Ray Dalio talks some sense on rates
So you all now I’ve got a boy-crush on Ray Dalio right? Actually, economist-crush might be more accurate.
But you know him right? Hedge fund guru, multi-billionaire, deep thinker on all things markets and economics.
Anyway, he was talking a bit of sense around inflation and interest rates the other day.
Basically, he’s having a go at all those talking heads who think that just raising rates is a low-cost option that targets inflation with surgical precision, and has no impact on the broader economy.
Reducing Inflation Will Come at a Great Cost: Stagflation
For me, hearing supposed “experts” talk about what’s now happening in the markets and economy is like listening to nails scratch against a chalkboard because they are typically saying incorrect things in an erudite rather than commonsense way.
Markets and economic movements are driven by much simpler and more commonsense linkages than most people articulate. … Here, I just want to talk about fighting inflation and what’s happening pertaining to it.
More specifically, I now hear it commonly said that inflation is the big problem so the Fed needs to tighten to fight inflation, which will make things good again once it gets inflation under control.
I believe this is both naïve and inconsistent with how the economic machine works.
That’s because that view only focuses on inflation as the problem and it sees Fed tightening as a low-cost action that will make things better when inflation goes away, but it’s not like that.
He then goes on to say that there’s no magic pudding here. Either inflation eats into household budgets, or interest rate hikes do.
The only choice you have is how you take your pain-medicine.
The facts are that: 1) prices rise when the amount of spending increases by more than the quantities of goods and services sold increase and 2) the way central banks fight inflation is by taking money and credit away from people and companies to reduce their spending. They also take buying power away by raising interest rates, which increases the amount of money that has to go toward paying interest and decreases the amount of money that goes toward spending.
… My main point is that while tightening reduces inflation because it results in people spending less, it doesn’t make things better because it takes buying power away. It just shifts some of the squeezing of people via inflation to squeezing them via giving them less buying power.
Yep. I think this is something people don’t realise. Raising rate is just a way to sop up the extra cash that the central banks have funnelled into the system.
It’s a way of slowing the economy down – giving it a dose of good ‘ol fashioned morphine.
The problem we’ve got though is that a lot of what’s causing inflation right now is on the supply-side – it’s supply chain disruptions and energy price shocks and what have you.
And in that sense, raising rates is the wrong medicine. Mopping up the extra cash in the economy isn’t going to change the price of oil coming out of Russia.
So I agree with him on this way. We can’t just flippantly say, “oh, raise rates a little and everything will be sweet.”
There’s a lot riding on what happens to rates from here.
JG.
Ingrid Vrecun says
Brilliant information…look forward to the next blog.
Julia says
Yep
I agree though I couldn’t have said it so clearly
Julia Aranui-Faed says
Yep
I agree though I couldn’t have said it so clearly
And it comes from a comment presumably written in 2022.
A lot of what is on this website is OLD.
ANYTHING written before the onset of this pandemic is likely to be unhelpful.
In my opinion. And I am 77 and I have seen a lot over many decades.
Dr Julia Aranui-Faed
New Zealand