- Bridgewater Associates co-Chairman Ray Dalio published an article on LinkedIn about why he believes the current state of making capitalism work for everyone is broken
Bridgewater Associates co-Chairman Ray Dalio recently published an article on LinkedIn about how “The World Has Gone Mad and the System Is Broken.” The points made in those articles were reiterated from talking points he made during interviews on CNBC and Bloomberg earlier in the week.
The main points Dalio — who oversees the world’s largest hedge fund with $160 billion in assets under management — made was the national debt, pension liabilities, and healthcare debt will result in higher taxes. And Dalio said that the debt and social programs will “either be paid by higher taxes or they’ll be not paid and defaulted on.” But he does not think that they will be defaulted on. The US national debt is currently hovering at about $23 trillion.
Dalio pointed out that if taxes are raised too much, then it will change the nature of economics. This debt includes traditional levels of public debt such as bonds along with financial debt and entitlement programs like Social Security, Medicare, and public pensions. Last month, the U.S. Treasury reported that the federal deficit for fiscal 2019 was $984 billion — which is up 26% from last year.
My below piece “The World Has Gone Mad and the System is Broken” explains some of the crazy things that are happening, why they are happening and why I believe that they are unsustainable. I’d be interested in knowing what you think about them. https://t.co/daUdsw0XLy
— Ray Dalio (@RayDalio) November 5, 2019
One of the major points Dalio made is that money is being offered free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. “More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up,” wrote Dalio in the LinkedIn post.
This “pushing on a string” dynamic happened many times in history before and Dalio explained the concept in his book Principles for Navigating Big Debt Crises. Due to this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down as economic growth and inflation remain sluggish.
“Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations,” added Dalio. “Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power.”
The pushing of money onto investors is understandable since investment managers (especially venture capital and private equity investments managers) now have large piles of uninvested cash that they need to invest in order to meet the demands of their clients and to collect their fees.
“At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen,” explained Dalio. “At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either.”
That is why Dalio expects benefits to be cut, taxes that will be raised, and money that will be printed at the federal level and will be passed to those at the state level who need it. And if policymakers are not able to monetize the obligations, then the rich and poor will battle over how much expenses should be cut and how much taxes should be raised. The money will also become less available to those who do not have as much despite their creditworthiness. This will contribute more to the rising wealth and opportunity gaps.
Due to all of these circumstances, Dalio believes that the world is approaching a big “paradigm shift.” This current state of making capitalism “work well for most people is broken.”
