RAY DALIO: The US economy looks like 1937 and we need to be careful

Business Insider CEO Henry Blodget spoke with Bridgewater’s Ray Dalio about the current circumstances of the US economy. Following is a transcript of the video.

Henry Blodget: On investing, you’ve recently written that risks are rising because of the political atmosphere. You’ve talked about how it looks a lot like 1937. That sounds very scary. What do you mean by that?

Ray Dalio: Well, let me clear up this. This is not like 2007 and 2008. In 2007 and 2008, we could do the calculations of how much that had to be paid by whom, and we can see that that wasn’t going to happen, and that we were going to have a financial bust … By and large, economically we are at the part of the cycle that is not too hot and not too cold, and assets have the right risk premiums, and so on. So, it’s a relatively stable kind of environment.

On the other hand, it’s very much like the ’30s in that in 1929-1932, like 2008, we had a debt crisis — took your interest rates to zero both of those times. When interest rates hits zero, you don’t have the same kind of monetary policy. So, they print money, they buy financial assets — in both cases they did. That caused an economic rebound in both of those cases. And it caused the stock market to rise a lot in those particular cases. And at the same time, it did not resolve the wealth differences.

So, that today, the top 1/10 of 1% of the population has a net worth that is equal to the bottom 90% combined, ok? The wealth gap is the largest wealth gap that there has been since the 1935 to 1940 period. And so while we have good conditions here, for the bottom 60% of the population, we have bad conditions. So, the averages don’t convey what the picture is because of this disparity. And so, what was tapped into and what we see is there’s a large percentage of the population who is hurting, and that there is a conflict between the “haves” and the “have nots,” and liberal ideas and conservative ideas, and all of that. And we are having a greater polarity.

In the ’30s, we had populism. In other words, the selection of leaders, who were strong leaders in a battle of one segment against the other segment and/or inclined to fight for certain things. And so, as we come into this period, it’s somewhat similar to that. We will have, as we go forward, obligations — demographics is going to affect our obligations. We’re right now at the point where pension obligations, not only debt obligations, pension obligations, healthcare obligations. All of those are going to gradually sort of squeeze us. And we have that division. And so, it’s very similar to that and we’re also at the point where 1937 was when the fed said we could tighten monetary policy and they put a slight tightness in monetary policy.

In my opinion, the risks are asymmetric on the downside. In other words, if you tighten monetary policy, certainly by more than is discounted in the market — and what’s discounted in the market is very minor rising market — that will reverberate through asset class prices, as well as then you can have a situation in terms of the economy. So, what’s similar in that: interest rates are close to zero, not much room on the downside, obligations are large, there was a political division, there is more populism. Therefore there’s more conflict. And therefore we need to be very careful at this moment. That’s what I’m basically saying.

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