by Simon Black, Sovereign Man:
“This is a global problem,” said billionaire hedge fund manager Ray Dalio yesterday to a packed audience of central bankers.
“Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States.”
I can only imagine the mood in the room was a bit tense after that comment.
Mr. Dalio, founder of the $160 billion investment firm Bridgewater Associates, was invited to speak at the Federal Reserve Bank of New York’s 40th Annual Central Banking Seminar yesterday.
Rather than gush about how wonderful the Fed’s zero interest rate policies have been since the financial crisis, Dalio gave them a fire hose of reality.
His primary thesis was that the debt supercycle that has lasted for decades is coming to an end, and that there’s going to be a “big squeeze”.
“The biggest issue,” he said, “is that there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”
The largest economies in the world– Japan, Europe, the United States, and China are racking up record amounts of debt and absolutely nearing those limits.
Just this morning the International Monetary Fund warned that global debt has hit an all-time high of $152 TRILLION.
That’s an astounding figure that’s nearly TWICE the size of the world economy.
But it’s more than that, because in addition to nominal debt, there are further obligations that must be paid– like healthcare and pension programs which are largely underfunded.
We’ve been discussing this a lot lately; in the US, Social Security is completely underfunded and will become cashflow negative in just a few more years.
Soon after it will entirely run out of money.
Dalio summed it up by telling his audience, “There are too many promises that can’t be kept, not only in the form of debt, but also in the form of health care and pension costs. . .”
In other words, not only is government debt, corporate debt, and household debt at record levels worldwide, but pension and healthcare obligations have become impossible to pay.
Bear in mind that all of this is happening at a time when economic growth and productivity are slowing.
This means that while debt is piling up, the ability to service those obligations is actually decreasing.
Central bankers have been desperately trying to hold the system together by keeping interest rates at record lows and printing trillions of dollars.
But as Dalio pointed out to his audience of central bankers, their strategy is also “approaching its limits.”
Yesterday we discussed why central banks are between a rock and a hard place.
If the Fed doesn’t raise interest rates quickly, they’ll be forced to make interest rates negative in the next recession.
But if the Fed does raise interest rates, they’ll cause a massive decline in asset prices, and potentially even engineer the recession that they’re trying to prevent.
Dalio again: “[I]t would only take a 100 basis point [1%] rise [in interest rates] to trigger the worst price decline in bonds since the 1981 bond market crash.”
So no matter which direction central banks go, i.e. to raise or not to raise interest rates, there are severe consequences.
This is why Dalio expects a “big squeeze.” And it won’t be pretty.
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