(image source: wikipedia)
On 7th May 2020, Ray Dalio, renowned investor published an article on linkedin titled “The Changing Value of Money”. It’s a part of the series “The Changing World Order”. You can find the original article at this link.
It’s a long article so for those who do not have time, I’ll give you a summary.
The end of reserve currency status of the US Dollar, Yen and Euro are coming. Reason is because their long term debt cycle is reaching the end. It will be a significantly disruptive economic event that will impact all of us.
At the end of a long term debt cycle, the debt burden is too high to service. There will be a resolution to that situation. Think of an individual's situation. When one’s debt level is too high and debt repayment and other expenses are much higher than income, and there’s no saving to draw from, one won’t be able to meet the obligations. There are 2 scenarios: (1) one will default and declare bankruptcy; (2) creditors will restructure the debt by extending the duration so repayment will be smaller or reduce the debt amount (usually called “taking a haircut”).
Similarly, for a nation debt burden, there are only 4 scenarios to resolve the high debt burden:
Austerity: cut down spending to have more money for debt repayment.
Default and Restructuring: extend duration or reduce debt amounts (like above individual’s example)
Transfer wealth: from those who have more. E.g. taxing
Print money to pay for the debt (debt monetization)
Scenarios 1 and 2 are too painful to be chosen. Usually, method 3 and 4 are taken. Method 3 is politically challenging because the richer population who are asked to pay more (via increased taxes) will be angry. In the end, the easiest and most convenient way is always method 4, printing money. As a result, currency always loses value due to money printing.
How do we measure the value of money? Value of money is its purchasing power. There are 2 ways to measure the value of money:
Measured against gold because gold is a timeless asset that can store wealth and people are willing to take gold
Measured against how much real stuff it can buy. Stuff here is usually a basket of goods. Other real stuff can be like real estate, arts, etc.
Ray Dalio showed that in the past 500 years, all currencies big or small have lost values. Many have disappeared.
What can we do about this?
Ascertain that now is the end of the big debt cycle by studying his debt cycle book
Think of currency risk that wealth is in.
Do not keep wealth in cash and bonds. Instead, move it to real stuff: precious metals, arts, real estate
Take advantage of the disruptive economic event
Commentaires