Monday, June 1, 2020

Ray Dalio on Monetary History and Where We Are Now

Recently we featured an article by hedge fund manager Ray Dalio that took a deep dive into how the purchasing power of fiat currencies compares over time versus goods and services, stocks, debt, and gold. I got quite a bit of positive feedback that his information was helpful. This article by Ray Dalio was the most recent article in a series that takes an even deeper dive into history and looks at the rise and fall of nations, monetary systems and currencies. It also talks in depth about how history tends to move in both short term and long term cycles. 

Ray Dalio says he feels we are near the end of a long term debt cycle and also possibly the monetary system we have known for most our lives. Since that is exactly what we watch for here on this blog, below I have linked to the entire series of three articles with an excerpt from each article to provide a feel for the issues discussed. I will add this post to our market place of ideas for monetary system reform. While Mr. Dalio does not offer a specific proposal for reform or for a new monetary system, he does discuss many of the factors that historically have led to this kind of major change. Given his career and resume, I felt his articles deserve to be added to the marketplace so that readers can easily find them there if desired in the future. Any underlines below I added for emphasis.


The Changing World Order - Chapter 1 - The Big Picture in a Tiny Nutshell

Where We Are Now

"As previously explained, the last major period of destroying and restructuring happened in 1930-45, which led to the new period of building and the new world order that began in 1945 with the creation a new global monetary system (built in 1944 in Bretton Woods, New Hampshire)and a new American-dominated system of world governance (located the United Nations in New York and the World Bank and the International Monetary Fund in Washington, DC).  The new American world order was the natural consequence of the US being the richest country (it then had 80% of the world’s gold stock and gold was then money), the dominant economic power (it then accounted for about half of world production), and the strongest military power (it then had a monopoly on nuclear weapons and the strongest conventional forces).

It is now 75 years later, and we are classically near the end of a long-term debt cycle when there are large debts and classic monetary policies don’t work well for the world’s reserve currency central banks.  This is happening as we are simultaneously in a deep economic and debt contraction that is producing income and balance sheet holes for people, companies, nonprofit organizations, and governments, while politically fragmented central governments are trying to fill in these holes by giving out a lot of money that they are borrowing.  Central banks are helping them do that by monetizing government debt.  All this is happening at the same time that there are big wealth and values gaps and there is a rising world power that is competing with the leading world power in trade, technology development, capital markets, and geopolitics.  And on top of all this, we have a pandemic to contend with.

At the same time, we have great human capital and thinking technologies that can help us see how to best deal with these challenges and do the inevitable restructurings well.  If we can all deal with each other well, we will  . . . ."


The Changing World Order - Chapter 2 - Money, Credit, Debt, and Economic Activity

"Because what most people and their countries want the most is wealth and power, and because money and credit are the biggest single influence on how wealth and power rise and decline, if you don’t understand how money and credit work, you can’t understand the biggest driver of politics within and between countries so you can’t understand how the world order works.  And if you don’t understand how the world order works, you can’t understand what’s coming at you

For example, if you don’t understand how the Roaring ’20s led to a debt bubble and a big wealth gap, and how the bursting of that debt bubble led to the 1930-33 depression, and how the depression and wealth gap led to conflicts over wealth all around the world, you can’t understand the forces that led to Franklin D. Roosevelt being elected president. You also wouldn’t understand why, soon after his inauguration in 1933, he announced a new plan in which the central government and the Federal Reserve would together provide a lot of money and credit, a change that was similar to things happening in other countries at the same time and similar to what is happening now.  Without understanding money and credit, you wouldn’t understand why these things changed the world order nor would you understand what happened next (i.e., the war, how it was won and lost, and why the new world order was created as it was in 1945), and you won’t be able to understand what is happening now or imagine the future.  However, by seeing many of these cases and understanding the mechanics behind them, you will be able to better understand what is happening now and what is likely to happen in the future."

Finally, here is the link to our previous article featuring his article comparing the purchasing power of fiat currencies versus debt, stocks, goods and services, and gold over time.

"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."

. . . . 

"Since 2000, we have seen a more gradual and orderly loss of total return in currencies when measured in gold, consistent with the broad fall in real rates across countries during those decades."

My added comments: The only comment I can add here is that Ray Dalio in these articles talks about many issues that we have covered here on this blog for years and also emphasizes that understanding these issues is very important for each of us. This is also what we have said here for many years.

Added note: Ray Dalio has followed up the three articles linked above with another one that talks about The Big Cycles Over the Last 500 Years that you can find here. He also added this new article on his thoughts about the most recent turmoil in the US.

1 comment:

  1. Go back to debt-free money. Inflation can also be controlled by "retiring" currency issued for expenditures like building bridges and other big infrastructure projects. When the build is complete, the bills that went into circulation to finance the construction are "retired" by the bank and withdrawn from the money supply. Most tax is to pay national/state/local debts off, with debt-free money there would be no such debts and all that tax is avoided. Less money is created over all, but it is more fluid and well-distributed in the economy.