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Ray Dalio: Great Disorder in Next 18 Months
Overextended Governments and Compliant Central Banks are Pushing us to Crisis
Last week prominent investor Ray Dalio wrote an article in Time Magazine warning the world is “on the brink of great disorder.”
If you don’t know Ray Dalio, he’s the founder of Bridgewater Associates, one of the world’s biggest hedge funds. Which he founded after getting drunk, punching his boss in the nose, and oddly enough getting fired.
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Beyond this heterodox career strategy, Dalio's interesting because he pays a lot of attention to history, looking for parallels to today’s events and tracing out what happened next. Indeed, despite modern trappings, mankind has generally been here before, often many times before.
What Dalio Fears
These days, Dalio's worried about 3 things that freak him out because they haven’t happened since the 1930’s:
#1 soaring debt and inflation
#2 historic gaps in income and wealth
#3 great powers flirting with world war
He worries these mean our financial system could completely crash in the next 18 months — reaching a "major inflection" that could then lead to widespread civil unrest, even civil war due to rising polarization amid anti-elite sentiment on both sides: He estimates that 30 to 40% of Americans are now populist — 2/3 on the right as in Trump and 1/3 on the left as in Bernie. With RFK currently trying to bridge the two.
Meanwhile, he thinks the elite-supporting moderates don’t have any fight in them — they’re coasting on inertia, nobody listens to them unless they’re paid to. Indeed, check out the engagement on a typical mainstream media tweet -- a tweet from Joe Rogan, Jordan Peterson or Scott Adams might get 100 or 150 likes per ten thousand views. The New York Times is lucky to get 3. Which looks a lot like buying audience who doesn’t really care what you say.
The Role of Government
I think Dalio's correct that the elite is unloved and hollow, and I think he's correct to be worried about both sustainability and what comes next. But I don't think he pins the root cause of disorder, which is the growth of government and above all the scope and scale of central banks, especially since 1971 and accelerating since the 2008 crisis.
These drive debt and inflation, they drive wealth inequality as the Fed takes from the poor in inflation and gives to the rich in asset purchases. Both lead to people feeling the system is rigged, that there's little reason to play by the rules and maybe a great crash wouldn’t be such a bad thing.
Consider the trends in all three since Richard Nixon broke our last vestiges of the gold standard in 1971, giving the Federal Reserve free rein to finance the federal takeover of our economy:
This is Your Economy on Central Banking
First up, debt. After decades of slowly paying off the World War II debt, it turned sharply higher with Nixon, going from under 40% to now over 120%. In fact, the CBO now projects the national debt will hit 180% in 30 years, which is both accelerating the trend and hits uncharted territory that, historically, had led to national bankruptcy.
Next up, inflation. Here, too, the trend turned sharply as soon as the Fed was freed, going from flat pre-Fed to slight rises under gold, and now it’s off to the races:
Finally, inequality. Both income and wealth inequality have soared since the 1970’s, which the left pins on “capitalism,” when of course our country was much closer to free markets in the 1950’s:
How Big Government Drives Polarization
The result of these trends in debt, inflation, and inequality has been not only widespread misery, but increasing polarization. Rising voter anger finds a voice in politicians, even if it doesn’t find a solution in those same politicians:
What drives this is governments use their Fed-financed budgets to push everything they can into the political arena, from climate to the kids. After all, the goal of any bureaucrat is to get more budget, more head count — it’s the bureaucratic equivalent of profits in a private firm.
Once something is political, it’s zero-sum: both sides must fight or grovel.
So more budget drives more activity. And if that activity is as dysfunctional and corrupt as government, and it’s armed with police power to compel obedience, it drives more dysfunction, more corruption and more conflict.
Indeed, populism on both left and right took off in the wake of the 2008 crisis that revealed both the deep incompetence and the deep corruption of the elite running this country.
Millions of Americans concluded, correctly, that the system is rigged. Leading to the birth of two mirror-image populist movements: the Tea Party and the Occupy Wall Street movement. They were divided by the corporate media, who predictably set them against each other with accusations of racism and communism. But that neutering did nothing to address the underlying anger, which festered then broke out with the rise of populist Trump and populist Bernie Sanders and now RFK, allfought by a corrupt political establishment — the better-funded Democrat party with more success.
Now we’re entering the next stage of polarization with the aftermath of the Covid catastrophe. Covid was 2008 on steroids -- epic incompetence and epic corruption that we're only now starting to reveal, from hiding the origins to demonizing the noncompliant to censoring speech to a degree we haven't seen since the authoritarian FDR. As voters connect the dots between the epic government failures and unnecessary deaths, this will intensify.
Finally, Dalio’s third concern: World War.
Historically, when the masses reject the establishment, it instinctively reaches for war. This was true in the late Roman Empire, it was true in the collapse of Song Dynasty China -- the Middle Kingdom’s last true "golden age." It was true in the Europe-wide push for war in 1914.
Elites do this because wars unite and distract like nothing else. Plus war has the very appealing feature that “national security” can be used to suppress dissent, even jail the opposition as both FDR and Winston Churchill did, and many before them. War is push-button totalitarianism.
From Ukraine to China to any number of third world countries, our elite is busily trying to drum up some war or another, the bigger the better.
So what's the solution?
The easy way is the elite proactively shrinks in scope and gets government out of the economy, out of social engineering, out of propagandizing kids or suppressing bona fide disagreement until it festers. The establishment is unpopular because it's trying to do everything and failing, so the obvious solution is do less.
Of course, this won’t happen: It takes a wise elite to proactively step back, and this bunch is many things but wise is not one of them.
Which brings us to the hard way: leaders keep hiding and gaslighting, kicking the cans until they grow too big to bail out. At which point, like the Soviet Union in the 1990’s, we undergo a wholesale replacement of our failed elite. We don’t yet know what replaces them, but it is unlikely to look anything like today’s sclerotic and gutless elite.
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