RAY DALIO : CENTRAL BANKERS RISK PUSHING ON A STRING

# Note added 1st February 2016 :

Link to Investor Literacy comment on $5.5 Trillion Government Bonds with negative yield and notes on negative interest rates

INTRODUCTION:

Ray Dalio, billionaire founder and head of Bridgewater Associates,  one of the world’s most successful money managers, consistently makes the case for investors to own gold as protection against adverse outcomes with other investments. His view is unambiguous:

“If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it…”

The above chart accompanies The Economist article “Falling Off The Supercycle – Trapped In A World Of High Debt, Low Rates and Slow Growth.”

The Economist  cite BCA Research as having defined the debt supercycle  as” the period since the Second World War  in which debt levels have inched persistently higher and notes “BCA now thinks the Debt Supercycle has come to an end. This is not because the overall level of debt has fallen; indeed, if one excludes the financial sector, the global level is still rising (see above chart)… monetary policy has failed to create a credit boom in the private sector, even with the help of zero short-term interest rates.”

As early as 2013 BCA commented  :  “The Supercycle reached an important inflection point in the recent economic and financial meltdown with authorities reaching the limit of their ability to get consumers to take on more leverage.  This forced the government to leverage itself up instead. Once fiscal policy is pushed to the limits of sustainability, the debt Supercycle could come to a violent end.”

 RAY DALIO  ON CENTRAL BANKS RISK PUSHING ON STRING

 In an article published in  the Financial Times last week titled Pay Attention To The Long term Debt Cycle and  headlined limits to spending growth financed by debt and money raises risks of policy makers  pushing on a string Dalio writes:

“I have a controversial view that is based on my alternative economic template, and I feel a responsibility to share at this precarious time.

 “In brief, the Federal Reserve’s template, and that of most economists and market participants, reflects the business cycle (however) there are two important cycles to pay attention to — the business cycle, or short-term debt cycle, and the debt supercycle, or long-term debt cycle

  “We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion phase of a long-term debt cycle, which typically lasts about 50 to 75 years…Since the long-term debt cycle issue is the biggest issue that separates my view from others, I’d like to briefly focus on its mechanics…

“…There are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle. In 1935, this scenario was dubbed pushing on a string

“This scenario reflects the reduced ability of the world’s reserve currency central banks to be effective at easing when both interest can’t be lowered and risk premia are too low to have quantitative easing being effective.”

Noting our capital allocation system is driven by spreads Dalio writes:

“…where things now stand across the world’s reserve currencies. expected returns of bonds (and most asset classes) are relatively low in relation to the expected returns of cash. As a result, it is difficult to push the prices of these assets up and it is easy to have them fall. And when they fall, there is a negative impact on economic growth.

When this configuration exists…stimulating demand is more difficult, and restraining demand is easier, than is normally the case.

At such times the risks are asymmetric on the downside…

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