Summary:
- Dalio sees increases in debt and spending keeping inflation and interest rates high in the foreseeable future.
- Dalio believes we are at the peak of the shirt-term economic cycle, and may see economic growth slow in the near futures.
- Dalio is optimistic about the impact of AI on productivity and sees the potential for significant productivity growth over the next 5-10 years.
Full Synopsis
Dalio reiterated the 3 big forces he he sees in the world including 1) The creation of a large amount of debt and debt monetization 2) Internal conflict between political parties with the United States and 3) External conflict between the US and China. Dalio has written about these topics frequently through free posts on LinkedIn.
With regard to long-term interest rates, Dalio believes rates will remain higher and that the days of low rates are past. Dalio expects real rates – that is the rate of return on a bond above the inflation rate – to return to 1-1.5% to entice bond holders to hold debt. At the same time, Dalio sees the potential for supply-demand imbalances due to increased issuance of treasury bonds and a shrinking pool of potential buyers. Dalio cited concern among foreign buyers about the US fiscal deficit and geopolitical influences as reasons for reduced demand for US treasuries.
Discussing what happened during the COVID19 pandemic, Dalio explained that there was a transfer of wealth to ordinary Americans in the form of stimulus payments. This cost of these payments, Dalio explained, has fallen on the holders of debt because the payments have resulted in increases in interest rates. This debt is partially owned by the Federal Reserve and by Commercial banks. Dalio continued that the recent failures in commercial banks is largely a result of these losses. Dalio believes the supply demand balance for treasuries will soon become more clear and pricing will show whether or not there are adequate buyers of US treasuries.
Speaking about Inflation, Dalio sees 2 forces that may keep inflation high. First, because Dalio believes there will he a lot of money and credit created which pushes up inflation. This printed money will allow consumers to consumer more than they earn, driving higher rates and the inflation dynamic. Secondly, Dalio sees demographics as a headwind to bringing inflation down, because the supply of labor will decline as a larger share of the population retires.
On a positive note, Dalio believes it is possible AI will have a significant impact on productivity and next 5-10 years its going to be like a time warp and you are going to see a completely different world.
For a more in depth discussion of how debt impacts the economic cycle, Dalio’s FREE book Principals for Navigating Big Debt Crisis is available in PDF format here.
