Ray Dalio Warns of Increased Debt Monetisation

Speaking to Bloomberg (20/3/2021), Ray Dalio (head of the world’s largest hedge fund) argues that we have entered the later part of the long-term debt cycle because:

“We see the need to distribute, and produce, a lot of debt. Where did those cheques come from? They came from the government, the government wrote the cheques. But the government can’t produce money, the central bank can produce money. The central bank had to print a lot of money, to lend to the government, to do that. And that’s monetisation.”  

Debt Monetisation is exactly this process of a central bank enabling the government to essentially “borrow” money, without needing to repay anyone. This is a different scenario to one where central banks purchase the debt of other sovereign governments. Traditionally, central banks have been forbidden by law from holding debt issued by their own government. In fact, the division between a treasury department and a central bank was principally to defend against this situation where a government can freely print money to cover its expenses.  

Dalio goes on:

“Central banks are put in a dilemma, either interest rates will rise a lot, or they will have to print money, and buy those bonds to hold them down.”

With US National Debt now sitting at more than $28 trillion, rising interest rates would lead to unmanageable interest repayments. In 2020, the US made $523 billion in interest payments, on a total of $3.42 trillion in revenue. Faced with higher and higher interest repayments, governments in deficit need to choose between default or inflation.  

Similar issues are emerging in other countries. The Reserve Bank of Australia is continuing to accelerate purchases of Australian Bonds. The Bank of Japan, not satisfied with simply controlling the bond market, also buys ETFs at a rate of US$55 billion annually.

Investors looking to protect themselves against the coming inflation portended by Ray Dalio and others are increasingly looking to precious metals. According to 13F Filings made to the SEC, as of 12 February 2021, Dalio’s fund Bridgewater Associates held significant positions in Gold ETFs NYSE:GLD (4.61% of portfolio) and NYSE:IAU (2.43% of portfolio). While the GLD position has been scaled back significantly since the previous 13F filing, the combined value of the two positions (7.04%) make gold the second largest holding behind the S&P 500 (11.93%).  Bridgewater uses ETF’s given the size and regulated space in which they work.  Dalio would likely know better than anyone the dangers of ETF’s and given his view of the economic cycle it would be an extremely safe bet to assume his personal holdings are in physical not an ETF.

Dalio has been thinking ‘big’ and long term for a while now with widely read articles last year on the Fall of the US Empire (as with all empires throughout history) and the End of the Long Term Debt Cycle of which the above is another symptom.  If you haven’t read these we suggest they are a must read and if you have the time click through to his full articles to read in full.  As the man himself famously said:

“If you don't own Gold, you know neither history nor economics.”