Bridgewater Fund founder Ray Dalio: Defend the value of currency

Author: Ray Dalio, Founder of Bridgewater Fund Source: X, @RayDalio Compiler: Shaw Golden Finance

The debate between Trump and Powell is essentially a struggle for control over the value of currency. As mentioned earlier, when there is too much debt and borrowing, the traditional solution is to lower the real interest rate and devalue the currency, which is bad for creditors and good for debtors. This is what Trump is pushing, and Powell is strongly opposed.

These debates are normal, but this time the debate is more intense. Heads of state usually want more stimulus to promote financial markets, spending on goods and services, which will make the public happy until inflation is so severe that even they think the currency should be tightened, while good central bank governors try to find a balance between being too loose and too tight, and "go against the wind" by observing various indicators to judge the direction of the situation. Therefore, there is a natural tension between central bank leaders and incumbent heads of state who want to please the public and be re-elected. In normal times, people recognize and respect this separation of powers, but in extreme situations, this separation of powers breaks down.

How should monetary policy be formulated?

What do the various indicators suggest should be done? There are market indicators, economic indicators, and other influencing factors to consider.

As for market indicators, they clearly show that monetary conditions are loose and the economy is not in crisis, because when stocks rise, currencies depreciate, credit spreads narrow, and real yields are low, this reflects "loose" liquidity. More specifically:

• Over the past year, the US stock market has risen 14%, which is at a historical high, and most valuation indicators show that the market is expensive.

• During the same period, the US dollar has fallen 5% against major currencies, 27% against gold, and 45% against Bitcoin.

• Credit spreads are near historical lows, for example, the spread of BAA-rated corporate bonds is only about 1% higher than that of US Treasuries.

• The 10-year US real interest rate is slightly above 2%, in the neutral to low range.

From the perspective of economic indicators, the economy is generally balanced, but it is slowing down slightly.

• The unemployment rate remains at a low 4.1%, but it is slowly rising.

• The technology sector, especially AI-related investment and revenue growth are strong, while market sentiment and the real estate market are relatively weak.

• The overall performance of the global economy is weak.

This is the current situation. Looking ahead, there are huge uncertainties and risks in debt and trade issues, politics and geopolitics, all of which are inflationary, while at the same time, technological progress is huge, has a deflationary effect, and will increase the gap between the rich and the poor.

Defending the Value of Money is Not Easy, But It Is Critical

Defending monetary discipline, like defending fiscal discipline, is unpopular because it essentially requires people to tighten spending. However, striking a balance is critical because one person’s debt is another person’s asset; if money is to work successfully, it must both circulate efficiently and maintain its value.

Will the Value of Money Be Defended? From historical experience and the current situation, I think it is clear that the value of money will not be defended until classic currency weakness/inflation problems become serious - and even then, perhaps not necessarily, because the pain they cause is enormous.Look at the 1970-1982 cycle as a classic example. Therefore, even if monetary policy is to be tightened someday in the future, it is almost certain that it will not happen in the short term.

Therefore, in my view,investors should still prefer to bet on the "weak currency" trend - that is, a lower dollar and low or even lower real interest rates.