Ray Dalio is one of the best economic thinkers alive. On 9 April 2020, TED interviewed him about what coronavirus means for the global economy. Here is my summary. Any errors, omissions, misunderstandings are mine.
Interviewer: Corey Hajim (TED)
Interviewee: Ray Dalio, Founder of Bridgewater Associates
Released 9 April 2020
How to think about this?
Look at second order effects – like a tsunami – what happens after the wave has gone? Look at incomes and balance sheets: big hits to both.
This is similar to the 1930-45 period, so read up on your history.
- Production of a lot credit-based money (govt borrowing). US Treasury is giving money to Americans. Europeans doing the same.
- Rest of world will have gaps/holes. Who will pay, who will fill these holes. Who will pay these debts?
- Will be a big difference between those who will get the money and who will not.
- Wealth distribution will be a big thing.
Will need to collaborate. This is a defining moment.
Think about the one pattern that happens over and over again – 4 driving forces of our economy (see https://www.economicprinciples.org):
- Productivity growth (learning, inventing, doing things well). Grows slowly. 1-3% per year. Not volatile. Raises living standards.
- Short term debt cycle (booms & busts), lasts about 8-10 years.
- Long term debt cycle, 50-75 years. New type of money & credit. Last one began in 1945 Bretton Woods. Start of American world order. USD powers 70% of the world. This is what’s going on now.
- Politics – how we deal with each other. Domestic and international politics.
Stress tests happen every 75 years (3rd force above). Think about those “inside the ring of (financial) support” vs “outside the ring of support”.
On politics, domestic politics is the wealth gap, the existence of the American dream etc. Revolutions do happen – whether this one will be peaceful or disruptive is the question. External politics is between countries – usually a rising power challenging existing power. There is a risk of war (12 of the last 16 challenges in the last 500 years have resulted in war). This time, will countries come together for the greater good or will they fight?
We’re headed into a global depression.
Meaning it will be like during 1929-1932 when there was double digit unemployment rate, 10% fall in the economy. Back then how did they deal with this? In 1933 they printed lots of money. Similar programs to now. Interest rates to 0. Same thing as today: credit/money expansion. Took a long time for stock market to exceed former highs & economy to recover to previous levels.
This is not a recession, it’s a breakdown in the operation of money & credit.
Tools previously used to fix it: Austerity, debt restructuring/forgiveness, redistribution of wealth, printing money? Can these help?
We’ll see printing money and redistribution. Need to leverage on human creativity and adaptation. We’ll get through this, this will be a tiny wiggle on the line, like how the others look when you zoom out.
There will be a new world order.
We see $20tn of losses. But money & credit is just digital, just accounting. We’ll see a giant restructuring of IOUs. Go entity by entity. Who will pay to keep them alive? Will take a couple of years to figure out the numbers. Who collects the cheques is important – who gets to survive. Then we’ll have a new working environment. This could make us healthier.
Supply chains will change – self sufficiency (nation by nation) will be important. Financial system will restructure.
This is bigger than what happened in 2008. Back then we were able to keep systemically important banks etc alive by extending them credit. This time it’s the real economy, those beyond banks. It’s a bigger crisis, and we have a less effective monetary policy (rates were lower going in). Simply buying financial assets won’t work this time. Need to get the money to those who need it.
Who has the best prospects going forwards? Two types:
- Those stable “meat & potato” unleveraged companies eg Campbell Soup.
- The Innovators / adaptors who have strong balance sheets.
How to understand it?
People lose sight of the basic fundamentals of money, credit, income, expenses, balance sheets, because shocks like this only happen once in anyone’s lifetime.
You need a firm grasp of cause-effect relationships. Don’t just apply machine learning to the markets, because we don’t have the training data for shocks like this. Your models won’t work. You’d have to go back to the 1930s to have analogous period.
Passive investment market is so huge now, what’s the impact?
Individual investors should know how to diversify well and in a balanced way (asset classes, countries, currencies). The greatest mistake of all investors is to think that what has done well lately is a better investment, rather than it’s expensive. And what has done badly recently is a worst investment, rather than it’s cheap.
Don’t think that cash is a safe investment. Cash is seductive but it taxes you in buying power (2% a year). Cash is often the worst investment. Think unconventionally – do you have a little bit of gold? (Note: he didn’t mention crypto or bitcoin… but those who know…).
Big picture question – what’s changing? There is a retreat from globalisation. We need a coordinated effort for recovery. (See Ray’s view on The Changing World Order)
We certainly will retreat from globalisation. Who will write what cheques in countries outside of their domain? Gets down to practical questions. The reality is a lot of people won’t be helped. One country’s vulnerabilities is another country’s opportunity. How to resolve dispute of who gets what? We’re in an interconnected but fragmented world. Can I depend on someone else giving me what I need, or not taking advantage of me? Not any more.
This separation / isolation of US vs rest-of-world began before we had Covid. Read the history. The Chinese right now are helping with things that are needed in this crisis. But even saying that is a politically challenging. Our world is so fragmented, it’s hard to say thank you to countries and companies that are helping. Right now there is demonisation of different people. How we come out of this depends on how we behave with each other.
Is this an opportunity to reform capitalism?
Do we want the outcomes that we’re getting, that the system is producing? The current world order was created at Bretton Woods in 1945. Environment of equal opportunity, American Dream, harmony, etc. You saw collapse, clash, fighting, followed by new systems.
The idea that the profit system can accomplish everything is not right: Resources are allocated to those who already have resources. All systems work for those who control the system – it’s self perpetuating. Eg in the US, the top 40% spend on average 5x on children’s education than those in the bottom 60%.
I’m a capitalist, I believe we can increase the size of the pie and divide it well. But needs reform and restructuring, that’s what’s happening now.
There has been a tremendous transfer of wealth through the production of borrowed money. We will come out of here, and over the next couple of years we will talk about how we do the restricting. My main worry: will this be done in a civil bipartisan way to increase the size of the pie and divide it well, or damage the economy by losing productivity?
Education is a great investment, the more well educated people the more productivity it will produce. But states and localities consider it as a budget item – an expense. That’s not the right way to think about education. This has to be engineered well. System has to be perceived to be fair.
I’m 60/40 pessimistic that we are not going to be good enough to do it well.
Is it genuinely possible to rebuild the economy to be fairer? Is the current crisis showing that it’s actually low pay / unskilled workers that holds countries together rather than bankers etc? Can we make the new system more fair for them?
They are definitely the heroes. But it takes everyone to buy in, both the CEOs and the workers on the front lines. We have to establish that there is a level of basics (education, healthcare, basics) that you can’t fall below, otherwise there’s no opportunity, and the cost is crime and incarcerations.
Our job is to get kids through high schools and in jobs: we will save money. Average cost of incarceration is $40-120k per year. The difference between a rich and poor student is whose who can have a computer and learn. Get them in jobs and we save a lot of money. Philanthropists can’t do this alone: the sums are too high.
On powerful people’s decision making:
You have to realise that very few people are making decisions based on the quality of the argument. Most people have an objective or are in a war of some kind, and they’re on one side. So they’re making decisions based on the side they’re taking rather than on high quality arguments. Everything is politically challenging – number of respirators etc. People on the other sides will take advantage.
We’re going to get through it. We have the opportunity to make changes, do better, and emerge stronger. We can improve the structures, but needs active cooperation. This is a defining moment.
Other Ray Dalio short videos: