Money, Monetary Policy, and Bitcoin | Ray Dalio at Consensus 2021

Introduction

• Introduction of Ray Dalio, founder and chairman of Bridgewater Associates.
• Mention of Bridgewater Associates as a prominent hedge fund in financial markets.

“Ray Dalio who is the founder the chief investment officer and chairman of Bridgewater Associates a mega hedge fund a very big player in financial markets for a long time”

Michael Casey’s admiration for Ray Dalio

• Michael Casey expresses his admiration for Ray Dalio and his interest in discussing big-picture issues with him.
• Michael Casey mentions his fascination with Ray Dalio’s daily observations and his desire to have a conversation about Bitcoin.

“I’ve been a big fan of yours for a very long time… I was just stunned… such an interesting insight… years I’ve wanted to have a sit down with you… discuss some of the big picture issues… when I got involved in bitcoin I felt like I’ve got to get Ray Dalio thinking about these things… daily observations from… a few months back landed on our desks and you’d sort of wade it into bitcoin and given some very, very interesting perspectives on that”

Ray Dalio’s thesis on long-term debt cycle

• Ray Dalio explains his focus on the long-term debt cycle and the state of the world.
• He mentions studying the rise and declines of reserve currencies.
• Ray Dalio explains that he sees a financial component to the cycle related to the creation of debt and financial assets.
• He mentions other cycles related to internal cohesiveness clash and the rise of a great power challenging an existing great power.

“About eight to ten years ago I began to see things that didn’t happen in my lifetime before but happened in the 1930-45 period… before the dollar there was the British pound and before that there was the Dutch gilder… we’re in the cycle… there’s a financial component… creation of debt and financial assets… limitations of that… internal cohesiveness clash cycle… rise of a great power… they all sort of go together”

Short-term stimulation and long-term depressant of debt

• Debt and credit create short-term buying power but become a longer-term depressant.
• Ray Dalio explains the mechanism of using credit to stimulate a weak economy, but the accumulation of debt makes it more difficult.
• At zero interest rates, it becomes challenging to stimulate further.
• Financial assets represent claims on real goods and services.

“Debt and credit create buying power… short-term stimulative… longer-term depressant… you have to pay it back… accumulate that debt… it becomes more and more difficult… something like a zero interest rate… financial assets… claims on real stuff… goods and services”

Pile of debt and its relationship to financial assets

• The pile of debt is also the pile of somebody’s assets (like bonds and financial assets).
• Financial assets are claims on real goods and services.
• The purpose of financial assets is to sell them and acquire goods and services.
• As the pile of debt and financial assets grows, there may be a problem when there are too many claims on tangible assets.
• Inevitably, printing money becomes the solution.

“The pile of that debt is also the pile of somebody’s assets… claims on real goods and services… the financial system… where is your wealth… financial assets… no purpose other than to sell them to get the goods and services… when the pile becomes very big and the incentives for not holding that are no longer there… you have a problem… it’s gone through history… inevitably, there’s the printing of money”

Decline of reserve currencies and the rise of the US as the reserve currency

• Ray Dalio talks about the decline of reserve currencies and the rise of new ones.
• The new world order began in 1945 after World War II, with the United States emerging as the winner and the dollar as the new reserve currency.
• The dollar used to be connected to gold, but in 1971, President Nixon ended the convertibility of dollars into gold.
• The system resulted in US spending more than it earned, leading to devaluation, printing of money, and economic challenges.

“The decline in… reserve currencies… new world order began in 1945… the dollar… connected to gold… the devaluation… the printing of money… we’re in a situation that’s like that… we have the decline in real rates… pushing of a lot of liquidity… they have to… everybody needs more money… so the government creates… a lot of credit… the central bank prints a lot of money”

Supply-demand problem and the need for more money

• Ray Dalio explains the supply-demand problem related to money.
• Governments and central banks need to print more money to satisfy the increasing demand.
• Holding cash becomes less attractive due to low or no interest rates and inflation, and holding bonds also lacks incentives.
• As budgets grow and more money is needed, there may be a need for capital controls or a search for alternative investments.

“As you look at the budgets and look ahead, we know we’re going to need a lot more money… so we can think of the financial system… supply-demand problem… hold that money… not much incentive there… supply-demand problem… there’s a printing of money… that money wants to go someplace… go to almost anything else… there’s too many claims… for to get it… then you have that problem”

Quote

“It’s gone through history… you have those financial assets… want to go to get the tangible assets… it’s so… it’s gone through history… you have those financial assets want to go to get the tangible assets… and then you have that problem”

Inflation and Monetary Policy

• There are two types of inflation: supply-demand inflation and monetary inflation. Supply-demand inflation occurs when demand exceeds capacity, leading to price increases. Monetary inflation happens when there is an excessive supply of debt, leading to the production of more money .
• Public debate often focuses on consumer price inflation (CPI), but this overlooks the larger issue of monetary inflation caused by the supply of debt .
• The influx of funds from monetary inflation contributes to the increase in asset prices such as stocks, real estate, and fine art .

“The big inflations that are most important are the ones that follow 1971… It’s the monetary inflation where the holders of debts then go into other things.”

Impact of Monetary Inflation

• Changes in who receives the money, such as through tax policies, affect the flow of funds into various assets .
• When the money flows into assets like stocks and real estate, their prices rise while future expected returns go down .
• This pattern makes it difficult to tighten monetary policy without causing disruptions in the markets .

“The central bank has got to then print… so you have negative real returns in stocks and other assets like we did in the ’70s, but the nominal return goes up.”

Geopolitical Implications and Dependence on the U.S. Dollar

• The ability to print the world’s currency, like the British pound or the Dutch gilder once did, signifies great power .
• Holding debt in a currency that one does not print creates a short position, amplifying the effects of debt contraction .
• Dependence on the U.S. dollar can be seen as a political problem, as it limits the independence and democratic decision-making of other nations .

“If you have a debt in a currency that you don’t print, you have a short position… money and credit is not a fixed supply.”

The Impact of Global Financial Crises

• The Great Depression and the 2008 financial crisis were significant periods of economic downturn.
• The recent financial crisis caused by the pandemic was shorter but had a larger impact.
• The short squeeze in the bond market created a supply-demand problem.

“This one was a nanosecond and much bigger.”

The Role of the U.S. Dollar in the World Economy

• The U.S. dollar serves as the world’s reserve currency.
• Many countries hold a significant amount of dollars in the form of debt.
• The holders of dollar-denominated debt may want to convert it due to negative real returns.
• Increasing deficits lead to the need for selling more bonds, which adds to the supply-demand problem.

“They’re overweighted in debt in dollar-denominated debt.”

China’s Growing Influence

• China has emerged as a strong competitor for capital.
• China’s capital markets are becoming more open and attractive.
• The internationalization of the Chinese yuan has increased its appeal for borrowers and lenders.
• The competition between the U.S. and China extends beyond military and technology to capital markets.

“It’s not just a geopolitical thing, it’s a capital markets competition.”

The Evolution of International Monetary Systems

• The transition from one single reserve currency to another is not a sudden switch; competition exists.
• China’s digital currency and its insertion into the international realm pose a challenge to the U.S.
• Digital currencies and decentralized currencies like Bitcoin offer alternatives in a fluid digital economy.

“We are entering into this world where perhaps there’s competition.”

The Historical Perspective on Currency and Monopoly

• In the past, there were multiple private currencies before the emergence of central banks.
• The Bank of England sought a monopoly on currency, leading to a dominant currency.
• The history of currencies demonstrates competition and dominance at different points in time.

“The history of currencies… in a dominant currency.”

“The biggest advantage to China is not that it is an attractive currency per se, but rather that by inserting it into not only its domestic economy but also its international relations, it will make all of that more efficient. The money itself will remove a lot of the friction for the system, and that’s going to be a powerful competitor to the US.”

Government Control over Currency

• Each country wants to control its currency and close its borders
• Currency control is a significant power for governments
• Governments aim to control where money and credit flow

“Each country would like to close the borders and control its currency.”

The International Currency

• Historically, gold and silver were considered international currencies
• Tangibility and intrinsic value were important factors
• Conflicts can devalue or render a currency worthless

“The preferred international currency has always been gold or silver due to its intrinsic value.”

Government Control and Competing Currencies

• Governments want to control their currency even with alternative currencies competing
• The government’s capacity to control various currencies, including Bitcoin, is a concern

“As we deal with competing currencies, the government’s ability to control them, including Bitcoin, becomes significant.”

Challenges in Controlling Bitcoin

• Bitcoin’s decentralized nature and wide distribution pose challenges for government control
• Mining can quickly pop up anywhere in the world
• International agreement on controlling Bitcoin is unlikely

“The idea that Bitcoin cannot be entirely shut down is appealing; however, historical context suggests government intervention is a significant risk.”

Diversification and Competitive Currencies

• Properly diversified portfolios should include gold and other alternative currencies
• Different currencies suit different stakeholders: governments vs. individuals
• The importance lies in competition and multiple currency choices

“I want a properly diversified portfolio of gold and alternative currencies to account for the competitive environment.”

Intrinsic Value and Imputed Value

• Intrinsic value refers to the inherent value of something, like a house or a car.
• Imputed value, on the other hand, refers to the value assigned to something based on collective belief.
• Bitcoin’s imputed value is influenced by the collective belief in its potential and adoption.

“Okay, intrinsic value is another thing… you have a house you have a car… okay that is intrinsic value as you start to get to imputed value and so on, you’re entering a different world.”

The Cycle of Economic Patterns

• Ray Dalio explains that economic patterns repeat themselves over time.
• The current financial environment is shaped by various factors, not just interest rates.
• These factors include financial dynamics, conflicts between different ideologies, changes in the global order, and more.

“It’s not just about interest rates, it’s about the whole enchilada.”

The Impact of Historical Events

• Dalio emphasizes the importance of studying history to understand what is likely to happen in the future.
• He mentions the period of 1930-1945 as a crucial time to learn from.
• The economic challenges faced during that period, including currency destruction, taxes, wealth and power conflicts, had a significant impact on different countries.

“Your children will really need to go back and study about what happened in the 1930-45 period.”

The Fortunate Era of the Post-War United States

• Dalio reflects on his own birth in 1949 and highlights the fortunate circumstances of that time.
• The United States had 80% of the world’s money, control of the global central power, and dominance due to nuclear weapons.
• He stresses the importance of realizing how lucky people were during that era.

“We don’t realize how unbelievably lucky we were.”

Historical Destruction of Wealth

• Dalio mentions the destruction of wealth during certain historical periods.
• This was not limited to currency devaluation, but also included the combination of taxes, conflicts over wealth and power, and other factors.
• Many countries saw their wealth wiped out or significantly devalued, while others experienced different outcomes.

“If you’re a German or a Japanese, you got wiped out totally.”

Importance of Learning from Historical Stories

• Dalio emphasizes the need to learn from the stories of different countries and their experiences.
• He mentions the ongoing story of the British monarchy dealing with the fallout from historical events.
• Understanding the historical context helps in preparing for and protecting against future challenges.

“You’ve got to know those stories.”

The illusion of wealth

• People mistakenly believe they are richer when the prices of assets like stocks and houses go up.
• They fail to recognize that the increase in price is merely an accounting adjustment.
• The underlying value of the asset remains the same.
• This misconception leads to false assumptions about wealth accumulation.

“In other words people think okay the price of the stock, the price of the house, the prices go up and they think they’re richer and that’s not true…they have the same house.”

Separating financial value from productivity

• It is essential to differentiate between financial value and productivity.
• Financial value is influenced by market prices and perceptions of wealth.
• Productivity, on the other hand, represents the real output and value created by individuals and economies.
• The challenge lies in accurately measuring productivity and its impact.

“I agree with you that um they don’t know how to…um you can’t actually uh calculate it efficiently because…they um you’re trying to measure one thing against another using a common denominator.”

Difficulties in measuring productivity

• Measuring productivity poses challenges because it lacks a common denominator for comparison.
• Using GDP as an example, it is challenging to determine the value of intangible assets or advancements.
• Even if there are more intangible assets or advancements, their value cannot be accurately translated.
• The absence of a common denominator prevents an efficient evaluation of productivity.

“If all GDP were pictures and then you would say, ‘What’s the value of pictures?’ and you would say it plunged to zero, but yet there are more pictures.”

The changing nature of productivity and technology

• The nature of productivity and the skills valued by societies evolve with technological advancements.
• Initially, physical labor and muscles played a prominent role in productivity.
• Over time, intellectual capabilities such as the prefrontal cortex and innovative thinking became increasingly important.
• The rise of automation and robotics has replaced certain types of labor, making them less valuable.
• This continuous shift in what is considered productive leads to efficiency gains but also creates social consequences and disparities in income and wealth.

“The world is going to change in an incredibly fast pace…when you see an upward curve and then you see the reasons for that upward curve…you know all sorts of things so the world is going to change in an incredibly fast pace.”

Revolutionary changes ahead

• The combination of technological advancements, changing productivity, and social consequences will lead to revolutionary changes.
• Issues such as wealth disparities, income inequality, and the impact of automation on human labor will require significant attention and resolution.
• Changes in these areas are inevitable and will likely lead to revolutions or major transformations.

“There are going to be revolutions…revolutionary changes ahead in terms of all of those issues…how do you deal with the wealth…what does it mean…how it’s going to have an impact on longevity…the world is going to change in an incredible fast pace.”