dalio says this would drive up interest rates and hit economic growth.
Dalio reckons this splurge in government borrowing could rip society apart. The government will either have to raise taxes or cut services to plug the deficit, which will worsen the rich-poor divide and might encourage the richest Americans to abandon the US. But that would reduce government tax income and exacerbate the problem.
So Dalio thinks we’ll have to overhaul the system: moving to something like “Modern Monetary Theory”, where central banks print money to fund government spending. That, although controversial, could fix things.
Dalio might be wrong: he says investors won’t buy more US bonds, yet prolific defaulter Argentina hasn’t had issues selling its bonds. But if he is right, we could be in for an economic sea change.
Want to know more? Read our Pack on Economic Theories.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.