10 points from Ray Dalio’s “world has gone mad” post

“The world has gone mad and the system is broken.” It wasn’t a Marxist or climate change warrior who said this, but Ray Dalio, billionaire hedge fund manager. 

His reasoning: The world is awash with cheap money from central banks keeping interest rates artificially low after the 2008 financial crisis.

The cheap money was designed to jolt economies into activity by increasing spending, but has only created massive ‘asset bubbles’ which distort the world economy.

You can earn 1% interest from cash, or you can own stocks, bonds and property which generate a lot more.

One of the mad effects of cheap money: companies no longer have to make profits – they simply sell their “dreams” to investors who are “flush with money and borrowing power.” Cue failures of Uber and other IPOs.

Government deficits are growing around the world. Central banks will buy the bonds that finance the debt, and will do it by printing money. That will lead to inflation.

Inflation will harm the economy and market returns, so pension funds have less ability to pay pensions of teachers, nurses etc. At the same time, ageing Baby Boomers will put pressure on the US health system to fund healthcare.

This squeeze will mean cutting benefits, raising taxes, or printing money. Politically, the last is the easiest, but it has big costs. It erodes the value of the major currencies, which are stores of wealth.

If benefits are cut and taxes rise, it will accentuate the rich/poor divide. The rich will take flight from countries where they are taxed heavily, making the tax intake fall and inequality even worse.

Capitalism is no longer working well for most people. It is broken, and we are approaching a paradigm shift.