The large amount of new wealth in America’s private sector is causing the Fed a headache according to Ray Dalio.
The veteran investor, worth more than $19 billion, says that the reason the economy isn’t slowing as might be expected given rate hikes over the past year, is because of the Great Wealth Transfer.
Writing on LinkedIn, the founder and CIO of hedge fund titan Bridgewater Associates said the co-ordinated transfer of wealth from the public sector (central government and central bank), and holders of government bonds, to the private sector (households and businesses) means that the economy is more resilient and people and organizations are less sensitive to rate hikes.
That means that the government’s balance sheets and income statements are in bad shape due to running large deficits and losses from government bonds they bought to fund government debt, while household finances in relatively good shape.
Commenting on 2022, Dalio wrote: "The private sector’s net worth rose to high levels, unemployment rates fell to low levels, and compensation increased a lot, so the private sector was much better off while central governments got a lot more in debt, and central banks and other government bondholders lost lots of money on those bonds.”
While the Fed could continue to hike interest rates, the cost of government borrowing may require policymakers to pull some other levers, Dalio believes.
He expects the government to generate wealth through taxes and printing money and opines that this should not be a problem in the near term.
However, later on there is the risk that current borrowing and that required by future budgetary demands could create a “self-reinforcing debt spiral that will lead to market-imposed debt limits while central banks will be forced to print more money and buy more debt as they experience losses and deteriorating balance sheets.”
Dalio said that he is not certain that this will be the case, but it’s certainly possible.
The 73-year-old investor ended his lengthy LinkedIn post by saying that he is sharing his insights not as a job but because “at my stage in life I’m passing this stuff along to be helpful.”
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