During a remote TED talk, world-renowned investor and entrepreneur Ray Dalio said that the economic fallout due to the pandemic needs to be seen from the perspective of income and balance sheets. Essentially, there are holes in income that generate losses on balance sheets.
Dalio thinks the crisis we’re currently experiencing has existed before during the 1930 to 1945 period, in that now we’re seeing the production of a lot of debt (government debt in particular) and zero interest rates.
“American printing of money and the borrowing will leave us with a lot of debt and monetization. That’s something interesting to talk about — and we need to talk about that,” said Dalio in a TED interview.
“Who will pay these bills and how will that be shared?”
When asked when whether we’re headed towards a global depression, Dalio paused for a couple of seconds before hesitantly answering ‘Yes’, fully aware of the implications of his words.
“From 1929 to 1932 there was a fall in the economy, double-digit unemployment rates, and magnitude of fall in the economy of about 10%. Do I think we’re in that? Yes.”
“How was that dealt with in 1932 is they printed a lot of money and the government came with the same type of programs that we’re having now.”
“Same thing: zero interest rates, same thing, same dynamics. And then that money causes an expansion from that point. How long does it take for the stock market to exceed its high or how long does it take for the economy to exceed its former highs? A long time.
“Okay, do I think that’s what we’re in? Yes, that’s what we’re in. We’ve seen that happen repeatedly in history. This is just the most recent one and there’s a structure to that.”
According to Dalio, markets have plunged 25%-50% accounting for about 20 trillion dollars in losses.
The solution: human ingenuity
In his books, Dalio talks about four levers to recovery after a financial recession or depression: cutting spending (austerity), debt restructuring, redistribution of wealth through taxes, and printing of money.
“I think what you’re seeing is a combination of printing money and redistribution. These things happen pretty quickly, they last a couple of years in that process, and then you have a rebuilding. And, they’re dealt with creativity.”
“The greatest force through time is human inventiveness. You’re going to see these restructurings happen. It’s the power of that adaption that is the greatest power.”
Dalio goes on to note that such restructurings aren’t necessarily bad and may actually be necessary. As a stress test, albeit an extremely challenging one in the case of the coronavirus crisis, such events expose weaknesses and flaws at both an individual level (low savings, emphasis on luxury over necessities ) and a societal level (inequality). History suggests that people come out stronger after a stress test and more appreciative of the basics of life.
Life after coronavirus
Dalio envisions a great restructuring that is going to transform the global economy and financial system.
“This is bigger than what happened in 2008. In 2008 we had banks, you have a certain amount of leverage, things go down, too much leverage means you’re broke in accounting terms.”
To avoid a systemic failure, during the 2008 financial crisis, the US government and federal reserve bailed out banks who secured the mortgages.
“This is more complex than that because there are the banks and then there are all of those that are beyond banks. It’s a bigger crisis and we have less effective monetary policy because interest rates declines have reached their limits and just by buying financial assets by the central bank and buying the normal financial assets won’t work.”
Concerning capitalism, Dalio is of the opinion that our current economic system will also suffer great reforms to create productivity. Dalio mentions that those in the top 40% income bracket spend five times as much money on their children’s education than those who are in the bottom 60%. “So, everything is self-perpetuating,” he added.
“It doesn’t mean just giving money away. It means how do you make those people productive so that they are also psychologically productive, as well as physically productive in producing output.”
“Now we are restructuring it. It is the inevitable consequence of what we’re doing here.”
“There’s a been a tremendous transfer of wealth whether people realize it or not through the production of all of that borrowed money and all of that producing of money — that is a big force.”