When Ray Dalio, the most succesful hedge fund manager of all-time, talks, people tend to listen.
And he’s worried that the one of the fixed constants of economics — the ability of central banks to stimulate economic growth through lowering the cost of debt — is coming to an end.
In an op-ed for the Financial Times published this week, Dalio said (emphasis ours):
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.
What I am contending is that 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”.
Dalio says that risk premia — the return of risky assets such as bonds compared with cash — are at historically low levels.
This makes it harder for central banks to keep pushing up the prices of these assets with loose monetary policy, such as low interest rates and quantitative easing, because there is less incentive, or yield, to compensate investors for taking the risk on debt.
Here’s Dalio again:
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 — and it is also the case that debt and debt service costs are high in relation to income, so that debt levels cannot be increased without reducing spending — stimulating demand is more difficult, and restraining demand is easier, than is normally the case.
This debt fatigue could go some way to explaining why central banks are still locked in to near-zero interest rates, seven years after the financial crisis that prompted their fall. In this scenario too, central banks would be powerless to stop the next financial crisis or recession with inflationary tactics.
Dalio made the comments in the Financial Times in the week LCH Investments crowned him as the the most successful hedge fund manager ever, dethroning George Soros.
In 2015, Dalio’s $82 billion Bridgewater Pure Alpha fund generated $3.3 billion in net gains for investors, according to the report. The fund, founded in 1975, has made $45 billion in profit over its lifetime. George Soros’s Quantum Endowment Fund, begun in 1972 has made $42.8 billion.