The founder of the world’s largest hedge fund on debt, government spending and education
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Now that the latest debt ceiling deal has been signed into law, the “Marketplace Morning Report” decided to take a wider-angle view on the debate given that it’s almost certainly not the last time the nation will see a fight over how to extend the federal government’s debt limit.
“Marketplace Morning Report’s” David Brancaccio recently spoke with Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, about the wider issues dredged up by the debt fight. They also discussed how more spending on education is a good return on investment.
Below is an edited transcript of their conversation.
David Brancaccio: Quick tutorial — government finances are like our household budgets, right? You use income, what you earn and borrowing to pay expenses, pay back loans. But with one big difference, right?
Ray Dalio: The one big difference is the government can print money. So you don’t have a risk of default at the end of the day if they want to print the money, but you have a risk of inflation, as printing a lot of money devalues money.
Brancaccio: You know, you’re not a dove on debt, you worry about too much debt, yet, you raise the issue of the gap between rich and poor in America, see it as destabilizing and think we got to deal with it.
Dalio: That’s right. Education for example– spending money on educating the population while making them work well, and so on. There are many areas in which there’s a return on investment, that is good for the vast majority of population. I believe in the power of putting capital in the hands of bright people who come up with new ideas. It’s fabulous. But at the end of the day, it’s got to work for most people. And so there are some structural things that can be done to make it work that way. History shows, and we understand that when you have bad economic conditions like a debt problem at the same time as you have a large polarity in wealth and values, you have a combustible combination.
Brancaccio: I mean, one way that comes early to mind about addressing inequality is taxing wealthy people more and redistributing. Is that how you would do it?
Dalio: Yes, particularly if that money is used for raising productivity. I’m not saying it all can be used that way. There’s certainly need for social programs and the like. But I want to say that being more productive, such as education and those types of things, infrastructures, various things, so that the equal opportunity that takes place is a hell of a good investment.
Brancaccio: Before we go, Ray, I want to ask you about the vibe of the markets. I have a feeling you’re about to sort of correct some misplaced thinking on my part.
Maybe we’re getting too caught up in this inflationary moment, the Fed will be able to knock down inflation — either, you know, inflation eases down or the Fed triggers a recession. But, wouldn’t then — I don’t know sometime next year or so — interest rates drop down again? And then we can go back to the time of rising stock market and low interest rates.
Dalio: Very unlikely, and let me explain if I may. Many things had happened in the past to create a bull market that are unlikely to happen in the future. For example, interest rates are not likely to fall as they did before. Profit margins, which doubled, are unlikely to increase as much, because labor will have a larger share of the revenue pie. And also taxes — corporate taxes, which were cut, are unlikely to be cut.
Brancaccio: Just so I fully understand: If the Fed engineers a soft landing or we end up in a recession, won’t interest rates come down? Or is it just that we have so much debt now that they can’t come down anymore?
Dalio: I think we’re in a situation where the central bank trying to balance interest rates that are high enough for creditors, that are good enough for debtors not to be in a financial problem — that balancing act is difficult. So you’re going to probably see a slowing of the economy to something like a 1% growth rate, and an inflation rate that’s probably stuck in the vicinity of a 4% rate. And with that, you need a bit higher interest rate. So I don’t think the scenario that you’re painting is likely.
Brancaccio: Yeah, I mean, it seems so long ago, but it wasn’t, where interest rates were near zero. And I guess I shouldn’t be holding my breath waiting for that again.
Dalio: In that environment, there was an enormous amount of borrowing and spending that set the stage up for the inflation that we experience. So then you have a very sharp shift in the other direction. There is an equilibrium, there is a balance, and that balance is settling in at something like the numbers that I just gave.
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