Ray Dalio, founder of the largest hedge fund in the world (Bridgewater Associates), said the world debt is so large it will take 10 years to de-leverage it — and “there are no more tools in the tool kit” to postpone the inevitable reckoning. He gave the world the bad news on Friday night on the Charlie Rose Show. The world is divided into debtors and creditors — emerging nations — and the end is near.
We should listen because Ray Dalio is the 55th richest man in the world with a net worth of $6 billion. His company manages $125 billion in global investments, and as Charlie Rose, “Over the last two years, Bridgewater ranked as the largest and best-performing hedge fund in the world. In 2010, his returns were greater than the profits of Google, Amazon and eBay combined.”
He knows this stuff.
From the transcript of his interview:
CHARLIE ROSE: So you have the same opinion that Standard & Poor’s had when they reduced –
RAY DALIO: Essentially.
CHARLIE ROSE: — America’s credit rating.
RAY DALIO: Essentially. So I think — and by the way I think it’s very important to understand that the government debt is the terrible challenging issue that we should talk about maybe but also more important is the private sector debt. So that resolving the public sector debt does not resolve the problem.
That individuals face the same problem meaning that they’re overly indebted and because they’re overly indebted and spend a lot of their consumption through borrowing and they had a — it was like if you borrow you have a party and everything’s good and you have a prosperity and you — you have your party, you hire the caterers, they’re employed and everybody’s happy.
So that there’s a private sector debt issue at the same time as the public sector debt. They’re both. So if you resolve the budget deficit, you do not resolve the private sector debt issue. Both of those things mean we’re both overly indebted. We cannot — the amount that we owe and have promised in its various forms can’t be paid.
Now we can accept is that right or wrong but let’s — and I think we need to talk about it forthrightly whether that’s right or wrong. And if it’s right — and I believe it’s right — then we have to talk calmly and logically about how we can approach that and deal with it in the best possible way without having this battle of one side or another.
Like the issue of is it better to have austerity or stimulus? The basic problem there is that there’s not a quality conversation on the subject. So if people who disagree could sit down and work on a television show or something, work through, how does the machine work, how does the economic machine work? What does it mean to each of those? How has it worked in the past so that they can understand what exists. Get past the ideology part of it and get on with trying to say we have is very difficult situation and how do we deal with it in our best possible way together?
We can’t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a de-leveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.
CHARLIE ROSE: Some people say that they describe that as there are no more tools in the tool kit.
RAY DALIO: There are no more tools in the tool kit.
CHARLIE ROSE: In terms of fiscal and monitory policy.
RAY DALIO: Yes, so number one is we have a de-leveraging. Now that de-leveraging means we’re going to have more debt problems. You`re going to see — no matter what is solved in Europe you will have a de-leveraging. Banks will lend less and lending less will mean a contraction. That’s — that is what I believe is the case, we should talk about whether or not that is the case. Thoughtful people should discuss that.
If it is the case, we should then approach how do we deal with that? Now – - so I’m saying there’s a — I believe there`s a de-leveraging going on. There are no tools in the tool kit and everybody’s at each other’s throats.
Certainly this is a problem that will take at least a decade to sort out. Had we faced the problem head-on in 2008, we would have saved the government trillions and we would be well on our way to recovery. But the politicians wanted to avoid 8% unemployment and passed a $787 billion stimulus. How’d that work out for everyone?
Now we have state, local and government spending as $7 trillion out of a $15 trillion economy, which is a prescription for Eurosclerosis and that $116 trillion in unfunded liability is a problem that likely will be solved by taxes first, benefit cuts later.
Of course, there are mitigating factors. Roughly a third of the national debt is held by the government itself (Social Security and the like) and China owns “only” $1 trillion of the debt. Still, owing $1 trillion to any one country makes us extremely vulnerable — particularly when that nation is an adversary.
The government and central bank running out of tools actually is a good thing because both are terrible tradesmen. And Ray Dalio sees another TARP as “politically not feasible” and forecasts a growth of 1 1/2%-2% annually for a decade. In other words the 1970s. From the transcript:
RAY DALIO: So we should be able to — there’s this downward pressure of the de-leveraging. We should be able to grow at a rate that’s comparable to our income growth if we are — if we keep orderly and we — and we work this through and everything is orderly. That means something between like 1.5 percent or 2 percent we should be growing at maybe about the 2 percent vicinity.
The problem with the 2 percent vicinity is that the employment rate remains the same or can trend higher. That produces social pressures, that produces tension which itself means that you can have a situation analogous to that which is existing in Greece and more social pressure you create the more tension that is existing and emerging in various ways, not just a Wall Street piece. But it`s existing in Spain.
CHARLIE ROSE: Right.
RAY DALIO: So if we can keep orderly and not argue with each other and not do disruptive things and we don’t go down OK and grow at that two percent you know maybe then it will be OK.
If we have disruption and we are not able to have a monetary policy and we can`t have fiscal stimulation and you have a problem of what do you do — you can’t recapitalize the banks. I mean if you should happen to need to recapitalize the banks you can`t have a TARP program again.
CHARLIE ROSE: Politically not feasible.
RAY DALIO: Politically not feasible.
So you have to have a plan. You need to be thoughtful, I think, how do you create that plan and not only it`s a theoretical thing when I say how do you make a plan because you have to be able to have agreement to implement the plan. You can`t have people at odds.
As I say sometimes to policymakers my job is very — is much easier than their job. My job is that I just have to pretty much anticipate what`s going to happen and be one step ahead. That`s not an easy job but it`s an easier job than policymakers who have to do that. They have to then find a solution for the bad stuff not happening. That`s not easy to find solutions and then even if they had solutions they have to get that solution through the political system. In which there’s — there’s — everybody`s saying that you can’t do that, whatever that is and everybody blaming each other.
CHARLIE ROSE: Are you optimistic or pessimistic?
RAY DALIO: I suppose I’m — if I was — I’m concerned. I think it’s a test of us. It’s a test of us in our society. It’s a test of us.
CHARLIE ROSE: On that note thank you for coming.
RAY DALIO: My pleasure, thank you for having me.
We did it before, we’ll do it again. First, though, we need adult leadership in the White House, at the Treasury and most definitely at the Fed.