Ray Dalio on Donald Trump vs Jerome Powell: ‘Argument about value of money…' What do market and economic indicators say?
In a post on social media platform X (formerly Twitter), titled 'Defending the Value of Money', Ray Dalio outlined his belief that the bone of contention between Donald Trump and Jerome Powell comes down to differences in philosophy over the value of money.
In his detailed article on X, Ray Dalio stated, 'The argument between Donald Trump and Jerome Powell is about the value of money.'
On the key point of contention, he explained, '… When there is too much debt and borrowing, the classic way of dealing with it is to push real interest rates down and devalue money, which is bad for creditors and good for debtors. That is what Donald Trump is pushing for and what Jerome Powell is defending against.'
Ray Dalio acknowleged that while such arguments are 'normal', the disagreement between Donald Trump and Jerome Powell is 'more intense'.
'Heads of state normally want to have more stimulation to boost spending on financial markets, goods, and services, which makes people happy, until there is so much inflation that even they agree that money should be tighter, while good central bankers try to get the balance right between being too easy and being too tight, looking at indicators of which way things are leaning to 'lean against the wind.' So, there is a natural tension between central bank leaders and those in office who want to make people happy and get re-elected. In normal times, there is a recognition of and respect for the separation of these powers, but in extreme cases, this separation of powers breaks down,' he added.
Dalio also sough to answer what monetary policy should do; noting that taking a cue from the market and economic indicators, besides others influences is important.
He added that at present, the market indicators 'are clearly saying that money is now easy and that the economy is not in trouble', noting that when stocks go up, the value of money goes down, credit spreads are narrow, and real yields are low, that 'reflects money being easy'.
Ray Dalio listed the following market indicators that the US central bank and elected officials can keep in mind: Over the last year, the US stock market was up 14 per cent, is now at its all-time highs, and by most measures is expensive.
Over the last year, the dollar was down 5 per cent against a basket of other major currencies, down 27 per cent against gold, and down 45 per cent against Bitcoin.
Credit spreads are trading near historically tight levels. For example, BAA-rated corporate spreads are now trading around 1 per cent above Treasuries.
Real interest rates are relatively moderate and normal at a bit over 2 per cent at the 10-year level.
On the economic indicators, Ray Dalio stated that 'they show that the economy as a whole is in relatively good balance with a slight slowing'. Listing the following to take note of: The unemployment rate is at a relatively low 4.1 per cent and slowly trending higher.
Tech, especially investments and revenues in artificial intelligence (AI), is booming while sentiment and real estate are weak.
The global economy is relatively weak.
'That is how things currently look. Regarding the future, there are great uncertainties and risks related to the debt and trade issues, politics, and geopolitics that all have an inflationary bias, while at the same time there are great technological advances that are deflationary and will tend to increase wealth gaps,' he added.
While not explicitly taking a side, Ray Dalio did indicate he leaned more toward Jerome Powell's line of thinking, noting: 'it is not easy, but important to defend the value of money'.
He added, 'Defending monetary discipline, like defending fiscal discipline, isn't a popular thing to do because it is de facto telling people that they need to have financial discipline. Yet getting the balance right is critical because one man's debts are another man's assets, and to be successful, money has to be a good storehold of wealth (as well as an effective medium of exchange).'
Ray Dalio however opined that 'judging from the lessons of history and current readings', it seemed 'clear' that the value of money won't be defended. He added, 'The value of money won't be defended until the classic weak money / inflation problems become intense — and perhaps not even then — because the pains those problems produce are intense.'
'Look at the 1970-82 cycle for a classic example. While maybe that tightening will happen sometime in the distant future, it's virtually certain that it won't come soon. So, it seems to me that one should keep betting on weak money (i.e., the dollar going down, and low and falling real interest rates),' he ended.
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