Friday, May 15, 2020

News note: Ray Dalio Authors Article on Gold and Currencies

Lately, I notice a number of "mainstream analysts" talking more about the idea that the fiat currencies we use now are perhaps on shaky ground and that gold is returning to investor favor. Hedge fund manager Ray Dalio offers this lengthy narrative on devaluation of fiat currencies and the role of gold as a hedge for investors. Below are a few excerpts from the article. Any added underlines are mine for added emphasis.

The Changing Value of Money - Ray Dalio

"As previously explained, there is a real economy and there is a financial economy, which are intertwined but different.  The real economy and the financial economy each has its own supply and demand dynamics.  In this section we will focus more on the supply and demand dynamics of the financial economy to explore what determines the value of money."

Printing and Devaluing Money Is the Easiest Way out of a Debt Crisis

"While people tend to think that a currency is pretty much a permanent thing and believe that “cash” is the safe asset to hold, that’s not true because all currencies devalue or die and when they do cash and bonds (which are promises to receive currency) are devalued or wiped out.  That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens."

. . . . . 

"In comparison to the others, printing money is the most expedient, least well-understood, and most common big way of restructuring debts.  In fact it seems good rather than bad to most people because it helps to relieve debt squeezes, it’s tough to identify any harmed parties that the wealth was taken away from to provide this financial wealth (though they are the holders of money and debt assets), and in most cases it causes assets to go up in the depreciating currency that people use to measure their wealth in so that it appears that people are getting richer.

You are seeing these things happen now in response to the announcements of the sending out of large amounts of money and credit by central governments and central banks."

. . . . .

"Most people don’t pay enough attention to their currency risks.  Most worry about whether their assets are going up or down in value; they rarely worry about whether their currency is going up or down.  Think about it.  Right now how worried are you about your currency declining relative to how worried you are about how your stocks or your other assets are doing?  If you are like most people, you are not nearly as aware of your currency risk and you need to be."

Added comments: In this article Ray Dalio goes on to compare the purchasing power of fiat currencies over time versus debt, consumer goods, stocks and versus gold. When it happens, significant devaluation of the currency of a nation historically eventually leads to major monetary system change. This is a very in depth exploration of these issues that readers here would likely find of interest.

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