By Nathan Crooks
"You need to understand how
money,
credit, and
debt work,”
Ray Dalio writes in his latest post in a series previewing an upcoming book he’s titled “The Changing World Order.”
The billionaire investor and founder of Bridgewater Associates said he’s working with both historians and political experts to connect pieces of the past together to better understand the future.
“They lacked adequate practical understanding of how money and credit work, and I lacked adequate practical understanding of how politics and geopolitics work,” Dalio wrote in the 13,000-word essay sprinkled with simple language and bold print in an attempt to make it easier and shorter to read. “Through this triangulation, we came away with a richer understanding of how the whole machine works.”
What is Money?
In starting starting with a simple question -- “What is Money?” -- Dalio comes away with a number of observations: most money has no intrinsic value; it’s not wealth; and while money printing isn’t necessarily bad, central banks always end up devaluing and most currencies are ultimately destroyed.
While the fate of most money may repeat itself in long-term cycles that can last longer than the average lifespan, being the country that can print reserves still comes with benefits, with Dalio noting that the US dollar accounts for about 55 per cent of international transactions.
“A reserve currency is probably the most important power to have, even more than military power,” he wrote after comparing recent US efforts to respond to the global coronavirus crisis with “helicopter money” to the announcement President Franklin Roosevelt made on March 5, 1933 when he abandoned the gold standard.
Despite accounting for only around 20 percent of world gross domestic product, the US still accounts for about 60 percent of global reserves and about half of international transactions, he noted and this is why the dollar and the dollar-based monetary and payments system still “reign supreme” and are “outsized” relative to the size of the economy.
“The Federal Reserve is now in the strong but awkward position of running its monetary policy in a way that is good for Americans but that might not be good for others around the world who are dependent on dollars.”
Key Quotes:
- “Governments that have the power to do so are printing money to help ease the debt burdens and help finance the expenses that are denominated in their own currencies, which will weaken their own currencies and raise their levels of monetary inflation to offset the deflation that is coming from reduced demand and forced asset sales that are happening as those that are stretched have to raise cash.”
- “One cannot create more wealth simply by creating more money and credit. To create more wealth, one has to be more productive.”
- When it is widely perceived that the money and the debt assets that are promises to receive money are not good storeholds of wealth, the long-term debt cycle is at its end, and a restructuring of the monetary system has to occur.
- “There is nothing wrong with having an increase in money growth instead of an increase in credit/debt growth, provided that the money is put to productive use.”
- “History has shown us that we shouldn’t rely on governments to protect us financially. On the contrary, we should expect most governments to abuse their privileged positions as the creators and users of money.”
- “Printing money to buy debt (called debt monetization) is vastly more politically palatable as a way of getting money and shifting wealth from those who have it to those who need it than imposing taxes, which leads taxed people to get angry.”
- “The US, by having the US dollar as the world’s reserve currency and having the world’s bank that produces that currency, and by having the power to put these needed dollars in the hands of Americans, can help Americans more effectively than other countries’ governments can help their own citizens. At the same time the US risks losing this privileged position by creating too much money and debt.”