Dalio: Peak debt, QE4 next

 From the excellent Ray Dalio:

That’s where we find ourselves now—i.e., interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high.  As a result, the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias. Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.

That is what we are most focused on.  We believe that is more important than the cyclical influences that the Fed is apparently paying more attention to.

While we don’t know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces.  These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions.

While, in our opinion, the Fed has over-emphasized the importance of the “cyclical” (i.e., the short-term debt/business cycle) and underweighted the importance of the “secular” (i.e., the long-term debt/supercycle), they will react to what happens.  Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required.

…We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten.

Works for me. Bonds were relatively unchanged overnight.

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Comments

  1. Ok. So we get “the risks of the world being at or near the end of its long-term debt cycle are significant.” yet the answer is….more debt?! Correct me if I’m wrong, but isn’t Dalio in the “hike rates to avoid a catastrophe” camp? And if so, do we have capitulation by the last voice of reason on the planet? In which case…..

      • interested party

        flawse,
        A bit off topic…but linked nevertheless, I have a question for you.
        Is Trump the first of several demagogues that we have been expecting? ZH has an article on similar lines today and it is something I was thinking about over the weekend.

      • IP I have been a bit too preoccupied to think about Trump. I thought he would fade away but it seems he is getting stronger. No REAL policies – just a lot of slogans which allow him lots of room to be a demagogue as time goes along. So you’rte right I think. He still may fade but, we can expect, as time passes, there to be more of him who are more serious contenders for dictators .I’m tired IP! I just see everything I feared coming true….and still nobody (well damned few) see it!

    • Janet,

      He did not say by more debt – he said more QE.

      Having regard to his references to asset prices being high and debt levels being high, one possible interpretation is some form of QE for People.

      Do you really think the pollies and even neo-lib central bankers are going to let a deflationary bust take place in the name of ideological consistency.

      They may but I doubt it – the US like running the world too much.

      They only real difficulty is that the Fed is not really equipped to deliver QE for Peeps but come a crisis comes a way.

      • To me, increasing the money supply ( what QE is, to then buy financial assets ) without commensurate productivity gains is …more debt!
        It doesn’t matter who you give it too, it’s still more debt
        (NB: Arguable, QE ‘for the people’ has already been done in the form of higher stock and property prices. The fabled Wealth Effect, if you like)

      • The QE we have seen to date bears no resemblence to QE for Struggle Street. Which is why we have not yet seen it.

      • I agree with you Janet. QE, in our societies as currently structured, will mean more debt. It may aslo mean we uise up more of our world more quickly (a debt to the universe) but who gives a damn?

      • If Fed is forced to launch more bond buying, but does so buying from foreign countries offloading USTs (e.g. China, UAE, Russia), then does the QE still result in more debt? (Genuine question, but my thinking would be that it doesn’t)

      • The reason for QE is to keep interest rates down so that governments can afford the debt.
        First tried by Herbert Hoover in 1931… he was smart enough to dismiss it after 18 months.

      • BB Those countries still have USD one form or another. Debt is not extinguished until there is a transaction in which the US sells them something – Oil, Goods or productive assets?
        In the meantime, in your scenario, the QE has been directed overseas not at the US economy so it is totally ineffectual as far as doing anythiung for the internal economy goes.

  2. Not raising rates this year is one thing, returning to QE is basically a sign of capitulation and an admission that the US economy still (after years of stimulus) cannot stand on its own two feet. No sane market can respond well to that. Plus Ortega is correct, it will leave the CB reputation completely trashed. They talk about zombie banks and corporations,but it looks like the U.S is a zombie economy..

  3. After their experience with MERS in the last real estate crash I wonder at the confidence of US citizens in their title to shares, which are only digital entries.

    A new overview tool for markets, technology has some uses, buy booze companies !

    http://finviz.com/map.ashx?t=sec

  4. Then I must be The Excellent Peter Rowan. I have said prior to today in several Macrobusiness posts, and prior to this weeks economic ructions, that there would not be a USA rate increase and that Q4 or its equivalent will be implemented by the Fed at latest by early next year. And there is a good chance this will be Q “4 a very long time very big”. My comments seem to be ignored and no kudos given by the Macrobusiness team. Likewise my ‘excellent’ statements about Land Tax are being ignored by Leith van Onselen when I email them to him. Not that some of his other commentary is not excellent. It seems that some people hold positions of privilege and power. Hmmm Is Bronwyn a staff member?

      • Some intelligent suggestions have been made here how you handle savers/creditors in the context of fairness.

      • “Some intelligent suggestions have been made here how you handle savers/creditors in the context of fairness.”
        I have never ever seen a single one!

        Nor have I ever seen any suggestions as to how we persuade Mrs Chen in China, Mrs Nakasomi in Japan or Mrs Bae in Korea how we persuade them, living frugally in their tiny apartments, why they should give up their savings so we can go on living our extreme consumerist lifestyle.
        Nor has it ever been explained, satisfactorily, how the ‘debt jubilee’ actually solves anything. Five minutes after the debt jubilee we would need more debt – that’s the way everything is structured.
        .

      • Flawse, those smarter than me can suggest ways.

        Gold standard for starters.

        It seems to me a startling coincidence that the debt machine and inflation started when we came off gold (didn’t it?)

      • Volataire,

        Great musical selection but a bit ironic considering the composer’s political enthusiasms and the economic policies of that party.

        The idea of QE4 or of QE for the People would not sound strange to any political party that considers a fundamental objective to be the co-ordination and optimization of the resources of the economy in the national interest.

        Any form of QE has its risks but we are living with the results of corporatism economics right now so the issue is how can we best dismantle the bomb and create an economic model that values the very things you endorse.

        At this stage more traditional QE is almost a certainty

        And QE for the People in some form, likely when they finally give up on traditional QE aka “QE for Rich Peeps”

        If they do neither we will get a debt deflation bust – which may appeal to the cleansing fire subscribers but is likely to be very unpleasant for the greatest number.

      • tmarsh
        I sure don’t have the answers – matter of fact it’s fair to say my mantra “the answer lies back in time” really is what I think.
        Re the Gold Standard, without getting all theoretical and out of my depth, seems to me to be the stage at which the dog got loose. So I agree that far. However I don’t think returning to it is going to automatically fix everything nor give you any debt jubilee. The societal dislocation necessary to solve our problems seems way beyond anything we can tolerate. Anyway on to another day eh! Cheers

    • So you are suggesting we reward all the reckless, spendthrift, careless, financially and socially illiterate who caused this mess and punish all those who were doing their best to avoid it and fix it.

      Wow.

      Is your real name Tim Geithner ? Hank Paulson ?

      Just an absolutely ABSURD position to take. What we need to do is return to productivity, hard work, social cohesion, and a collective effort for a better future – instead of this insane orgy at the money well while the crop whither and die leaving us fighting over the credit bucket.

      NOTHING sums it up better than Carl Orff – The Carmina Burana poems- O Fortuna !

      https://www.youtube.com/watch?v=AdIpoE2LEps

      O Fortune,
      like the moon
      you are changeable,
      ever waxing
      and waning;
      hateful life
      first oppresses
      and then soothes
      as fancy takes it;
      poverty
      and power
      it melts them like ice.

      Fate – monstrous
      and empty,
      you whirling wheel,
      you are malevolent,
      well-being is vain
      and always fades to nothing,
      shadowed
      and veiled
      you plague me too;
      now through the game
      I bring my bare back
      to your villainy.

      Fate is against me
      in health
      and virtue,
      driven on
      and weighted down,
      always enslaved.
      So at this hour
      without delay
      pluck the vibrating strings;
      since Fate
      strikes down the strong man,
      everyone weep with me![3]

      • Voltaire
        “Just an absolutely ABSURD position to take. What we need to do is return to productivity, hard work, social cohesion, and a collective effort for a better future – instead of this insane orgy at the money well while the crop whither and die leaving us fighting over the credit bucket.”

        Beautifully put.

        I always thought it was best summed up by “we penalise the prudent to reward the profligate”

      • If you say so, be sure to be on the lookout for QE4 mentions and jump all over them.

        Characterising everyone with debt as: reckless, spendthrift, careless, financially and socially illiterate who caused this mess and punish all those who were doing their best to avoid it and fix it” is hardly accurate.

        Thus far, attempts to fix the situation have led to more debt, but all the insiders (those closest to QE) have made all the money. i.e. the money power elite.

        Not the poor sod trying to make their way in the world and put a roof over their heads.

        The current debt machine is stacked against the 99%.

        I would countenance the 1% Money Power Elite kleptocracy are the reckless.

        My position is hardly absurd. (QE4)

      • “Just an absolutely ABSURD position to take. What we need to do is return to productivity, hard work, social cohesion, and a collective effort for a better future – instead of this insane orgy at the money well while the crop whither and die leaving us fighting over the credit bucket.”

        Well put
        That one’s going in the pool room bro

      • tmarsh – I think this mess has been caused by just about everyone in society taking poor decisions. For mine the crap started in the universities and continues to be largely generated there. Someone else might be able to point to somebody who bought the university professors and if so i’d bow to their superior knowledge. Certainly the created distortions have resulted in a great power elite (or been caused by it) nevertheless we have all been complicit. Anyone who ever told us they’d institute measures that would fix this would never have been voted in and would have been roundly criticised by just about every economic academic in the land.
        In agreement with you to this extent I do believe Aus is controlled by a small secret group. The evidence, in my view, is compelling. The real influence of parliament is confined to making decisions about things like gay marriage and other social matters plus minor tax considerations.

  5. QE4 won’t work. Will be confirmation to the market that the economy is toast and cannot go anywhere without LIQUIDATION!!!! You know that concept that is the KEY to REAL CAPITALISM! Not this crony fascists sh*t we have today.

    • Yes JC but what else are CB’s now going to do? Indeed what will our societies demand? We are corrupted beyond redemption.
      The answers lie back in time.

      • Central banks have now shown that they are only meant for the good of banks and the super rich.
        All they can do is manipulate to produce bubbles in their chosen part of the economy.
        They are also very good at jaw-boning and bluff.
        Central banks do not understand the very simple….recessions are an important natural occurrence of markets and should always be worked out through markets not by CB manipulation.
        The depression of 2007 was a good example where markets were given their head.